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Submission due by 31 July

The Trade Practices Amendment (Australian Consumer Law) Bill 2009 (the Bill) was introduced into Federal Parliament last month. The Bill proposes changes to the Trade Practices Act 1974 (Cth) (TPA) and the Australian Securities and Investments Commission Act 2001 (Cth) that will result in a fundamental change to the way in which consumer contracts are regulated in Australia across a wide range of industries. The Senate Economics Committee has invited submissions on the Bill from the public, which must be received on or before 31 July 2009. The Committee is scheduled to report on 7 September 2009.

What is proposed?

The Bill proposes to introduce provisions that will result in "unfair" and "prohibited" terms in standard form consumer contracts being found void. In some circumstances it will also be a contravention of the TPA (or the ASIC Act, as relevant) to apply or rely on these terms. A Court will have the power to grant an injunction in relation to the conduct and/or damages to a consumer who suffers loss as a result of the contravention, and new civil pecuniary penalties of up to $27,500 (per incident) will apply in respect of a contravention in the case of prohibited terms. This is a significant addition to the range of enforcement options currently available under the TPA.

The Bill is the first phase in a significant overhaul of Australia's consumer law, which is centred around the implementation of a new, uniform, national consumer law following agreement by the Council of Australian Governments – to be known as the "Australian Consumer Law" (ACL). The other components of the ACL include the implementation of national product safety regulatory and enforcement framework, and the development of enforcement cooperation and information sharing mechanisms between state and territory regulatory agencies. The ACL will be applied as a law of each State and Territory, pursuant to the COAG agreement. It is expected to be fully implemented by the end of 2010.

What kinds of contracts will be affected?

The new provisions apply to "consumer contracts" only, however this has not always been the case and the possibility remains that the provisions will be extended to business-to-business contracts. In its draft form, the Bill also applied to these contracts so that contractual arrangements between sophisticated corporate customers would also be within its scope. Following a consultation process in May, the Australian Government made a number of changes to the unfair contract term provisions of the Bill, the most significant of which was to scale down the application of the new provisions to exclude business-to-business contracts. However, at the time the Bill was introduced into the House of Representatives, the Government indicated that it would revisit the issue of business-to-business contracts after it has completed its reviews of the unconscionable conduct provisions in the TPA and the Franchising Code of Conduct (which touch on some similar issues). The Government has also flagged that this will be an issue for further consideration by the Senate Economics Committee.

The new provisions will also apply only to standard form contracts. While the Bill does not define a "standard form contract", it lists a number of matters a Court must take into account when considering whether a contract is a standard form contract (while not limiting the factors it is permitted to take into account). As you would expect, these matters include whether another party was given an opportunity to negotiate the terms of the contract and whether the contract was prepared by one party prior to the transaction taking place. This is likely to cover many 'pro forma' or 'template' agreements used by business.

What is an "unfair" or "prohibited" term?

An unfair term is broadly described as one that:

  • would cause a significant imbalance in the parties' rights and obligations arising under the contract
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.  

The Bill lists a number of examples of provisions which may be unfair. These examples are based on section 32X of the Victorian Fair Trading Act 1999 (FTA) and include terms that allow one party (but not another party) to terminate the contract or vary its terms.

A prohibited term is one prescribed by the regulations. There are none currently specified in the Bill. Prohibited terms are not subject to the unfairness test – they are assumed not to be justified in a contract. It will be a contravention to include, apply or rely on a prohibited term in a standard form consumer contract. The new civil pecuniary penalties, which are also being introduced as part of the Bill, may be available in respect of such a contravention.

Who will be affected by the new law?

The new law has significant reach and will affect a wide range of businesses that supply goods and services to "consumers" under standard form contracts. These include:

  • utility services
  • communications services (e.g. ISPs and telcos)
  • subscription services, including pay TV
  • suppliers of consumer software
  • online services, including music download services, auction and gambling services
  • health and fitness and other leisure services
  • banks and other financial institutions
  • airlines. 

Key issues for consultation

Some of the key issues that are likely to be raised during the Senate consultation process are as follows:

Definition of "consumer contracts"

The way in which "consumer contracts" has been defined is likely to lead to potential confusion and uncertainty regarding the application of the new provisions.

The new provisions apply to contracts for the supply of goods or services to an individual who has acquired the goods wholly or predominantly for personal, domestic or household use or consumption (i.e. "consumer contracts"). This definition requires business to consider all the possible purposes for which a consumer might acquire a good or service when preparing a standard form contract, regardless of the nature of the good or service. This differs from the definition in the Victorian legislation (and the existing definition of a consumer in the TPA) on which the new provisions have been modelled, which is limited to contracts for the supply of "goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption" which is an objective test.

Application and transitional provisions

In its report, the Productivity Commission recommended that transitional arrangements be put in place to give business time to modify their contracts. The Bill does not include any transitional provisions or 'grace period' before which the new provisions will apply. Without a transitional period, it may be difficult for some businesses to comply with the new provisions, particularly those that sell physical products (for example, mobile phones or software products) or distribute their products via third party networks.

Earlier this year the Government announced that the new provisions would commence on 1 January 2010. The Government has since indicated that it may be willing to reconsider the commencement date in recognition that businesses will need more time to comply with the new provisions. The Bill currently provides that the provisions will commence on a date to be proclaimed, or 6 months after Royal Assent (whichever comes first).

The provisions will apply to all contracts entered into on or after the commencement date of the new provisions. They will also apply to contracts renewed or varied on or after that date.

The matters which a Court must have regard to in determining whether a term is "unfair"

When considering whether a term is unfair, a Court must have regard to a number of matters, including the extent to which it would cause, or there is a significant likelihood that it would cause, detriment to the consumer. This is a lower threshold than that recommended by the Productivity Commission, which proposed that an unfair term be one that results in material detriment to the consumer.

A Court must also have regard to the extent to which the term is transparent when determining whether a term is unfair. However, according to the Explanatory Memorandum, transparency, in itself, cannot overcome underlying unfairness in a contract term. The fact that such a term is expressed clearly (perhaps even including an explanation regarding its effect), and is drawn to the consumer's attention, would not of itself be enough to avoid a finding that the term is unfair.

Rebutting the presumption of 'unfairness'

A term will be "unfair" if it would cause a significant imbalance in the parties' rights under a contract and is not reasonably necessary in order to protect the legitimate interests of the party seeking to rely on it. There is very little guidance in the Bill as to what will satisfy this condition. Without clarification, this may lead to uncertainty as to the application of the provision.

Examples of unfair terms

The Bill includes a number of examples of terms that may be unfair, which are based on section 32X of the Victorian FTA. These include terms which in many cases could be justified on the basis that they are reasonably necessary to protect a supplier's legitimate interests. There is a risk, however, that their inclusion in the legislation may make it harder for businesses to overcome arguments of unfairness in respect of terms similar to the listed examples. Ideally the Bill should make it clear that these terms are merely examples and that it is still necessary for a complainant to satisfy the basic test of unfairness.