July 2010 marked the commencement of the new national unfair terms regime, embodied in the Australian Consumer Law and the ASIC Act1.  Last week, the Australian Competition and Consumer Commission (ACCC) released a paper summarising the outcomes of its engagement with industry in relation to the regime2. The paper follows the recent publication by the ACCC of its revised Compliance and Enforcement Policy outlining its enforcement objectives going forward.  With the ACCC signalling that it now intends to adopt a more enforcement-based approach, we thought it would be timely to also pass on our experiences in advising on the unfair terms regime so far.

The unfair terms regime – a recap

The unfair terms regime is embodied in Part 2-3 of the Australian Consumer Law and subdivision BA of the ASIC Act. The legislation itself is short – only four pages of the Australian Consumer Law – yet its effect is potentially powerful.

The unfair terms regime applies to standard form consumer contracts, and renders void any provisions which are unfair. The test for unfairness is contained in a number of different provisions, and can be summarised as follows:

A provision is unfair if it:

  1. would cause a significant imbalance in the parties’ rights and obligations; 
  2. is not reasonably necessary to protect the legitimate interests of the party who is advantaged by the term; and 
  3. would cause detriment to a party,  taking into account the extent to which the term is transparent (i.e. expressed in reasonably plain language, legible, presented clearly and readily available to the party affected by the term) and the contract as a whole.

A limited range of provisions are not subject to the regime, including provisions defining the main subject matter of the contract, provisions setting the upfront price payable, and provisions required or permitted by legislation.

It is not an offence to include an unfair term in a standard form consumer contract, however if a person attempts to enforce a provision of a contract that has been declared unfair then remedies can apply, including court-awarded compensation.

A few twists

As you can see, the regime is not terribly complicated. However there are a few twists that make it a potentially complex area of the law:

  • The test for unfairness is broad and high-level. While obviously this is deliberate from the legislature’s point of view, this imparts complexity into any advice in this area. As a result, even after a contract is reviewed and updated to comply with the regime, it is impossible to say with certainty that no terms in the contract will be considered unfair. 
  • The test for whether the regime applies is purposive. The test for whether the consumer guarantees apply under the Australian Consumer Law depends on the nature of the goods. An organisation supplying particular goods or services can form a view about whether the guarantees are likely to apply based on the nature of the goods or services, and once it has done so that analysis will apply to all acquisitions of those goods and services.

In contrast, whether the unfair terms regime applies depends on the purpose for which a particular individual acquires the goods or services. An organisation may supply goods or services that would never be thought of as consumer goods, but if one individual purchases them for personal use, then the unfair terms regime will apply to that one transaction e.g. a photocopier supplied to an individual for their personal use.

This means that suppliers of non-consumer goods face additional issues. Suppliers who wish to be cautious and offer different terms complying with the unfair terms regime may not be able to determine which transactions are for which purpose. If a supplier attempts to have a single set of provisions which contain “over-riding” terms complying with the unfair terms regime depending on the purpose of the acquisition, this may make the terms more complex (a relevant factor in assessing unfairness under the regime) or indicate to non-consumer purchasers that the supplier is able to accept more favourable terms.

An update on relevant cases

The unfair terms regime in the Australian Consumer Law and the ASIC Act is similar to the regime that existed in Victoria since 2003,3 and which currently exists in the United Kingdom4.  While the United Kingdom experience is instructive, and the United Kingdom Office of Fair Trading has provided very detailed advice on the types of provisions they consider unfair, it remains unclear how applicable such experiences are to the Australian legislation.

While a number of decisions have applied the new unfair terms regime, there remains a lack of guidance as to the precise scope of this regime. What can be gleaned from the cases is that:

  • Clarity of drafting is important and does matter in determining whether a provision is unfair. Terms that are confusing, unclear or inconsistent are much more likely to be considered unfair. As an extreme example, an airline ticket printed with the words “NON ENDNON REF” was found not to be clearly or legibly expressing a restriction that the ticket was non-refundable, even though accompanying documentation referred to non-refundability.5  In another (less extreme) case, a court found that certain provisions were not transparent because the relevant concepts were dealt with in two separate clauses that were internally inconsistent, the structure of the agreement was confusing, and the provisions were only a small part of a large 13 page contract provided online.
  • If a provision creates an imbalance, the onus rests with the supplier to prove that it is necessary to protect its legitimate interests. Courts will act reasonably in determining this, but clearly provisions which seek to unreasonably shift risks to the consumer, or unreasonably attempt to limit a supplier’s liability for matters within its control, are at significant risk of being considered unfair. For example, a provision in an online auctioneer’s terms was found to be unfair where it purported to remove all rights of the auction winner to return the goods, even if they were damaged prior to them being made available for pickup.   
  • Even if a supplier is able to describe circumstances in which a particular provision may protect its legitimate interests, if the provision goes beyond those legitimate interests the entire provision may be void. For example, in a delivery contract a provision reserved an absolute discretion for the supplier to determine the method, route and time by which goods were to be delivered. While some aspects of this provision did not create any unfairness (such as the ability of the supplier to determine the method and route of transportation), the fact that it gave the supplier a total discretion as to when goods are to be delivered was considered unfair.8    
  • Provisions which are inconsistent with a consumer’s other rights under the Australian Consumer Law (in particular the consumer guarantees which have been identified by the ACCC as a key risk area) will be unfair.9

