17 February 2020

Ashley & Martin – Unfair contract terms in consumer contracts

The terms in three Ashley & Martin standard form consumer contracts were unfair, and therefore void and unenforceable.
Australia Consumer Protection
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In the decision of ACCC v Ashley & Martin Pty Ltd [2019] FCA 1436, the Federal Court held that the terms in three Ashley & Martin Pty Ltd (Ashley & Martin) standard form contracts with consumers were unfair within the meaning of section 24 of the Australia Consumer Law as set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (ACL), and therefore void and unenforceable pursuant to section 23 of the ACL. The use of unfair contract terms in consumer or small business contracts is prohibited by section 23(1)(a) of the ACL. The unfair contract terms regime aims to protect consumers and small businesses from terms and conditions in standard form contracts that are not adequately disclosed and are often offered on a "take it or leave it" basis. As discussed in our article, Government to strengthen unfair contract terms protections the Government has committed to strengthening these protections.

Ashley & Martin's conduct

The unfair terms in three Ashley & Martin standard form contracts stated that consumers must commit to a program of medical treatment for hair regrowth before they were offered the opportunity to consult a doctor regarding their eligibility. If a consumer was then found to be ineligible for the program, their early termination of the contract would result in them being obliged to pay a significant percentage of the total costs under the contract. Following an adverse reaction to a hair loss product, the refund term in the contract limited Ashley & Martin's obligation to only being liable to a refund for the hair loss product that caused the adverse reaction and no refund for the other components of the program.

The ACCC initiated proceedings in November 2017. The ACCC's position was that the terms operated in a manner that committed consumers to undertake and pay for a medical program without obtaining properly informed consent. By the time consumers had consulted a doctor they had already committed to a contract from which they could not withdraw without incurring a significant cost.

The relevant contracts in questions were used with consumers over the period from June 2014 to June 2017 and affected over 25,000 consumers. Upon execution of the contract, consumers were obligated to pay for all or part of the cost of the program, subject to the terms of the contract, with payments ranging from $1,820 to $6,600 for a term of 8 or 12 months. The termination periods for the relevant contracts were as follows:

  • under the first contract, upon signing the contract the consumer was obligated to pay 25% of the price, rising to 50% if they terminated within two days of seeing a doctor, and then rising to 100% after the two day period; and
  • under the second and third contracts, the 25% payment upon signing the contract was replaced with an obligation to pay for any hair loss products that had been provided by Ashley & Martin up to that point. The third contract also removed the 50% payment.

Relevant provisions

Section 23 of the ACL provides that a term of a consumer contract is void if the term is unfair and the contract is a standard form contract. Thus, the contract continues to bind the parties if it is capable of operating without the unfair term. Section 24(1) of the ACL sets out three elements that must be satisfied before a term of a consumer contract or small business contract will be considered unfair:

  • it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The Court may consider any relevant factors to determine whether a term is unfair. Additionally, pursuant to section 24(2) of the ACL, the Court must take into account the transparency of the term and the contract as a whole.

The decision

For the first test of unfairness, the following factors were relevant in concluding that there was a significant imbalance in the parties' rights and obligations arising under the contract:

  • the contract imposed a "disadvantaged burden or risk" on the consumer by committing them to a medical program before consulting with a doctor to discuss the risks and suitability beforehand, depriving them of informed consent; and
  • the consumer was given minimal time to consider the risks when given the doctor's advice by only allowing two days to determine whether they would cancel the program and still pay 50% of the costs; and
  • the consumers was denied the opportunity to consult with their own doctor and had to rely on the information provided by the Ashley & Martin doctor whom the consumer was meeting for the first time and with whom the consumers did not have a longstanding and trusting relationship.

For the purposes of the second test, Ashley & Martin bore the onus of proving that the impugned terms were reasonably necessary in order to protect its legitimate interests. Ashley & Martin submitted that the terms were not unfair as it had a legitimate interest in protecting its business reputation by ensuring that consumers persist with treatment long enough to observe results and achieve results, and were provided with sufficient products to do so. If a contract was terminated early, it was in their legitimate interest to be paid a reasonable sum for the goods and services it had provided.

Ashley & Martin provided the Court with little evidence to support these assumptions. Justice Banks-Smith accepted that protection of reputation was a legitimate interest, however the unfair terms, particularly the timeframes within which payment obligations escalate, were not reasonably necessary to protect Ashley & Martin's reputation.

In considering the third test of the existence of detriment to the consumer, the ACCC claimed that consumers incurred both financial and non-financial detriment. Justice Banks-Smith concluded that the consumers incurring financial detriment is apparent from the findings with respect to the significant imbalance and agreed that the financial obligations of the contract negated the consumers ability to freely give or withhold informed consent to medical treatment by pressuring the consumer into making a decision within a short time frame. The fact that the consumer had already received products did not ameliorate the detriment.

For these reasons the relevant terms in the contract were found to be unfair within the meaning of section 24 of the ACL, and void pursuant to section 23 of the ACL. The ACCC proposed orders for redress in respect of the consumers who terminated any of the contracts. On 24 October 2019, pursuant to section 239 of the ACL Ashley & Martin was ordered to conduct a review to identify the consumers who were owed a refund and pay all refunds in accordance with the process set by the Court.

Ashley & Martin will also bear the ACCC's costs of the proceedings, which are to be assessed if not agreed.

What this means for your business

If a term in a standard form contract is unfair, the term will be void. The whole term, or part of the term will be severed from the contract if the contract can operate without the term. If the unfair term goes to the root of the contract, the whole contract with be invalidated.

When drafting termination clauses you must ensure consumers are afforded a reasonable period of time in which to make an informed decision. Additionally, costs associated with the termination of a contract must reflect the actual loss likely to occur after any breach of contract by the consumer.

If you would like examples of contract terms that are potentially unfair, read our article Unfair contract terms.

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.

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