There are many reasons to take note of the "unfair contract term" (UCT) laws right now:
But now there is another reason to take note. The ACCC has just commenced court proceedings alleging that a non-disparagement clause is an unfair term (ACCC v Smart Corporation Pty Ltd (trading as Australian 4WD Hire) (WAD215/2019)). If the ACCC succeeds, it could lower the threshold for establishing that a term is unfair. To understand why, we need to recap the three requirements for a term to be unfair.
When is a term unfair under the Australian Consumer Law?
Under both the Australian Consumer Law (ACL) and Australian Securities and Investments Commission Act 2001, a term is unfair if:
- it would cause a significant imbalance in the parties' rights and obligations arising under the contract;
- it's 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.
The UCT 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 UCT laws for specific types of contracts and terms.
If a term is unfair, it may be declared void by a court or tribunal. Although currently there are no penalties for using an unfair term, depending on the nature of the term and the extent of its use, the finding may still have significant consequences – for example, money that was paid under the now-void term may need to be refunded.
So what is this new court proceeding and why is it important?
The ACCC has commenced proceedings in the Federal Court against a car hire business called Australian 4WD Hire, or A4WD for short, and two people associated with it. A4WD lent 4WDs to consumers for off-road use. Among other things, the ACCC alleges that A4WD used "Non-Disparagement Clauses" that "had the effect of preventing honest, critical reviews of A4WD from being posted online [by its customers], thereby distorting genuine consumer choice and indirectly damaging AWD's competitors."
This isn't the first time the ACCC has taken issue with non-disparagement clauses being used to prevent customers posting negative online reviews. The ACCC has previously accepted court enforceable undertakings from two businesses not to use such terms, but this is the first time it has commenced court proceedings. This is significant because for the ACCC to prove a non-disparagement clause is unfair, it must prove that it "would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on".
The reference to "a party" is to a party to the contract, which in this case is the consumer who hired the 4WD. But how does a non-disparagement clause cause "detriment" to the person who hired the 4WD? The ACCC alleges that the "detriment" is "the limitation on their rights to publish honest and genuinely held statements about their experiences with A4WD." The ACCC's argument is both interesting and important.
It's interesting because it perhaps reflect the sort of society we live in. Ordinary consumers regularly publish reviews about goods and services via the internet. It would be very rare for an ordinary consumer to publish a review using something other than the internet, such as their own hardcopy publication. Other than reviews, people regularly take to social media to express their views on anything and everything. It now seems the ACCC considers the opportunity to vent online about goods and services is a right that the ACL should protect.
The ACCC's argument is important because it could set a low threshold for proving that a term is unfair. If losing the opportunity to vent online is considered "detriment" for the purposes of the UCT laws, it may result in other non-financial matters being regarded as "detriment", such as disappointment, shock and inconvenience. This sets a low threshold for the third element of establishing that a term is unfair, which is that the clause "would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on". It might also have an effect on the first element, which is that the clause "would cause a significant imbalance in the parties' rights and obligations arising under the contract". This is because a low threshold for "detriment" might have a relative effect on what constitutes a "significant imbalance".
Another important point that's likely to arise from this case is the extent to which a business can use contractual terms to protect itself from incorrect or imbalanced online reviews. A term is not unfair if it's "reasonably necessary in order to protect the legitimate interests" of a business. One would think that a business has a "legitimate interest" in protecting itself from incorrect or imbalanced online reviews, but what sort of contractual provisions can it use to achieve this without going beyond what's "reasonably necessary"?
Where to from here for online reviews and the ACL?
The next step is seeing what the judgment in this proceeding says, but there may be another development beyond that. It will be interesting to see whether the ACCC brings proceedings in the future alleging that contractual terms that forbid consumers from posting disparaging reviews amount to misleading or deceptive conduct. The argument would be that by eliminating or limiting the number of negative reviews, a business is likely to mislead consumers by giving them an inaccurate impression of the quality of their goods or services. The prohibition on misleading or deceptive conduct under section 18 of the ACL is not subject to penalties, but there are other provisions of the ACL which are subject to penalties and could be engaged; for example, section 34 of the ACL prohibits "conduct that is liable to mislead the public" as to the nature, suitability or quantity of any services. The ACCC used section 34 to obtain a $3 million penalty from Meriton Apartments for manipulating the online review system of TripAdvisor so as to reduce the likelihood of customers posting negative reviews. Currently, the ACCC cannot obtain a penalty for using an unfair term, so it would need to look to other provisions in the ACL, such as section 34 or those prohibiting unconscionable conduct, but this may become unnecessary if penalties are introduced for using unfair terms.
What should I do if I have a standard form contract?
For now, there are two things. First, you should review your standard form contracts to see whether they contain any terms that may restrict customers from making negative statements about your goods and services. The ACCC appears to be keen to pursue such terms. In June 2018, the ACCC obtained an undertaking from one business not to use such terms and then publicly said that this "should serve as a warning to other businesses that imposing contract terms that prevent their customers from making public comments will attract ACCC attention." The ACCC has clearly made good on this warning by commencing court proceedings against A4WD.
Second, you should look out for the result of the A4WD proceeding and other developments in the dynamic world of unfair terms – all of which you'll find in future editions of Clayton Utz Insights.