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01 Jul 2016

Counting down to 12 November: some tips on how to identify potentially unfair contract terms

By Peter Sise

With only a few months until the unfair contract term provisions apply to small business contracts, businesses should start reviewing standard form contracts for potentially unfair terms.

From 12 November 2016, the unfair contract term provisions in Pt 2–3 of the Australian Consumer Law (ACL) and Pt 2 of the Australian Securities and Investments Commission Act 2001 (Cth) (together, the UCT provisions) will apply to “small business contracts”.[1]

The June 2016 edition of Inhouse Counsel contained an article addressing what businesses should do to prepare for the extension of the UCT provisions.[2] It looked at what constitutes a small business contract and how the transitional arrangements concerning the extension of the UCT provisions will apply to existing contracts that are varied or renewed.

This article addresses a separate issue; identifying and addressing potentially unfair terms in standard form contracts. Some businesses will already have experience in this area if they use standard form “consumer contracts” since the UCT provisions already apply to these contacts, but for businesses which do not, this exercise may be novel. This article will provide some tips for reviewing potentially unfair terms. For convenience, it will only refer to provisions of the ACL and not the Australian Securities and Investments Commission Act.[3]

When is a term “unfair”?

Section 24(1) of the ACL states that a term 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 in order 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.

Three things should be noted about this test. First, there must be a significant imbalance in the parties’ rights and obligations; a minor imbalance will not suffice. Second, due to s 24(4), the onus is on the party seeking to uphold the impugned term to prove that it is reasonably necessary to protect their legitimate interests. And third, any detriment to the party challenging the impugned term will suffice whether it be slight or significant.

Tips for reviewing potentially unfair terms

First, you should consider whether the UCT provisions apply to the potentially unfair term at all. As already noted, the UCT provisions will extend to small business contracts but not all small business contracts. A small business contract must be a standard form contract.[4] The ACL excludes company “constitutions” and certain maritime contracts from the reach of the UCT provisions while s 15 of the Insurance Contracts Act 1984 (Cth) excludes contracts of insurance.

Section 26(1) of the ACL also excludes a term from being capable of being “unfair” if it:

(a) defines the main subject matter of the contract; or

(b) sets the upfront price payable under the contract; or

(c) is … required, or expressly permitted, by a law of the Commonwealth, a State or a Territory.

Next, you should identify a term which might cause “a significant imbalance in the parties’ rights and obligations arising under the contract”.[5] There is no bright line between a “significant imbalance” and simply an “imbalance”. The test for whether there is a significant imbalance, which has been endorsed by case law, is that the “term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour”.[6] “Significant” has been referred to as meaning “significant in magnitude”, “sufficiently large to be important” and “not too distant from substantial”.[7] Due to this uncertainty, a conservative approach to what might constitute a significant imbalance is prudent at this stage of the review.

Next, you should consider whether the term falls within one of the examples of potentially unfair terms given in s 25(1) of the ACL. There are 14 potentially unfair terms listed in s 25(1). It is important to note that there is no presumption that any of these terms are unfair.[8] However, a would-be applicant is more likely to challenge such a term due to the prominence given by s 25(1).

By this stage, you may be considering whether the potentially unfair term needs to be addressed in some way, but before you get to that, you should consider whether the term is “reasonably necessary in order to protect the legitimate interests” of your client. If the term is reasonably necessary in this way, it will not be unfair. For this reason, your client should clearly explain what interest this term protects:

  • whether it is common practice in its industry to protect this interest;
  • whether it is common practice to protect it with such a term; and
  • whether there are alternative ways of protecting the interest.

These inquiries should all be documented with file notes because the onus will be on your client to prove that the term is reasonably necessary. So far, there have been a small number of decisions about whether an impugned term is reasonably necessary to protect a legitimate interest.[9] These may provide some guidance.

Even if you believe that the potentially unfair term protects a legitimate interest and does so in a way which is reasonably necessary, there is still a risk that your client may not fulfil the onus of establishing these matters. In that case, it will be important to address the risk of a court concluding that the term would cause a significant imbalance in the parties’ rights and obligations. This risk could be addressed in several ways, depending on the circumstances. Some possible options are as follows:

  • A broadly drafted term which covers various situations could be broken into several terms, each of which specifically addresses a different situation. A broadly drafted term may create a significant imbalance in some scenarios but not on others. For example, a term that allows one party to terminate for any breach of the contract, trivial or serious, is at greater risk of creating a significant imbalance than a term which allows termination for specific, serious breaches.
  • The obligations and rights created by the term could be made mutual.
  • A term could be added to alleviate the obligation imposed by the potentially unfair term or offset the right granted to the party who is advantaged by the term. For example, a term which allows one party to terminate for any breach could be tempered by requiring notice to be given of a proposed termination and a period of time for the other party to remedy the breach.

