Are non-disparagement clauses void under the Australian Consumer Law?

By Peter Sise

19 Jul 2018

Non-disparagement clauses in standard form contracts may attract the ACCC's attention, although there is some question over the statutory basis for the ACCC's concerns.

Non-disparagement clauses are commonly used in various agreements. A recent action by the ACCC raises the question of whether they are void under the "unfair contract term" provisions of the Australian Consumer Law (ACL), and suggests the ACCC may have a broader agenda when it comes to consumer comments and reviews.

When is a term void under the ACL for being "unfair"?

A term may be declared void under the ACL if (i) it is in a standard form contract which is either a "consumer contract" or "small business contract" and (ii) it is "unfair". According to section 24(1) of the ACL, a term is "unfair" if:

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

Wisdom Homes and the non-disparagement clauses

Wisdom Properties Group Pty Ltd (Wisdom Homes) is a residential building company. Between 2008 and 2018, it entered into standard form home building agreements with customers which contained the following non-disparagement clauses:

  • Clause 10.4: The customer "must not make a media release, announcement, blog, public statement or article for publication" about the agreement or the services provide pursuant to it, "whether in electronic form or otherwise", except with the prior written consent of Wisdom Homes (which may be withheld at Wisdom's "absolute discretion") or as required by law.
  • Clause 10.5: If Wisdom Homes agrees to the customer making "a media release, announcement, blog, public statement or article for publication", Wisdom Homes "is entitled to determine the time and wording" of it.
  • Clause 10.6: The customer indemnifies Wisdom Homes "for any loss arising from any media release, announcement, blog, public statement or article for publication" whether or not Wisdom authorised it.

The non-disparagement clauses were not limited to prohibiting statements that were actually disparaging of Wisdom Homes, nor were they presented as non-disparagement provisions. Instead, they were presented as "confidentiality" provisions under the heading "Confidentiality". However, their purpose appears to have been preventing disparaging statements about Wisdom Homes since they were not aimed at protecting information which was genuinely confidential (for example, trade secrets).

The ACCC takes action

The ACCC investigated the non-disparagement clauses on the basis that they may be "unfair" under the ACL, and concluded they were included in the agreements to prevent or limit customers from making negative public comments about their experiences with Wisdom Homes.

The ACCC did not commence court proceedings against Wisdom Homes, but resolved its investigation in June 2018 by accepting a court enforceable undertaking from Wisdom Homes by which Wisdom Homes agreed:

  • that the non-disparagement clauses were "unfair" according to the ACL;
  • that Wisdom Homes would not enforce the non-disparagement clauses or any similar clauses; and
  • not to use any similar clauses for three years from the date of the undertaking.

The action against Wisdom Homes is not the first time the ACCC has claimed that non-disparagement clauses are "unfair". Action had previously been taken against a Western Australian builder of residential homes called 101 Residential Pty Ltd, which used terms that prohibited customers from publishing or disseminating, without its prior written consent, any "material which is or may be disparaging or harmful to the business interests of" 101 Residential including "any online posts, blogs or comments that do, or may reasonably be inferred to, relate to" 101 Residential. On 15 December 2017, 101 Residential gave a court enforceable undertaking to the ACCC that it will not use "clauses that prevent or prohibit consumers from publishing or disseminating genuine feedback and/or information relating to 101 Residential or home building services provided by 101 Residential".

Are non-disparagement clauses actually "unfair" under the ACL?

It is important to note that there was no court proceeding against Wisdom Homes and hence no finding by a court that the non-disparagement clauses were actually "unfair", even though Wisdom Homes admitted they were.

