22 Aug 2019

Potato case highlights one of the problems with the unfair contract term provisions

By Peter Sise

Unfortunately, since the context of a contract is important to whether a term is unfair, judgments on whether a particular term is unfair are of limited assistance.

The ACCC recently resolved a court proceeding concerning the use of "unfair contract terms" and breaches of the Horticulture Code of Conduct. The court proceeding was brought against a potato producer and supplier called Mitolo Group Pty Ltd. It was resolved by the ACCC and Mitolo agreeing to consent orders being made by the Federal Court and an undertaking being given by Mitolo to the ACCC.

This proceeding highlights one of the difficulties with the laws concerning unfair contract terms. Whether a term is "unfair" depends on the other terms in the particular contract. For this reason, a finding by a court that a term is unfair in one particular contract only provides limited guidance on whether that term may be unfair in another contract. Also, it is difficult to justify a court ordering that a particular term not be used in another contract which the Court has not considered. To understand why this is so, we need to quickly recap on what these laws are.

When is a term "unfair" under the Australian Consumer Law?

Under both the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001, a term is unfair if it fulfils each of the following three requirements:

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

These laws don't apply to all contracts. Instead, they are limited to standard form contracts which are also "consumer contracts" or "small business contracts". There are other exclusions from the unfair contract term laws for specific types of contracts and terms.

If a term is unfair, it may be declared void by a court or tribunal. Although there are currently no penalties for using an unfair term, depending on the nature of the term and the extent of its use, a finding that a term is void may still have significant consequences; for example, money paid under the term may need to be refunded.

The Mitolo proceeding highlights a difficulty concerning the first of the three requirements for a term to be unfair, being that the term would cause a significant imbalance in the parties' rights and obligations arising under the contract. When considering this requirement, the court must consider "the contract as a whole". The upshot of this is that a particular term may be unfair in one particular contract but not unfair in another depending on the other terms of the two contracts. One contract may have other terms that offset the imbalance that the impugned term would otherwise create while the other contract may not. This is a problem for two reasons.

  • First, it means that judicial decisions on whether a term is unfair give businesses limited guidance on whether that term may be unfair when used in another context.
  • Second, it means that a court should not restrain the future use of a term, which it has found to be unfair, unless the restraint only applies to the particular contract(s) which the court considered. If the court generally restrains the use of the term, it may be restraining its use in a contract where the term is not actually unfair. This gives the court an unenviable decision: (i) restrain the use of the term in future contracts and run the risk of restraining the use of a term which is not actually unfair or (ii) not restrain the use of the term in future contracts and run the risk that it may be used in circumstances where it is unfair.

The Mitolo proceeding

In the Mitolo proceeding, the Federal Court declared that several terms used by Mitolo were unfair. Under section 232 of the Australian Consumer Law, the Federal Court restrained Mitolo from using the impugned terms for a period of 5 years in:

(i) the particular contracts that were before the Court; and

(ii) in any other "small business" contract that was also a standard form contract.

The restraint in point (ii) is problematic because the impugned terms may not be unfair when used in a different contract depending on the other terms in that particular contract. For example, one of the impugned terms was a non-disparagement provision that said a potato grower must not "make any statement that directly or indirectly has or is likely to have a negative effect on the reputation of … Mitolo's business". Such a term may not be unfair if, for example, Mitolo also agreed not to make any disparaging statements concerning the potato grower. Also, using all of the impugned terms in the one contract may be unfair but perhaps using only one or two of them may not be.

It is difficult to justify forbidding the use of an impugned term in any future contract on the basis that the term is unfair. You simply don't know what the other terms of that future contract will be and hence whether the impugned term is unfair in the context of that future contract. The only way to address this problem is to draw up a complete contract which contains the impugned terms and say "In the context of this contract, the terms are unfair so you can't use this particular contract!" Well, that's almost what the ACCC and Mitolo agreed to. In addition to the orders made by the Federal Court, Mitolo gave the ACCC an undertaking that:

  • annexed a 20-page contract that Miltolo may use when contracting with potato growers; and
  • said that Miltolo must not enter into a contract which is "less favourable overall" to the potato grower than the annexed contract.

The annexed contract left the parties to determine the amount of potatoes to be supplied and the price, but was otherwise a very detailed agreement. The undertaking came close to prescribing an overall deal between Mitolo and a grower and then saying that Mitolo may not offer a deal that is less favourable to the grower. It's unlikely that this outcome could be achieved by court orders since it's unlikely that a court would be willing to effectively draft an entire contract for a party to use.

What's next for unfair contract terms

At present, the Federal Government is consulting about the introduction of penalties for the use of unfair contract terms. Currently, there are no penalties. If penalties are introduced, businesses will want as much guidance as possible about whether a particular term is unfair. Unfortunately, since the context of a contract is important to whether a term is unfair, judgments on whether a particular term is unfair are of limited assistance. This assistance is particularly limited when the judgment was obtained by agreement between the parties like in the Mitolo proceeding. 

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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.