Section 24(2)(b) requires a court to consider “the contract as a whole” when assessing whether a term is unfair. Hence, these matters will be considered by a court.

Fine print: are the terms clear and prominent?

You should consider whether the term is “transparent”. A key concern with the UCT provisions was that many one-sided terms are hard to read or buried in “boilerplate” clauses in printed form contracts and therefore missed by the other party unless they read the form very carefully. Typical examples are printed form contracts for the hire of vehicles and other equipment which may impose onerous liabilities on the hirer for damage or other events beyond the hirer’s control.

Section 24(2)(a) requires a court to consider “the extent to which the term is transparent” when determining whether it is unfair. A term is transparent if it is “expressed in reasonably plain language”, legible, presented clearly and “readily available to any party affected by the term.”[10] The transparency of a term is one of only two matters that a court must consider when determining whether a term is “unfair”, so it is likely that considerable weight will be given to the issue. The following could assist a finding that a term is transparent:

  • Use clear and simple language for the potentially unfair term.
  • Used defined terms where necessary, and then use those defined terms consistently.[11]
  • Give the term a prominent place in the contract. This could be done in various ways, including placing the term in a section marked “Some important terms that may affect your liability”.[12] However, this could increase the risk of a term being unfair if it is left out of such a section and it has a significant impact on the rights and obligations of a party. Hence, care should be taken.
  • Do not “bury” the term in a schedule or annexure or place it in a separate document.
  • Consider including an “acknowledgment” clause where the counterparty acknowledges they have read and understood the term. Consider placing this acknowledgment above the signature space for the counterparty.
  • Avoid using small font for the term, particularly a font which is smaller than that used for other terms.[13]
  • Consider techniques to make the term more visible such as italics, bold, a larger font and a different text colour.[14]
  • Consider introducing a standard procedure for bringing the term to the attention of a counterparty before they enter into the contract. It may assist to document this procedure in the form of a company policy or a directive to those dealing with contracts on behalf of the company. It may also assist to require such people to note that the term was specifically brought to the attention of the counterparty before entering into the contract.

It is important to note that “transparency” alone may not save a term from being unfair. The explanatory memoranda for the bills that introduced the UCT provisions specifically said: “Transparency, on its own account, cannot overcome underlying unfairness in a contract term.”[15]

Finally, you should consider addressing the consequences of the term being declared unfair. The main consequence is that a court may declare it void.[16] The contract will continue to bind the parties if it is capable of operating without the term.[17] Since a term that “defines the main subject matter of the contract” or “sets the upfront price payable under the contract” is beyond the reach of the UCT provisions, it is unlikely that the provisions will render a contract void due to uncertainty. Still, it would be advisable to include a standard severance clause in the contract.

Conclusion

With only a few months until the UCT provisions begin to apply to small business contracts, businesses should start reviewing standard form contracts for potentially unfair terms, if they have not done so already. In addition to the tips referred to above, four general points should be kept in mind when reviewing terms.

  • First, whether a term is unfair is assessed at the time the contract is entered into. Hence, any action that a party may take to alleviate an unfair outcome that resulted from it relying on the term will be irrelevant. This means it is important to focus on the terms of the contract and not on any custom that your client has “to do the right thing” by a counterparty if a term creates a harsh outcome.[18]
  • Second, the UCT provisions are not the only legislative provisions which may render a term void because it is unfair or of similar effect. A special regulatory regime may exist for the industry or jurisdiction your client operates in.[19]
  • Third, there are several decisions concerning the unfair term provisions in the now-repealed Fair Trading Act 1999 (Vic).[20] The provisions in that act are similar to the UCT provisions in some respects but different in others. Hence, caution should be exercised in relying on these decisions, particularly those which applied the reasoning in Director of Consumer Affairs v AAPT Ltd[21] which was not endorsed in Jetstar Airways Pty Ltd v Free.[22]
  • Fourth, a declaration that a term is unfair and hence void may have significant consequences for a business, particularly if the term exists in numerous contracts which are of long duration and high value. In addition to declaring a term void, a court may make broad compensatory orders if a person relies on, or purports to rely on, a term that is declared unfair.[23] Some comfort can be taken from the fact that the more serious consequences that exist for certain contraventions of the ACL, such as penalties and disqualification orders, do not apply simply because a term is unfair.