It is debatable whether the non-disparagement clauses fulfilled the third requirement of the definition of "unfair", ie. that they "would cause detriment (whether financial or otherwise) to a party if [they] were to be applied or relied on." The alleged "detriment" appears to be the loss of an opportunity to publicly criticise Wisdom Homes. (Presumably, Wisdom Homes would not object to a complimentary statement from a customer.) "Detriment" does not have to be financial and the ACL does not require it to be significant. Still, it is debatable whether it would extend to something as minor as losing the opportunity to publicly express your displeasure with a product or service. In this regard, it is worth noting two points. First, depending on how widely you interpret "announcement" and "public statement", the non-disparagement clauses may have still permitted a customer to express their displeasure in spoken form without Wisdom Homes' prior approval, so customers were not entirely muted. Second and more importantly, the definition of "unfair" in the ACL only considers "detriment" suffered by a party to the contract. It is irrelevant that another third person may suffer detriment from acquiring unsatisfactory goods or services (which they would not have acquired had they been forewarned by reading an online review).

If the third requirement of the definition of "unfair" is unlikely to be fulfilled because the alleged "detriment" is minor, it is also debatable whether the first requirement of the definition is fulfilled. The first requirement is that the term would cause a significant imbalance in the parties' rights and obligations arising under the contract.

It is possible that the ACCC wasn’t too concerned about whether the customer, who entered into the agreement, actually suffered any "detriment" even though this is what the third requirement of the test for "unfair" requires. Instead, the ACCC appears to be concerned with potential consumers, who are clearly not parties to the agreements, losing the opportunity to read any negative online reviews about Wisdom Homes. This is apparent from a media release about the ACCC's action against Wisdom Homes where the ACCC said "Consumers are increasingly relying on online reviews when making purchase decisions and businesses must not prevent consumers from seeing genuine, relevant and lawful reviews by their customers through standardised contract terms."

So what is the ACCC's real concern with non-disparagement clauses?

The ACCC's real concern seems to be whether consumers have access to accurate and balanced online reviews. Recently, the ACCC successfully brought proceedings against Meriton Apartments for manipulating the processes of TripAdvisor so as to reduce the likelihood of customers posting negative reviews on the TripAdvisor website. In that case, the ACCC relied on the misleading or deceptive conduct provisions and focused on the practices of Meriton Apartments rather than any contractual provisions.

A clause that prevents consumers posting negative online reviews may lead to an absence of negative reviews and hence give consumers a misleading impression of the quality of goods and services. This could perhaps amount to misleading or deceptive conduct under the ACL. Establishing a case of this kind is likely to involve much more work than establishing that a contractual term is "unfair". This is because the applicant would need to show that:

  • negative online reviews were not posted due to the impugned term; and
  • as a result of the number and nature of the negative reviews that were not posted, consumers were likely to be misled.

This would be a significant evidentiary exercise. By contrast, a case alleging that a term is "unfair" under the ACL would largely be limited to analysing the terms of a contract.

The ACCC appears to have taken a pre-emptive step of trying to prevent potentially misleading conduct before it actually occurs. To do this, it relied on the "unfair contract term" provisions of the ACL but these may not be appropriate due to the absence of any real "detriment" to the customer who is the party to the contract. Perhaps the unconscionable conduct provisions would be more appropriate because of their broad scope, but the threshold for what is "unconscionable" is high.

The measures that the ACCC is taking to ensure that consumers receive accurate and balanced online reviews appears to be expanding. In the past, the ACCC has brought court proceedings for glaring examples of online reviews being manipulated, such as a business writing testimonials on an online review platform but presenting them as if they were written by its customers. More recently, in the Meriton Apartments matter, the ACCC successfully brought proceedings for a business engaging in a course of conduct that reduced the likelihood of customers posting a negative review. Now, the ACCC has obtained two undertakings from businesses that they will not use contractual terms that prohibit a person from posting an online review. The net appears to be slowly expanding.

Consumer contracts and consumer comments: the key lessons

The action against Wisdom Homes indicates that non-disparagement clauses in standard form contracts may attract the ACCC's attention – and confidentiality clauses which are in substance non-disparagement clauses may also attract the regulator's attention.

The ACCC has publicly said "Any standard form contract terms that prevent or limit a customer from making public comments about goods or services are likely to be unfair under the ACL" and that the action against Wisdom Homes "should serve as a warning to other businesses that imposing contract terms that prevent their customers from making public comments will attract ACCC attention." Businesses that include them in standard contracts should consider what, exactly, is being prohibited and whether they will be seen to overstep the mark.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.