Background

The Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Bill) was introduced into Federal Parliament on 24 June 2009 and is the first phase of a uniform national consumer law. The Government has proposed that the commencement date will be 1 January 2010. States and Territories must enact laws to apply the new consumer law within their jurisdictions, to the extent not covered by the Federal law, by 1 January 2011. The new law will apply to contracts entered into, or renewed or varied, on or after the commencement date and will also apply to contracts between overseas suppliers and Australian consumers.

The Bill is focussed on establishing the new unfair contracts regime and new regime for enforcement and remedies for breaches of the consumer protection laws. While the impact of the Bill primarily concerns the retail sales of goods and services to consumers it should be noted that the provisions can apply to goods or services acquired by individuals partly for business purposes, so long as the predominant purpose is personal, domestic or household use or consumption. This will include contracts with consumers for utility services, banking and financial services, and telecommunications services. The Bill will also apply to contracts for the sale of land and contracts under which rights of occupancy are granted.

While ostensibly creating a single national law, the Bill in fact splits jurisdiction between two broadly similar laws, and two regulators. The Australian Competition & Consumer Commission will apply the law under the Trade Practices Act to contracts for the supply of goods and services to consumers, excluding financial services. The Australian Securities Investments Commission will apply the law under the Corporations Act to contracts for financial services.

There are a number of areas of uncertainty in the proposed law. Retail suppliers will need to undertake significant due diligence in relation to their standard terms of business and address these uncertainties if the law is passed in its present form. The Bill is based on United Kingdom law implementing the European Community Directive on Unfair Contract Terms. We comment on the UK experience of those new laws.

What is a standard form contract?

It is left to the courts to determine what is a “standard form” contract. However, the court must consider whether: there is an imbalance of power; the contract was prepared prior to discussions; the consumer was required to take or leave the contract; the consumer was given an effective opportunity to negotiate the terms; the contract terms take into account the consumer’s situation or the particular transaction. The supplier bears the burden of proving that a contract was in fact negotiated. It seems that the entire contract would have to be negotiated, provision by provision, to be held not to be a standard form contract. The UK proposes to remove the concept of standard form contracts and apply the unfair contracts law to all consumer contracts.

When is a term unfair?

The Bill adopts the proposed definition of “unfair” which requires that it would cause significant imbalance in the parties’ rights and obligations and is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it. The “reasonableness” element is an addition to the UK concept of unfairness, and is at first glance to be welcomed. However, the Bill provides for a reversal of the burden of proof, in that a contract is presumed not to be reasonably necessary to protect the interests of a supplier unless the supplier proves otherwise.

In determining whether a term is “unfair”, a court must consider the contract as a whole, the extent to which there is a substantial likelihood of detriment to a party if the term is enforced and the extent to which the term is in plain language and readily available to any party. These provisions follow the UK law. There is an implication in the last matter that contract terms must be mutual in order to be fair. This is not generally the case, since the obligations of parties will be different and the terms governing rights and obligations generally reflect this, for example, one supplies goods or services and the other pays for them. These requirements will lead to significant re-drafting of contract terms to ensure provisions are expressed in plain language and so far as possible to operate mutually.

What terms are not affected?

The unfair contracts law does not apply to terms which define the “main subject matter” of the contract. This follows the UK law, where the courts have held, for example, that provisions that only apply on default by the consumer are not part of the “main subject matter”. The Bill provides that the contract continues unaffected by a term being held void, so long as the contract is “capable of operating” without the unfair term. This raises a similar issue. Arguably, there will be a matrix of provisions that are bound into the price for goods or services, which will define the “main subject matter” and, if changed, would render the contract incapable of operating. These matters are not clarified by the Bill, and will have to be determined in the courts.

The unfair contracts law does not apply to terms setting the price specified in the contract and which are disclosed before the contract is entered into. This broadly follows the UK law.

There are also exceptions for contract terms required or expressly permitted by a law of the Commonwealth or a State or Territory. While this broadly follows the UK law, unique Australian provisions of the Bill state that the Bill does not apply to certain shipping contracts, the constitution of a company or managed investment scheme, or to any term the avoidance of which would result in an acquisition of property on unjust terms. That is, the divestment of certain rights can be unconstitutional in certain circumstances.

The new proposed law applies to insurance contracts, except to the extent the provisions of the Insurance Contracts Act provide otherwise. That Act appears to prevent the contract being reviewed for unfairness or unconscionability, but does not apparently give insurers immunity from claims for misrepresentation or damages. The interplay between the Insurance Contracts Act and the new law is left for the courts to determine.

Enforcement

Unlike other provisions of the Trade Practices Act, which are contravened by making or giving effect to certain agreements, the Bill provides that contraventions will occur, and liability to penalties and civil damages actions will arise, only in relation to contracts which contain prohibited terms, or are made after courts have declared terms to be unfair. The ACCC and ASIC are given wide enforcement powers including to obtain injunctions, compensation orders for affected consumers, and issuing public warning notices. The two bodies will publish guidance notes, jointly with State and Territory offices of fair trading, on unfair contract terms following the enactment of the legislation. It is likely that many standard contract terms which are at present considered normal will have to be re-considered and re-written during calendar 2009 if the Bill is passed in its present form.