The Federal Court has applied the unfair contract terms provisions of the Australian Consumer Law to void a termination clause in a contract for a Medical Treatment Program for hair loss which permitted the consumer to terminate early but required 100% of the agreed fee to be paid if they did so.

The decision is Australian Competition and Consumer Commission v Ashley and Martin [2019] FCA 1436 (4 September 2019) Federal Court of Australia (Justice Banks-Smith).

The Medical Treatment Program

Part 1: The Initial Consultation with a hair loss consultant

The patient makes an appointment with Ashley & Martin and sees a hair loss consultant for 60 minutes. The first consultation is free. A confirmatory email advises the patient to be 'financially prepared'. The patient fills out a questionnaire and a checklist, and if the patient wishes to proceed, they and the consultant sign a legally binding standard form contract. The deposit is paid. The patient is provided with shampoos, conditioners, herbal supplements and multivitamins  at that consultation, sufficient for the term of the program.

Part 2: The consultation with an Ashley & Martin doctor

Ashley & Martin provides a protocol letter (as to risks) to their nominated doctor, who is engaged by the patient as an independent contractor. After carrying out a risk assessment, the doctor prescribes Finasteride tablets and Minoxidil lotions for males and anti-androgen tablets for females, which are prescription drugs.

Part 3: The term and the cost

Contract / Program term is between eight to twelve months.

The cost of the Program ranged from $1,820 to $6,600, based on the samples before the Court.

During the relevant period June 2014 to June 2017, some 25,000 contracts were entered into.

The Termination Clause

In contracts entered into until September 2016, the patient's rights to terminate were:

You may terminate your agreement with us at the following times by paying the following sums:

* immediately after accepting the Medical Treatment Program and before the consultation with the medical doctor by paying 25% of the total price payable under the complete Medical Treatment Program; * within 2 days of accepting the Medical Treatment Program and after the consultation with the medical doctor by paying 50% of the total price payable under the complete Medical Treatment Program, and * at any time after 2 days after accepting the Medical Treatment Program and after consultation with the medical doctor by paying 100% of the total price payable under the Complete Medical Treatment Program.

In contracts entered into between September 2016 and January 2017, the first part was changed so that instead of charging 25% of the total price, it read:

* immediately after accepting the Medical Treatment Program and before the consultation with the medical doctor by paying for any Hair Loss Goods and Hair Loss Services provided at our standard prices.

The second and third parts remained unchanged.

In contracts entered into after January 2017, the second part with the 50% charge was removed, so that termination could be immediate without charge, or within 2 days after consultation with the medical doctor by paying for the goods and services provided. The third part was retained in which 100% of the total price was payable by a patient terminating after 2 days after the medical consultation. One right was added:

* If the medical doctor determines that you are not suitable for medical treatment for your hair loss condition then the company will refund all monies already paid.

Applying the Unfair Contract Terms Law to the Termination Clause

The Court made these findings of unfairness (in terms of s 24(1)):

* the term caused a significant imbalance in the parties' rights and obligations under the contract because when entering the contract the patient had no medical advice and therefore could not give informed consent to the contract. The imbalance was exacerbated by the limited refund regime. Further, to make a decision to proceed requires reasonable time - 2 days is too short a time for consideration.

* the term was not reasonably necessary to protect the the legitimate interests of Ashley & Martin. Ashley & Martin presented no evidence as to their actual expenses or as to why the clause was necessary to protect its business reputation or to explain the 2 day period or to explain why the charge should increase from 50% to 100% 2 days after the medical consultation, other than to pressure the patient into making a decision.

* there was both financial and non-financial detriment to the patient. The financial detriment arose because the patient had committed to payment without knowing if the program was suitable or might cause an adverse side effect. The non-financial detriment was the inability to make an informed choice.

The Court found that the termination clause was an unfair contract term, except for the full refund right, within the meaning of s 23 and s 24 of the Australian Consumer Law and proposes to make declarations under s 239 that:

The terms are unfair under s 23 and are void under s 24 ACL because they commit the consumer to pay for a medical treatment program before the consumer has had the opportunity to receive and consider medical advice and give or refuse informed consent to the medical treatment.

Conclusion - Termination fees must be Fair

The 'unfair contract term' test is now used to determine the validity of termination clauses in consumer contracts in Australia. In part, it echoes the common law test of 'reasonable pre-estimate of loss' which is commonly applied in tour and cruise contracts to clauses which enable a traveller to cancel the tour or the cruise but to forfeit an increasingly higher percentage of the price the shorter the period before the departure date the traveller cancels. 

The Ashley & Martin decision turned on informed consent. Not only should a reasonable period of time have been given to the patient to decide to continue with the treatment after receiving medical advice before being committed to pay such large termination fees, but also the amount payable should have reflected actual loss flowing from the breach of contract.