On 27 May 2011, the UK High Court of Justice found that various contact terms contained in standard form gym memberships were unfair and unenforceable, including terms requiring the customer to continue their membership for a minimum fixed period and to pay termination charges if they cancelled early.

The case has important implications for Australian companies using standard form contracts in their dealings with consumers, as the UK unfair terms regime is similar to the national Australian unfair terms regime introduced last year.

Background

The decision of Office of Fair Trading v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch) concerned the practices of Ashbourne Management Services Ltd (Ashbourne), a “gym membership management, recruitment and retention” company that provides services to gyms and health clubs in the United Kingdom. Ashbourne recruits members, signs them onto long-term (typically 12, 24 or 36 month) standard form membership agreements, collects their monthly membership payments and recovers money owed by members upon default or termination.

The Office of Fair Trading (OFT) brought proceedings alleging that 13 of Ashbourne’s standard form agreements contained unfair contract terms, that Ashbourne had engaged in unfair commercial practices and that its agreements did not comply with consumer credit laws. The proceedings followed 10 years of dialogue between the OFT and Ashbourne, during which time Ashbourne had not amended its agreements to comply with the OFT’s recommendations and had persisted in certain practices despite assurances to the contrary.

Decision - unfair terms

The OFT contended that a number of terms contained in Ashbourne’s standard form agreements (and commonly used in other standard form agreements) were unfair including:

  • terms imposing minimum membership periods of 12, 24 or 36 months;
  • a term requiring payment of an early termination fee calculated on the basis of the remaining monthly payments for the minimum membership; and
  • terms allowing Ashbourne to terminate the agreement for minor breaches by the customer.  

Minimum period of membership

Justin Kitchin determined that the defendant’s business model was designed to take advantage of the naivety and inexperience of the average consumer using gym memberships and to take advantage of the fact that the average consumer overestimates the use they will make of the gym when they first sign up. In these circumstances, His Honour found that all 24 and 36 month minimum terms were unfair.

His Honour also found that 12 month minimum terms were unfair where the customer was given insufficient rights to terminate early. However, minimum terms of 12 months were not unfair where the contract allowed the member to suspend or cancel their membership (without incurring charges) in certain circumstances including for financial or health reasons, or if the member moved out of the area or lost their job.

Importantly, the Court considered whether the terms relating to the minimum period of membership were terms that defined the ‘main subject matter’ of the agreement and, as such, were not able to be challenged under the UK unfair terms regime. The same exception exists under the Australian unfair terms regime.

His Honour rejected the argument that the minimum period terms fell within this exception. He held that the assessment of fairness did not “relate to the meaning or description of the length of the minimum period of the length of the period, the facilities to which the member gains access or the monthly subscription which he has to pay…instead it relates to the obligations upon members to pay monthly subscriptions for the minimum period when they have overestimated the use they will make of their memberships and failed to appreciate that unforseen circumstances may make their continued use of a gym impractical or the memberships unaffordable. Put another way, it relates to the consequences to members of early termination in light of the minimum membership period”. [emphasis added]

This aspect of the judgement appears to suggest that a term will only ‘define’ the main subject matter of the contract if it relates to the meaning or description of the subject matter, rather than the terms setting out that subject matter (here the terms containing the length of the minimum period). This is a narrow interpretation of the exception, and is likely to have ramifications for the future decisions of Australian courts looking for guidance from overseas jurisdictions.

Payment of early termination fees

Some of the gym membership contracts required members to pay a termination fee if the agreement was terminated prior to the expiry of the minimum term, which was equal to the balance of the monthly payments for the minimum term. These terms were held to be unfair because they made no allowance for accelerated payment.

His Honour also considered that terms allowing for termination (and payment of early termination fees) for a minor breach by the customer (such as a few days’ late payment) were also unfair.

Decision - consumer credit agreements

Justice Kitchin held that the standard form membership agreements did not constitute consumer credit agreements because they were “not agreements under which a debt is deferred and credit is provided”. His Honour stated that credit is provided where an obligation to pay is incurred at the outset and is discharged in instalments, but not where payments fall due in stages as the contract is performed.

His Honour held that, on a proper interpretation of Ashbourne’s agreements, consumers agreed to join a fitness centre for a minimum period and agreed to pay a charge every month for that period, but did not incur an obligation to pay the whole of the value of membership from the outset. Rather, the payment obligation only arose as the agreement was performed. This was because the agreements expressly provided that each payment related to the particular month during which the fitness centres’ facilities would be made available. Consequently, there was no lag between the time the payment was incurred and the time the payment fell due, and accordingly the agreements did not constitute credit agreements.

Decision - unfair commercial practices

Justice Kitchin also held that Ashbourne engaged in unfair commercial practices by: recommending the use of an agreement that contained unfair terms, seeking monthly payments that members were not bound to pay, reporting or threatening to report to credit reference agencies that individuals were in arrears where payment was claimed under an unfair term; reporting or threatening to report to credit reference agencies that individuals owed a debt that was not in fact a debt or was not owed; and demanding payment of a sum when the liability to pay that sum was in dispute.

Australian implications - unfair terms

Under the Competition and Consumer Act (CCA), the test for assessing whether a contract term is ‘unfair’ is very similar to that exercised by Justice Kitchin.

In preparing non-negotiated standard form customer contracts, Australian business should be careful to ensure that the following types of clauses are not unfair:

  • minimum terms, where the length of the term goes beyond the period of time over which customer typically use the relevant services;
  • minimum terms which do not allow for an early costless termination in the event of changed circumstances or circumstances outside the control of the customers;
  • fees payable on early termination which reflect the total cost payable over the term without a discount for accelerated payment; or
  • termination rights (and payment of fees) for minor breaches.