 

This article was first published in Inhouse Counsel, Vol 20 No 6, July 2016

 

[1] See Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth).Back to article

[2] M Monks and I Bakhilov “Preparing for the extension of the unfair terms regime to small business — some practical issues” (2016) 20(5) IHC 103.Back to article

[3] The Australian Securities and Investments Commission Act 2001 (Cth), and not the ACL, addresses unfair terms that relate to financial products and financial services.Back to article

[4] Above n 1, Sch 1, s 46.Back to article

[5] Australian Consumer Law, s 24(1)(a).Back to article

[6] Director General of Fair Trading v First National Bank plc [2002] 1 AC 481, at [17] (Lord Bingham), followed in Australian Competition and Consumer Commission (ACCC) v ACN 117 372 915 Pty Limited (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 ; BC201502903, at [950]; Australian Competition and Consumer Commission v Chrisco Hampers Australia Ltd [2015] FCA 1204 ; BC201511025, at [47]; and Australian Competition and Consumer Commission (ACCC) v CLA Trading Pty Ltd [2016] FCA 377 ; BC201602725, at [54].Back to article

[7] Australian Competition and Consumer Commission (ACCC) v CLA Trading Pty Ltd, above n 6, at [54].Back to article

[8] Australian Competition and Consumer Commission v Chrisco Hampers Australia Ltd, above n 6, at [44].Back to article

[9] See Bransgrove v Sebring Pty Ltd [2012] VCAT 1189, at [63]–[65]; Scott v ATF Services Pty Ltd (Civil Claims) [2013] VCAT 1859, at [31]; Malam Graysonline, Rumbles Removals and Storage (General) [2012] NSWCTTT 197 (Malam), at [58]; Ferme v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384 ; BC201508506, at [71]–[86]; Chanel v Tiger Airways Australia Pty Ltd (Civil Claims) [2016] VCAT 84, at [8]; and Terry Truck Rentals Pty Ltd v Haseeb [2016] WADC 101 ; BC201640192 (Terry Truck), at [96]–[102]. Please note the conclusions in Malam and Terry Truck on this issue were obiter dicta; see Malam at [42] and Terry Truck at [96].Back to article

[10] Above n 5, s 24(2)(a).Back to article

[11] See Mastos v Advanced Hair Studios Pty Ltd (Civil Claims) [2016] VCAT 57, at [49] and [63]; and Terry Truck, above n 9, at [48], [57] and [108].Back to article

[12] A similar heading was used in Ballard v Sebring (Civil Claims) [2014] VCAT 1636, at [16] and [26].Back to article

[13] Australian Competition and Consumer Commission v Chrisco Hampers Australia Ltd, above n 6, at [89].Back to article

[14] Australian Competition and Consumer Commission v Chrisco Hampers Australia Ltd, above n 6, at [90].Back to article

[15] See the explanatory memoranda for the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth), at [2.46] and the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 (Cth), at [5.36]. See also Australian Competition and Consumer Commission v Chrisco Hampers Australia Ltd, above n 6, at [43].16 Above n 5, ss 23(1) and 250.Back to article

[16] Above n 5, ss 23(1) and 250.Back to article

[17] Above n 5, ss 23(2) and 16(1).Back to article

[18] See Ferme v Kimberley Discovery Cruises Pty Ltd, above n 9, at [53]–[58].Back to article

[19] For example, see the Contracts Review Act 1980 (NSW), Independent Contractors Act 2006 (Cth) and Motor Dealers and Repairers Act 2013 (NSW). This is not an exhaustive list of potentially relevant legislation.Back to article

[20] For example, the decisions for the Australia and New Zealand Banking Group Ltd (ANZ) “bank fees class action” applied the provisions of the now-repealed Fair Trading Act 1999 (Vic); see Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199 ; (2015) 321 ALR 584 ; [2015] FCAFC 50 ; [2015] FCAFC 50 ; BC201503488 and Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 ; [2014] FCA 35 ; BC201400298.21 Director of Consumer Affairs v AAPT Ltd [2006] VCAT 1493.Back to article

[21] Director of Consumer Affairs v AAPT Ltd [2006] VCAT 1493.Back to article

[22] Jetstar Airways Pty Ltd v Free [2008] VSC 539 ; BC200810737.Back to article

[23] Above n 5, ss 237 and 243.Back to article

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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.