On 14 March 2013, the Australian Competition & Consumer Commission (ACCC) released the findings of its industry review into unfair contract terms (Review).

The Review focused on standard form consumer contracts in the airline, telecommunications, fitness and vehicle rental industries, as well as some contracts commonly used by online traders and prominent travel agents. The findings of the Review provide valuable compliance insights for businesses inside and outside these industries of the types of contractual clauses that the ACCC is likely to consider unfair and that may be void if the court agrees.

What is the law relating to unfair contract terms?

Under Part 2–3 of the Australian Consumer Law (ACL), a court may determine that a term of a standard form consumer contract is unfair.

Whilst the ACL does not specifically define a ‘standard form contract’, it outlines a number of factors that the court must take into account in determining whether a contract is a ‘standard form’. Importantly, however, there is a rebuttable presumption that a contract that is alleged to be standard form is a standard form contract. Generally, a standard form contract will be one that has been prepared by one party and is not subject to negotiation between the parties.

The unfair contract term regime is restricted in scope to consumer contracts and does not apply to contracts for the supply of goods or services from one business to another business. A ‘consumer contract’ is a contract for the supply of goods and services or the sale or grant of an interest in land, to an individual who acquires it wholly or predominately for personal, domestic or household use or consumption.

A term of a consumer contract will be unfair if:

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

All three elements of the test must be proved in order for a term to be unfair. In determining whether a term is unfair, the court must have regard to the contract as a whole and the extent to which the term in question is transparent.

Contract Terms of Concern

The ACL provides broad examples of the types of terms that may be considered unfair. However, they are examples only. The Review provides practical guidance about the particular terms that the ACCC will consider unfair. In this regard, the ACCC was particularly concerned with the following contractual terms and has indicated that they will remain a particular focus as the ACCC moves into its enforcement phase:

  1. contract terms that allow the business to change the contract without consumer consent;
  2. terms that cause confusion about agency arrangements that apply and that seek to unfairly absolve the agent from liability;
  3. terms that unfairly restrict the consumer’s right to terminate the contract;
  4. terms that suspend or terminate the services provided to the consumer under the contract;
  5. terms that make the consumer liable for events that would ordinarily be outside of their control;
  6. terms that prevent the consumer from relying on representations made by the business or its agents;
  7. terms seeking to limit consumer guarantee rights; and
  8. terms that remove a consumer’s credit card chargeback rights when buying the service through an agent.

Unfair contract terms in focus

a) Unilateral Variation

The ACCC is particularly concerned with terms that allow one party to unilaterally vary the contract during its life without the consent of the other party. If they are accompanied by a balancing right for the other party to consent to or reject the change, or to exit the contract, these terms may be saved. However, without such a right, these terms are of significant concern. For example, such a term may read:

You must pay all fees applicable under the contract. You understand that all fees and charges may be altered from time to time by us without notice.

It is likely that such a term will be viewed as unfair as it has the effect of permitting a party to increase fees payable under the contract during the life of the agreement without notice to the consumer and does not provide means of redress if the consumer is not agreeable. However, an ability to unilaterally vary a contract may sometimes be necessary to protect legitimate business interests.

b) Lock-in terms

Terms that purport to ‘lock-in’ consumers to long-term contracts can be unfair where a business fails to adequately perform under the contract, fails to live up to consumer expectations or has sub-standard levels of consumer service. Unduly harsh and unfair lock-in terms may read as follows:

You may not cancel, or otherwise terminate this Agreement or revoke any authority given under it once supply has commenced.

It is likely that such a term will be viewed as unfair as there is a significant imbalance in the parties rights under the contract and would cause detriment to the consumer if it were relied on. Further, the term is potentially misleading as it purports to affect a consumer’s right to reject goods under the consumer guarantees regime in the ACL.

Implications for business

Businesses across all industries should ensure that they have undertaken a review of their standard form consumer contracts to make certain that no unfair terms are present. Such a review would be timely as the ACCC has indicated that it is now considering whether further action, and in some cases court action, is warranted against businesses that utilise unfair contract terms in their standard form consumer contracts.

Where court action is taken and it is found that a term is unfair, and a party subsequently seeks to rely on the unfair term, the court may vary the contract; refuse to enforce any or all of the terms of the contract; or direct a person to refund money or property to the injured person.