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Unfairness is out

Feature Articles

Cite as: November 2011 85(11) LIJ, p.42

The new national unfair contract terms regime seeks a balance between providers and consumers, but case law is needed to see if it works.  

By Andrew Felkel

This article discusses the new national unfair contract terms regime which was introduced on 1 July 2010 as part of the Australian Consumer Law in Schedule 2 to the Trade Practices Act 1974 (Cth) (TPA) and, from 1 January 2011, Schedule 2 to the Competition and Consumer Act 2010 (Cth) (CCA).

Contracts to which the unfair contract terms regime applies

Section 23(1) of the Australian Consumer Law provides that a term of a consumer contract is void if the term is unfair and the contract is a standard form contract.

Consumer contract

Section 23(3) of the Australian Consumer Law states that a consumer contract is a contract for the supply of goods or services, or a sale or grant of interest in land, to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

An interest in land is defined in s1 of the Australian Consumer Law to be:

  • a legal or equitable estate or interest in the land; or
  • a right of occupancy of the land, or of a building or part of a building erected on the land, arising by virtue of the holding of shares, or by virtue of a contract to purchase shares, in an incorporated company that owns the land or building; or
  • a right, power or privilege over, or in connection with, the land.
Unfair

According to s24(1) of the Australian Consumer Law a term of a consumer contract is unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it 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 on.

In determining whether a term of a consumer contract is unfair, a court may take into account such matters as it thinks relevant but must take into account the contract as a whole and the extent to which the term is transparent (i.e. expressed in reasonably plain language, legible, presented clearly and readily available) (ss24(2) and 24(3) of the Australian Consumer Law).

In relation to legitimate interests, a term of a consumer contract is presumed not to be reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise (s24(4) of the Australian Consumer Law).

Standard form contracts

The Australian Consumer Law does not define what is meant by a “standard form contract”. That said, standard form contracts are typically contracts that are prepared by one party, are not subject to negotiation and are offered as “take it or leave it”.

Section 27(2) of the Australian Consumer Law provides that in determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account:

  • whether one of the parties has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • whether another party was given an effective opportunity to negotiate the terms of the contract;
  • whether the terms of the contract take into account the specific characteristics of another party or the particular transaction;
  • any other matter prescribed by the regulations.

Where a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise (s27(1) of the Australian Consumer Law). As noted in the ACCC’s Guide to Unfair Contract Terms (draft), the purpose of this section is to ensure the widest possible applicability of the unfair contract terms regime and ensure that acknowledgments from consumers that the contract has been negotiated or trivial “negotiated” terms do not prevent a court from considering whether the contract is a standard form contract. It also acknowledges that businesses are generally in a better position than consumers to establish whether a contract is a standard form contract.

Contracts to which the unfair contract terms regime does not apply

Section 28 of the Australian Consumer Law excludes the following contracts from the unfair contract terms regime:

  • a contract of marine salvage or towage;
  • a charter party of a ship;
  • a contract for the carriage of goods by ship;
  • a contract that is the constitution of a company, managed investment scheme or other kind of body.

Transitional provisions in the CCA provide that the unfair terms regime does not apply where the contract was entered into before 1 July 2010 unless the contract was renewed or varied after 1 July 2010. In relation to a contract that has been varied, the unfair contract terms regime will only apply to the varied terms.

Section 131A of the CCA states that the unfair contract terms regime does not apply to the supply, or possible supply, of services that are financial services. While not the focus of this article, financial services are governed by mirror terms which have been added to the Australian Securities and Investments Commission Act 2001 (Cth).

Section 15 of the Insurance Contracts Act 1984 (Cth) prevents the unfair contract terms regime from applying to most insurance contract terms (i.e. those regulated by the Insurance Contracts Act). That said, private health insurance contracts, state and federal government insurance contracts and re-insurance contracts are not regulated by the Insurance Contracts Act so they will be governed by the operation of the unfair contract terms regime.

Terms to which the unfair contract terms regime applies

Section 26(1) of the Australian Consumer Law provides that the regime does not apply to a term of a consumer contract to the extent that the term:

  • defines the main subject matter of the contract; or
  • sets the upfront price payable under the contract; or
  • is a term required, or expressly permitted, by a law of the Commonwealth or a state or territory.

The upfront price payable under a consumer contract is the consideration that:

  • is provided, or is to be provided, for the supply, sale or grant under the contract; and
  • is disclosed at or before the time the contract is entered into.

It does not include any other consideration that is contingent on the occurrence or non-occurrence of a particular event (s26(2) of the Australian Consumer Law).

Examples of unfair contract terms

Section 25 of the Australian Consumer Law provides the following examples of unfair contract terms:

  • a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
  • a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
  • a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
  • a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
  • a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
  • a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
  • a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
  • a term that limits, or has the effect of limiting, one party’s right to sue another party;
  • a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
  • a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract;
  • a term of a kind, or a term that has an effect of a kind, prescribed by the regulations will also be considered unfair.

