19 Oct 2009

Are you being served: Unfair contract terms

by Alexandra Wedutenko, Jacqui Real

Entities should review their use of standard form contracts to ensure that they comply with the regime.

On 24 June 2009, the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (the Unfair Contracts Bill) was introduced into Parliament.

The Unfair Contracts Bill will implement the Australian Government's policy of increasing protection for consumers, increasing competition and establishing national consistency in the regulation of contractual relationships.

Importantly, the Unfair Contracts Bill seeks to void terms in standard form consumer contracts that are found to be "unfair", and impose penalties on the corporations that use unfair contracts. However, the Bill is now more limited than the originally proposed exposure draft.

The unfair contracts regime

The Unfair Contracts Bill contains a series of provisions (the unfair contract term provisions) which seek to amend the Australian Securities and Investments Act 2001 (Cth) to regulate unfair terms in contracts for financial services and financial products, and the Trade Practices Act 1974 (Cth) to regulate unfair terms in contracts for goods and services other than financial services.

The basic operation of the unfair contract term provisions is:

The unfair contract terms provisions apply to consumer contracts …

The unfair contract terms provisions are proposed to apply to standard form contracts entered, renewed or varied after 1 January 2010 under which an individual acquires goods, services or interests in land for personal, domestic or household use or consumption (consumer contracts).

If those consumer contracts are standard form contracts.

A contract is presumed to be a standard form contract if that is alleged by one party, unless proven otherwise. A court adjudicating this issue can take into account any factors that it considers relevant, although it must consider the factors listed in the Unfair Contracts Bill. These include whether:

  • there is a significant imbalance in the bargaining power between the parties;
  • the contract was prepared by one party before the transaction was contemplated; and
  • the party asked to accept the contract had an effective opportunity to negotiate its terms.

The unfair contract terms provisions regulate unfair terms.

A term in a standard form consumer contract will be unfair if:

  • it causes 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 advantaged by the term. Interestingly, an unfair term is presumed not to be reasonably necessary unless the party advantaged by the term proves otherwise.

The Unfair Contracts Bill also gives examples of terms that may be unfair. These are generally terms that grant a broad right to, or impose a harsh consequence on, one party to a contract but not the other. Unfair terms will include:

  • terms that penalise one party but not the other for breaching the contract
  • terms that allow one party to vary the upfront price payable under the contract
  • terms that permit unilateral variation of the contract, and
  • terms prescribed in the regulations.

Matters that must be taken into account when considering whether a term is unfair are also specified, although courts are also given a broad discretion to take into account any other matters that they consider relevant. The matters mandated for consideration include whether the term is transparent, the extent to which the term will cause detriment if enforced, and the contract as a whole.

Unfair contract terms are void.

If a provision in a standard form contract is found to be an "unfair contract term", it will be void. The contract will still be valid if it is able to operate without the void term. This is consistent with case law regarding the severability of unlawful terms.

Ultimately, the decision as to whether a contract term is void for unfairness will be one that will need to be made by a court. A consumer will not be able to unilaterally declare that the contract is unfair in order to walk away from performing it.

Prohibited terms are also void … and may result in a fine.

There is also scope for regulations to classify certain terms as "prohibited terms". If a prohibited term is included in a standard form consumer contract, it will also be void, and the offending entity could be fined.

There are some exceptions to the application of the unfair contract terms provisions

Among other things, the unfair contract provisions will not apply to:

  • shipping contracts, employment contracts, or constitutions of companies, managed investments schemes or other bodies; or
  • terms that define the main subject matter of the contract, set the upfront price payable under the contract, or are required or expressly permitted by law.

What does this mean for business and government standard form contracts?

Business and government commonly use standard form contracts. For example, government uses standard form contracts when dealing with suppliers for the provision of goods and services. The implementation of the unfair contract terms provisions in their original form would have required an overhaul of standard form contracts across the board.

As amended however, the Unfair Contracts Bill will not affect the majority of business-to-business or government-to-business contracts. The Government has however indicated that it will further consider whether business-to-business standard form contracts, particularly those involving small businesses, should be captured by the unfair contract terms provisions. It has also foreshadowed a review of the unconscionable conduct provisions of the Trade Practices Act, particularly the protections afforded to (smaller) businesses dealing with businesses with greater market and bargaining power.

The Unfair Contracts Bill will affect individuals' rights in relation to standard form contracts. Also, where the unfair contract terms provisions apply, entities should review their use of standard form contracts to ensure that they comply with the regime, which will involve a reassessment of contractual positions and approaches to contracting.

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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.