Beware the traps and pitfalls of online contracting

In this article, Hamish Fraser and Emma Cameron consider what Australia's unfair contract regime means for consumers buying online and businesses who sell their products and services online.

We all click "I agree" online a lot. Often without reading the actual terms we are accepting.

Online business in Australia is increasing exponentially. It is predicted that 1 in 10 items will be bought online in Australia by 2020.[1]

As at April this year, more than half of Australia's growth in retail sales was accountable to online retailers.[2] Also, the rise and use of online platforms such as Airtasker, Uber, Uber Eats, Airbnb and the arrival of Amazon Australia, continues. The combined online marketplace in Australia achieved record year-on-year growth of 74.8% from 2016-17[3].

But how many of us obtaining goods or services online actually read the terms we accept at purchase?

Unlike the increase in online sales, we suspect this number to be low.

However, what if an online contract was unfair or you wouldn’t agree to it (had you thoroughly read it)?

For example, what if the platform could increase their price without telling you? Or terminate the contract but you can't? Or vary the entire contract without telling you?

How enforceable are those terms if you already clicked "I agree" online?

In Australia, online contracts are often seen in the form of:

  1. a 'click-wrap' agreement – where the customer has to scroll through the terms and conditions located on the same page as the "I agree" or "I accept" button; or
  2. a 'browse-wrap' agreement – where the customer is required to click on a hyperlink that takes them to a page with the terms and conditions.

Whilst the presentation of each, such as the process for viewing and accepting terms online, will effect the enforceability of such contracts. Broadly speaking, online contracts are enforceable. But what about their terms?

Under Australian consumer law[4] and by virtue of what is referred to as Australia's unfair contract regime[5], there are some limits on what a supplier can or cannot include in a standard form contract when contracting with consumers. Otherwise, the terms of such contracts can be at risk of being void and not enforceable[6].

A standard form contract will include a click-wrap or browse-wrap agreement, where the party who prepared the contact almost always has the most bargaining power (e.g. the supplier of goods of services) and the other party (e.g. the consumer) was required to either accept or reject those terms in the form presented to them, with little or no opportunity to negotiate them.[7]

Consumers protected by Australia's unfair contract regime also include not only individuals but also small businesses

  • with fewer than 20 employees; or
  • which enter into a contract where the upfront price of the contract does not exceed AUD$300,000; or
  • which enter into a contract with a term of more than 12 months and where the upfront price payable under that contract does not exceed $1,000,000[8].

The application of Australia's unfair contract regime to standard form contracts was recently reinforced in the Federal Court's decision in Australian Competition and Consumer Commission v Servcorp limited [2018] FCA 1044.

In this case, the Federal Court found 12 contractual terms in three standard form contracts used by two Servcorp Ltd subsidiaries ("Servcorp") to be unfair and therefore void pursuant to s 23 of the Australian Consumer Law[9].

The court provides useful guidance for those creating standard form contracts on what constitutes an unfair contract term. Markovic J determined that any terms which create a significant imbalance in the parties' rights and obligations and which would cause detriment if applied by the party relying on them will be declared unfair.[10]

The terms found in this case to be 'unfair' included:

  • Unilateral rights by the business to vary the contract price at its discretion and without notice to the customer[12].
  • Unreasonable limitations of liability of the business or imposition of unreasonable liability on the customer, such as the exclusion of liability of the business except for gross negligence or wilful misconduct, including where the business causes loss, theft or damage and limiting the customer's right to sue for legitimate claims against the business[13].
  • A right for the business to determine if a notice, such as termination, is validly served by the customer[14].
  • Termination rights by the business due to any breach by the customer (not just material breach) and without the opportunity to remedy the breach[15].
  • A right for the business to retain a security deposit if it is not requested back by the customer within a certain period (rather than an obligation on the business to return the security deposit to the customer)[17].
  • An unlimited indemnity in favour of the business (but not the customer) even where the loss or damage is caused by the business[18].
  • Provisions preventing the customer from persuading a client of Servcorp, including its clients' affiliates, to leave Servcorp otherwise penalties could be imposed on the customer for up to 2 years after the end of the contract and regardless of whether Servcorp suffers loss or damage[19].

The Court ordered that Servcorp pay the ACCC's costs for the proceeding of $150,000. It also directed that Servcorp at its own expense establish, participate in and administer a compliance program as agreed with the ACCC, or in absence of agreement as ordered by the Court.

In response to the decision, the ACCC's Deputy Chair, Mick Keogh, also said “Businesses can no longer impose contract terms that create a significant power imbalance between parties, are not necessary to protect their legitimate interests, and which would cause significant financial detriment to a small business. While penalties do not apply for unfair contract terms, the ACCC will continue to take matters to court to ensure these terms are declared void and protect businesses.[20]

This provides a useful guidance for those drafting contracts or otherwise supplying goods or services online, whether click-wrap or browse-wrap.

In addition to privacy, spam and other consumer law considerations, Australia's unfair contract regime should be at the forefront of drafting online contract terms, to prevent the risk of being unenforceable.