As part of the Federal, State and Territory Governments’ efforts to introduce a uniform national consumer law (called the Australian Consumer Law), a new national regime governing unfair contract terms will soon become effective in Australia.

The Trade Practices Amendment (Australian Consumer Law) Bill 2009, which implements new law, was passed by the Senate on 17 March 2010 and is now awaiting royal assent. It is currently expected to become effective on 1 July 2010.

The impending introduction of the new rules, that govern standard form consumer contracts, means that businesses should now ensure their arrangements will be compliant.

As we have reported in earlier newsletters, the unfair contract terms provisions apply to standard form consumer contracts. In general terms, these are contracts for the supply of goods or services (including an interest in land), to an individual, whose acquisition is predominantly for personal, domestic or household use, the terms and conditions of which are imposed by the supplier and are non-negotiable.

The new law provides that a term is “unfair” if:

  1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  3. it would cause detriment to a party if it were to be applied or relied upon.

Relevant to this determination is:

  1. a consideration of the contract as a whole; and
  2. the extent to which the term is transparent – that is, whether it is:
  1. expressed in reasonably plain language;
  2. legible;
  3. presented clearly; and
  4. readily available to the party affected by the term.

The new law provides some examples of terms that may be regarded as unfair in appropriate circumstances. These examples are merely intended to give statutory guidance on the types of terms that are regarded as warranting caution, rather than being prohibited outright or creating a presumption that they are unfair. The examples include:

  1. permitting unilateral changes to key elements of the contract by the supplier;
  2. limiting the rights of the consumer;
  3. penalising the consumer - but not the supplier - for a breach or termination of the contract; and
  4. permitting assignment of the contract to the detriment of the consumer without the consumer’s consent.

An unfair term will be void. A void term does not automatically strike down the entire contract. It will continue to bind the parties if it is capable of operating without the unfair term.

It should be noted that the law is not aimed at discouraging the usage of standard form consumer contracts. The mischief to which the law is aiming is the potential for a business to use them as a mechanism to allocate risk in an unfair manner by using its stronger bargaining position. Conversely, the law is not concerned with reversing a bad bargain struck by a consumer and allowing them to walk away from a poor choice. It is about affording consumers a measure of protection against risks that may be unfairly allocated to them by virtue of their weaker bargaining position.

Clearly though, the new law necessitates that a business think carefully when preparing or relying on standard form consumer contracts. Real consideration should go into whether inclusion of each term is necessary to protect legitimate business interests.