The Australian Competition and Consumer Commission (ACCC) has scored a victory in its first legal proceeding based exclusively on the new unfair contract terms provisions of the Australian Consumer Law (ACL).

On 30 July 2013, the Federal Court declared that a number of clauses in ByteCard Pty. Limited's (ByteCard) standard form consumer contracts are unfair and therefore void.

This case confirms the ACCC's commitment to cracking down on unfair contract terms and the shift in its stance from a compliance-led approach to a more enforcement focused approach. Further, it demonstrates (once again) that the telecommunications industry remains a particular target on the ACCC's enforcement radar.

The Case Against ByteCard

ByteCard (better known as NetSpeed Internet Communications) is an internet service provider that provides internet connectivity, domain registration, hosting and web design.

In April 2013, the ACCC instituted proceedings in the Federal Court against ByteCard alleging that a number of clauses in the ByteCard standard form consumer contracts were unfair. It was alleged that these terms:

  • enable ByteCard to unilaterally vary the price under an existing contract without providing the customer with a right to terminate the contract;
  • require the consumer to indemnify ByteCard in any circumstance, even where the contract has not been breached, and the liability, loss or damage may have been caused by ByteCard's breach of the contract; and
  • enable ByteCard to unilaterally terminate the contract at any time with or without cause or reason.

The ACCC alleged that these clauses are unfair and contravened the ACL. It also considered these clauses not to be reasonably necessary to protect ByteCard's legitimate business interests.

The Federal Court declared, by consent, that the clauses concerned are unfair contract terms. The Federal Court found that these terms:

  • created a significant imbalance in the parties' rights and obligations;
  • were not reasonably necessary to protect ByteCard's legitimate interests; and
  • f applied or relied upon by ByteCard, would cause detriment to a customer.

ByteCard has also been ordered to pay a contribution to the ACCC's costs.

Unfair Contract Terms – What are They?

The national unfair contract terms laws came into effect on 1 July 2010, as part of the wider ACL reforms. The unfair contract terms regime in Part 2-3 of the ACL provides that a court may determine (on application by a consumer or the ACCC) that a term of a standard form consumer contract is unfair and therefore void.
A 'consumer contract' is a contract for the supply of goods and services, or the sale or grant of an interest in land, to an individual who acquires it wholly or predominantly for personal, domestic or household use or consumption. It does not include a contract to supply goods or services from one business to another or for business use.

For the contract to meet the 'standard form' requirement, in broad terms, it will typically be one that has been prepared by one party to the contract and is not subject to negotiation between the parties – that is, it is offered on a 'take it or leave it' basis. Further, if a party to a proceeding alleges that a contract is a standard form contract, it will be presumed to be one unless the other party proves otherwise.

A term of a consumer contract will be considered 'unfair' if each of the following elements is satisfied:

  1. it would cause a significant imbalance in the parties' rights and obligations under the contract;
  2. it is not reasonably necessary to protect the legitimate interest of a party to the contract; and
  3. it would cause detriment (whether financial or otherwise) to a party to the contract if it were to be applied or relied upon.

In assessing whether these elements have been met, the court must take into account the extent to which the term is transparent (i.e. expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term).

To assist the court, the ACL has provided a non-exhaustive list of examples of the type of terms that may be considered unfair (although still subject to the unfair terms test), such as:

  • a term that permits one party (but not the other) to avoid or limit performance of the contract;
  • a term that permits one party (but not the other) to vary or terminate the contract;
  • a term that penalises one party (but not the other) for a breach or termination of the contract; and
  • a term that limits one party's right to sue another party.

Terms which set the upfront price payable by the consumer and the subject matter of a contract, and terms expressly required or permitted by law, are excluded from the regime and cannot be declared unfair. Contracts for certain goods and services are also excluded, including contracts for the shipping of goods, constitutions and most insurance contracts.

A similar unfair contract terms regime exists under the Australian Securities and Investments Commission (ASIC) Act 2001 (Cth) in relation to standard form consumer contracts for financial products and services.

The Approach Taken by the ACCC

The ACCC has recently undertaken an industry review and engagement which examined consumer contracts in the airline, telecommunications, fitness and vehicle rental industries, as well as some contracts commonly used by online traders and travel agents. The aims of the industry review were to:

  • evaluate compliance with unfair contract terms law and broader ACL requirements in key national industries, by identifying problematic contracts and contract terms, as well as broader concerns; and
  • work with business to achieve positive changes to standard form consumer contracts and related practices, to benefit consumers.

On 15 March 2013, the ACCC released its report 'Unfair contract terms industry review outcomes' (Report), which identified a wide variety of problematic terms in standard form consumer contracts. The Report identified the following types of terms to be of particular concern to the ACCC:

  1. terms that allow the business to change the contract without consent from the consumer;
  2. terms that cause confusion about the agency arrangements that apply and that seek to unfairly absolve the agent from liability;
  3. terms that unfairly restrict the consumer's right to terminate the contract;
  4. terms that suspend or terminate the services being provided to the consumer under the contract;
  5. terms that make the consumer liable for things that would ordinarily be outside of their control;
  6. terms that prevent the consumer from relying on representations made by the business or its agents;
  7. terms seeking to limit consumer guarantee rights; and
  8. terms that remove a consumer's credit card chargeback rights when buying the service through an agent.

The ACCC found that in the majority of industries reviewed, most businesses took advantage of the opportunity to align their standard form contracts with the new unfair contract terms laws. In particular, in the airlines industry 79% of problematic terms identified by the ACCC have been amended or deleted as a result of the review.

Noting that some businesses have not provided full cooperation during the review or have chosen not to address the problematic terms in their standard form contracts, the ACCC warned that it is now considering further enforcement actions, including the possibility of court proceedings.

What Does This Mean for Your Business?

The ACCC has made good on its promise in the Report that the grace period focus on compliance review has come to an end and the ACCC has now transitioned to an enforcement focus in dealing with unfair contract terms. The ByteCard case illustrates the illegality of terms squarely within the unfair contracts terms domain, however it is likely that future ACCC action may seek to test the edges of that territory, such that businesses cannot rely on a checklist approach of terms that will be struck out.

Accordingly, all businesses that use standard form consumer contracts should, if they have not done so already, comprehensively review their standard terms and conditions and make changes where necessary, to ensure compliance with the unfair contract terms provisions and the broader consumer protection requirements in the ACL.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.