There are no regulations prescribing any additional terms to also be considered unfair.

Enforcement

A term that is found to be unfair will be void. This means that the term is treated as if it never existed. Nevertheless, the party that sought to gain the benefit of the section will not be said to have breached the Australian Consumer Law (s15). Further, the contract will continue to bind the parties to the extent that the contract can operate without the unfair term (s23(2) of the Australian Consumer Law).

Under s250 of the Australian Consumer Law a court may, at the application of either the ACCC or a party to a standard form contract, declare that a term of such a contract is an unfair term.

Where such a declaration has been made and a party seeks to rely upon that term, it is considered a contravention of the Australian Consumer Law and the court may grant one of these remedies:

  • injunction (s232);
  • an order prohibiting payment or transfer of moneys or other property (s232(6));
  • an order to redress loss or damage suffered by non-party consumers (s239).

In relation to orders to redress loss or damage suffered by consumers that are not parties to the proceedings, the type of orders made by a court might include declaring all or part of a contract void, ordering a variation to a contract, or ordering the refund of money or return of property.

Section 9 of the Fair Trading Act 1999 (Vic) (FTA) provides that the Australian Consumer Law applies as a law of Victoria. A modification of the Australian Consumer Law by a Commonwealth law will apply in Victoria unless the modification is declared by order of the Governor in Council published in the Government Gazette to be excluded (s10 FTA).

The enforcement of the Australian Consumer Law in Victoria is handled by Part 11, Division 5 of the FTA. To this end, s160E states that any reference in the Australian Consumer Law to a court means:

  • the Supreme Court;
  • the County Court;
  • the Magistrates’ Court;
  • Victorian Civil and Administrative Tribunal (“VCAT”).

There are some exceptions. For example, the Magistrates’ Court cannot make a declaration that a term of a consumer contract is an unfair term.

Victoria’s unfair contract terms regime

In 2003 Victoria introduced unfair contract provisions into the Fair Trading Act 1999 (Vic). This regime has subsequently been replaced by the national unfair contract terms regime. In its final form, a term was considered unfair under the former Victorian regime “if, in all the circumstances, it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of the consumer” (s32W).

There have been “landmark” cases under the former Victorian regime, most notably Director of Consumer Affairs v AAPT Ltd1 (AAPT) and Free v Jetstar Airways Pty Ltd2 (Jetstar).

In AAPT, Consumer Affairs Victoria brought an application before the Victorian Civil and Administrative Tribunal (VCAT) against telephony service provider AAPT alleging that certain terms in its mobile telephone consumer contracts were unfair and in breach of the FTA. Just before the matter was heard, AAPT amended many of the terms in question and allowed retrospective operation. Hence, VCAT did not make any of the declarations or injunctions sought by Consumer Affairs Victoria, but it did find that several terms were unfair including:

  • AAPT’s right to unilaterally vary any term;
  • A broad and unilateral right for AAPT to terminate for any breach;
  • A broad and unilateral right to vary AAPT’s products or charges without notice.

In Jetstar, VCAT considered among other things the unfairness of a term in Jetstar’s fare terms and conditions which required a customer who wanted to transfer an existing ticket into her sister’s name to pay the (substantial) difference between the fare applicable on the day that the change was made and the original fare. In deciding that the charge was unfair, VCAT made two key findings: that the charge caused a significant imbalance in the rights and obligations of the parties, and that “contrary to the requirements of good faith” was not to be treated as an independent limb that must be established to find a term is unfair.3

On appeal to the Supreme Court4 Jetstar succeeded on the following three grounds:

  • VCAT had erred in finding the charges caused a significant imbalance by ignoring the benefit to Ms Free of being able to transfer the ticket;
  • VCAT had erred by failing to assess the impact of the charges in the context of the contract as a whole;
  • VCAT had erred by failing to recognise that “contrary to the requirements of good faith” is a separate limb that must be established to find a term is unfair.

Given the differences in the Victorian and national regimes, it is unclear how much we can take from the Victorian experience when anticipating the way the new law will be interpreted. In comparison, the national regime is much narrower than the old Victorian regime, excluding the subject matter, prices, negotiated contracts and some insurance contracts. Further, the national scheme requires consideration of whether or not a term is reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

Conclusion

By voiding terms that cause a significant imbalance in the parties’ rights and obligations to the detriment of a party that are not reasonably necessary to protect a party’s legitimate interests, the new national unfair contract terms regime hopes to strike a balance between the interests of business and the interests of consumers. It will be interesting to see, with the benefit of some case law, whether this balance is achieved.



ANDREW FELKEL is a barrister working in general commercial and competition law. He has previously worked as legal counsel at the National Competition Council, at the ACCC and in the competition group at Mallesons Stephen Jaques.

1. [2006] VCAT 1493.

2. [2007] VCAT 1405.

3. Note that at the time s32W provided that a term was unfair “if contrary to the requirement of good faith and in all the circumstances it causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumer” (italics added).

4. Jetstar Airways Pty Ltd v Free [2008] VSC 539.

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