In summary, suppliers who take a reasonable approach to reviewing their contracts for unfair terms, and ensure their contracts appropriately reflect their legitimate interests, are likely to be well placed to protect against claims of unfairness.

Our experience in reviewing contracts for unfair terms

As noted above, conducting an unfair terms review of a contract can be a difficult exercise given how broadly the test is drafted. We generally adopt the following processes in reviewing unfair terms:

  • confirm whether the regime applies. Where the goods or services are rarely to be acquired for personal use, it might make sense to refuse to provide the goods or services in such isolated cases. Alternatively, you may need to consider whether to adopt different contracts depending on the purpose of the acquisition, or to include “over-riding” provision which only apply where the goods or services are acquired for personal use;   
  • confirm how thorough an approach to compliance you wish to take from a risk-perspective. Because the test for unfairness is so general, it is relevant to consider whether you only wish to address significant “red flag” issues as part of your review, whether you wish to develop extremely consumer-friendly terms, or something in between; 
  • identify those provisions which create a (significant) imbalance in the rights of the parties. We usually take a highlighter to an agreement to identify these, and these are the provisions which are then carried forward for the next stage of analysis; 
  • determine whether the imbalanced provisions are reasonably necessary to protect your legitimate interests. Sometimes the legitimate interest is obvious, however sometimes it requires considered internal analysis; and 
  • assess whether the provision as drafted protects that legitimate interest and therefore the term is unlikely to be considered unfair. If not, there are a number of alternatives that you may wish to consider taking:

Possible approaches to address unfair terms

Click here to view table.

Particularly for borderline clauses that you retain, be sure to draft the provision with severability in mind. Under the unfair terms regime an entire provision can be void even if only it part of it is unfair.

In our experience, a contract can be amended in ways that doesn’t give up important and necessary protections for your business. Most often we are able to suggest removing “red flag” clauses that are rarely relied upon, or limit over-reaching clauses so that they more closely address the particular risks they were intended to cover in any event. Occasionally contracts could benefit from a restructuring or re-write, to ensure they are understandable for consumers and compliant with the unfair terms regime.

The approach taken by the ACCC

The ACCC's paper shows they have investigated a number of industries in relation to potentially unfair terms, including the airline, telecommunications, car rental, travel agency, online shopping and fitness industries.  The ACCC investigated businesses in these industries, identifying particular provisions which they considered to be at risk of being unfair, and invited the businesses to address such issues. We assisted a number of clients in dealing with such inquiries from the ACCC.

While the ACCC's paper states that they found a good level of co-operation from businesses during the reviews, leading to some substantial changes by businesses to their standard form consumer contracts, the ACCC also warns that they are considering whether further enforcement actions are warranted in some cases. From our experience in dealing with the ACCC, businesses that engaged with the ACCC, co-operating to amend some clauses while explaining others, achieved good outcomes.

What is clear from the ACCC's paper on the unfair terms regime and its recently released Compliance and Enforcement Policy is that the ACCC is signalling an increase in its enforcement of the Australian Consumer Law.  This is reflected in the numerous proceedings commenced in the latter part of last year, including against HP in October 2012 for allegedly engaging in misleading and deceptive conduct in relation to consumer’s guarantee and warranty rights under the Australian Consumer Law.  Other proceedings were taken for unconscionable conduct (now on appeal by the ACCC) and unsolicited consumer agreement contraventions.  It was also around this time that the ACCC commenced its first court proceedings in relation to the unfair terms. The ACCC claims that Advanced Medical Institute included unfair termination provisions in its long-term consumer contracts, requiring consumers to pay out 15% of the remaining contract price which it argues constitutes an unfair penalty.

Conclusion

The introduction of the unfair terms regime was a significant step-change in Australia’s consumer protection laws, however it has quickly become part of the regulatory landscape within which consumer contracts need to be written. While many businesses have reviewed standard form consumer contracts for compliance with the unfair terms regime, it is obvious that others have chosen not to, or may not understand the need to do so. Many suppliers might view of the associated risks as being low.  However, particularly in important or long-term consumer contracts (such as those in the financial services industry), the potential effect of provisions being void can be significant. Unfortunately for some, our understanding of the unfair terms regime may increase this year as the ACCC increases the number of enforcement proceedings brought.