The new national regime governing unfair contract terms will commence on 1 July 2010. All Australian and foreign businesses operating in Australia will need to carefully scrutinise their standard form consumer contracts to ensure that these contracts do not contain unfair contract terms.

Overview

The new laws dealing with unfair contract terms are contained in the Trade Practices Amendment (Australian Consumer Law) Act 2009.

In summary:

  • The unfair contract terms provisions apply to standard form consumer contracts.
  • The laws only apply to business to consumer contracts – that is, contracts for the supply of goods or services to an individual whose acquisition is wholly or predominantly for personal, domestic or household use or consumption.
  • A contract between businesses does not fall within the scope of the provisions, except potentially in respect of a ‘sole trader’ who may have common business and personal interests (but only to the extent that the contract relates to goods and services acquired wholly or predominantly for the consumer’s personal, domestic or household use).
  • The laws also only apply to ‘standard form contracts’ – this is not defined, but in broad terms will typically be a contract that has been prepared by the business and is offered to the consumer on a ‘take it or leave it’ basis.
  • The unfair contract terms provisions will apply to all standard form consumer contracts entered into on or after 1 July 2010. They will also apply to standard form consumer contracts that are renewed, or terms of a standard form consumer contract that are varied after 1 July 2010.
  • Terms in standard form consumer contracts will be open to review against a test of unfairness. Unfair terms will be void. (What is an ‘unfair term’ is considered in more detail at the end of this article).

Consequences of regulation

The new laws do not prohibit or prevent the use of standard form consumer contracts. The new laws are also not concerned with giving consumers additional protection where they have made a poor choice or struck a bad bargain.

The aim of the unfair contract term provisions is to provide a measure of protection for consumers who are ‘at the mercy’ of businesses who are in a stronger bargaining position. The new laws afford consumers a measure of protection against risks that may be unfairly allocated to them by virtue of their weaker bargaining position

What should businesses do now?

Businesses need to think carefully when preparing or relying on standard form consumer contracts. Businesses need to consider whether inclusion of each term in the contract is necessary to protect legitimate business interests.

Businesses should consider the following:

  • Review contracts to check for terms (particularly those that preserve discretionary or unilateral rights) that may be regarded as unfair, and assess whether these terms should be varied or removed from the contract.
  • Ensure that contracts are clear and well structured - all terms should be expressed in plain language, be legible and presented clearly.
  • Any terms that are weighted towards the business should be checked to ensure that they are not disproportionate to the need to protect legitimate business interests.
  • Ensure that contracts contain severance clauses, to allow any unfair term to be severed from the contract.
  • Keep detailed reasons why terms were included in contracts to provide the necessary justification for the term.
  • Consider incorporating outlines and acknowledgments as to why certain terms are included in the contract in pre-contract disclosure and the contract itself.
  • If there is an opportunity for the consumer to negotiate contract terms, ensure any negotiations are recorded and undertaken in good faith.

What do the new laws mean for franchisors?

Thankfully (after substantial lobbying) the unfair contract terms provisions only apply to business to consumer contracts, not business to business to business contracts. Therefore franchise agreements are generally outside the scope of the new provisions.

However, franchisors still need to be aware of these new laws, as they will apply to standard form consumer contracts used by the franchisor and the franchise network.

What are “Unfair Terms”

If a contract is a standard form consumer contract, a term of that contract will be void if the term is unfair. The contract will continue to bind the parties to the extent that the contract is capable of operating without the unfair term.

A term in a standard form consumer contract is unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract, and
  • the term 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 if it were to be applied or relied upon.

Relevant to this determination is:

  • a consideration of the contract as a whole, and
  • the extent to which the term is transparent – that is, whether it is:
  • expressed in reasonably plain language
  • legible
  • presented clearly
  • 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 terms that:

  • Permit one party (but not the other) to:
    • avoid or limit performance of the contract
    • terminate the contract
    • vary the terms of the contract
    • vary the upfront price payable under the contract without the consumer being able to terminate it
    • renew or not renew the contract
    • vary the characteristics of the interest in land sold or granted under the contract
    • unilaterally determine whether the contract has been breached or to interpret its meaning
    • limit vicarious liability for its agents
    • assign a contract to a third party to the detriment of the other party without their consent
    • limit the right of one of the parties to sue the other party
    • limit the evidence that one party can adduce in proceedings relating to the contract or to impose the evidential burden on one party in proceedings.
  • Penalise a party for breach or termination of the contract. In this context arguably even a genuinely compensatory provision (like default interest) will be of the nature of a penalty for non-performance.

The terms of a contract that cannot be considered to be unfair are terms that:

  • set the upfront price payable under the contract, or
  • define the main subject matter of the contract, or
  • are terms required, or expressly permitted, by a law of the Commonwealth or a State or Territory.

Certain shipping contracts are excluded from the unfair contract terms provisions, including shipping contracts, contracts which are constitutions of companies, managed investment schemes or other kinds of bodies, and certain insurance contracts.

Note on new Australian Consumer Law

The new laws dealing with unfair contract terms are part of a broader national approach to consumer law.

The Trade Practices Amendment (Australian Consumer Law) Act 2009 is the first stage of the introduction of a single national consumer law known as the Australian Consumer Law.

In addition to the unfair contract term provisions, the first stage of the new Australian Consumer Law also includes new enforcement powers for the ACCC to protect consumers. These powers include the ability to seek or issue:

  • civil monetary penalties
  • banning orders
  • substantiation notices
  • infringement notices
  • refunds for consumers, and
  • public warnings.