On 24 July 2013, the Federal Court of Australia made orders in respect of proceedings between the Australian Competition and Consumer Commission (ACCC) and internet service provider ByteCard Pty Limited (known as NetSpeed Internet Communications).  This is the first case in which the ACCC had issued proceedings solely based on the unfair contract provisions of the Australian Consumer Law.

The case was resolved by consent, with ByteCard acknowledging that various terms in its standard form consumer contracts were ‘unfair’ and agreed to pay the ACCC’s costs.

The proceeding is the first to be brought by the ACCC for the sole purpose of pursuing a company for alleged breaches of the unfair contract provisions that commenced in 2010 and mark a significant transition by the ACCC from a compliance focus to an enforcement focused response when considering unfair contract terms in consumer contracts.

Although the case was resolved by consent, it provides insight as to the types of terms and conditions that may trigger action by the ACCC.

Unfair contract provisions

The unfair contract provisions only apply to standard form consumer contracts.

A standard form consumer contract is one that is essentially non-negotiable and is for supply to an individual who acquires the goods or services wholly or predominantly for personal, domestic or household use. Examples include contracts for airline tickets and mobile phone services.

The unfair contract provisions do not apply to business to business contracts.

If terms of standard form consumer contract are 'unfair', they can be deemed void and unenforceable. A term is 'unfair' if:

  • it would cause a significant imbalance in the parties’ rights and obligations under the contract; and
  • it is not reasonably necessary 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 to the contract if it were to be applied or relied upon.

Consideration is given to whether a term is in plain language, legible, presented clearly and readily available.

Background

In the ByteCard proceeding the ACCC alleged that ByteCard forced customers to accept standard form contracts which contained unfair terms and conditions.

The ACCC was concerned about certain terms which:

  1. allowed ByteCard to unilaterally vary the price under an existing contract without providing the customer with a right to terminate under the contract;

  2. required the customer to indemnify ByteCard in any circumstance, even where the contract had not been breached and the liability, loss or damage may have been caused by ByteCard’s breach of the contract; and

  3. enabled ByteCard to unilaterally terminate the contract at any time without cause or reason.

The ACCC believed that these terms were ‘unfair’ as they:

  1. created a significant imbalance in the parties’ rights and obligations;

  2. were not reasonably necessary to protect ByteCard’s legitimate interests; and

  3. if applied or relied upon by ByteCard, would cause detriment to a customer.

Orders by Consent

Ultimately ByteCard consented to orders that the terms were unfair and therefore void.

ByteCard also agreed to pay the ACCC’s costs in the sum of $10,000. No other penalties were imposed.

The orders demonstrate that even if matters such as these do not proceed to a contested trial, they can still have the potential to be detrimental and costly for a business.

Comment

Since the unfair contract provisions first came into force on 1 July 2010, the ACCC has been educating businesses about the new laws rather than strictly enforcing them. This litigation represents a strong shift in the ACCC’s attitude toward an enforcement based approach in respect of unfair contract terms in standard form consumer contracts. This is not unusual for the ACCC, particularly during Chairman Rod Sims’ tenure.

Although the ACCC has its first scalp in the area, it may well be disappointed not to have set authority as to what can constitute an unfair contract term. The ACCC is reportedly eager to test various aspects of the Australian Consumer Law and determine the outer limits but a consenting respondent will not assist with this.

It is important that companies and lawyers view this case for what it is. It is an indication of the ACCC’s preparedness to litigate based on the unfair contract provisions and it is an indication of the types of contract terms in respect of which the ACCC may take action. However, it is not authority as to how a court will interpret the unfair contract provisions.

ByteCard is not unique in choosing to consent to orders in an ACCC proceeding. Consenting to orders has been somewhat of a trend over the last few years as companies seek to avoid the risks and costs associated with litigation and reduce any penalties.

However, one thing that consent will not necessarily shield a company from is adverse PR. Companies should be aware that the ACCC issues press releases in respect of court proceedings both at the time of issuing and once final orders are made. The ACCC does this regardless of consent. It has been evident that the media has been giving the ACCC the attention it seeks (for deterrence reasons) by reporting on nearly all of these cases.

Risk management is best addressed before engaging in unlawful conduct (such as when preparing or reviewing standard form contracts) and not just after proceedings have been issued.

What to do

Many businesses reviewed their standard form contracts in 2010, when the unfair contract provisions were first introduced. The ByteCard case represents a wakeup call for those businesses that failed to review their terms and conditions initially or need to review any updated terms and conditions.

 This article was prepared with the assistance of Sam Baring, graduate lawyer.