Unfair contract terms law reform – recent changes to Australian Consumer Law

unfair contract termsUnfair contract terms law reform – recent changes to Australian Consumer Law

Pre-amendments to ACL Post-amendments to ACL
Previously, Australian Consumer Law was limited to governing contracts with individual consumers and not contracts between companies. A term can be declared as void if the term is ‘unfair’ and the contract is a ‘standard form contract’. Standard form consumer contracts include:

–          Telephone services and internet access services;

–          Domestic building contracts;

–          Gym memberships

–          Motor vehicle contracts

–          Travel (airline tickets and car hire).[1]

 

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (“the Act”) was introduced to amend legislation[2] to extend unfair contract protections to small business contracts, and to address the potential for unfair detriment where unfair contract terms are enforced against small businesses.

 

This means that more contracts will be subject to extended unfair term protections. The types of standard form contracts small businesses may enter into include:

–          Business loans;

–          Credit cards; and

–          Client or broker agreements.[3]

The common law courts have traditionally not recognised unfairness in the terms of a contract as a basis for intervention, the underlying premise being that a party is free to enter into a binding contract on terms of his or her choice.[4]

 

This presumption of freedom of contract, and the voluntary entry into binding contracts overlooks the fact that many standard form contracts relate to essential goods or services, such as utilities, and that the consumer may have no bargaining power and little choice as regards the terms and conditions on offer.[5]

The application of the Act is not limited by the type of goods and services which are provided for under the contract. A term of a small business contract will be deemed as void if the following three requirements are satisfied:

1.       The contact must be a standard form contract;

 

2.       The contract must be a small business contract; and

 

3.       The contract must contain a term that is unfair.[6]

Unfair contract term protections for consumer contracts only apply when an individual acquires goods, services, an interest in land, financial products or financial services. The Act covers contracts where the small business is the supplier of goods or services, as well as contract where the small business is the acquirer.

Requirements

The Act commenced on 12 November 2016 and applies to standard form contracts entered into or varied after this date.

  1. Standard form contract

An express definition of ‘standard form contracts’ is not provided for in the legislation. If a party alleges that a contract is a ‘standard form contract’, it is presumed to be one, unless that other party to the proceeding proves otherwise.[7]

‘Standard form contracts’ are often prepared by one party to the contract, and the other party has little or no opportunity to negotiate the terms i.e. offered on a “take it or leave it basis”.

However, the legislation provides some guidance in determining whether a contract is a standard form contract.[8] A court may take into account the following matters:

–          Whether one of the parties has all or most of the bargaining power relating to the transaction;

–          Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;

–          Whether another party was, in effect, required to accept or reject the terms of the contract in the form which they were presented;

–          Whether another party was given an effective opportunity to negotiate the terms of the contract.

 

  1. Small business contract

The contract must also be a ‘small business contract’. That is:

(a)          The contract is for a supply of goods or services, or a sale or grant of an interest in the land;

(b)          At least one party to the contract is a business that employs fewer than 20 persons (at the time the contract is made); and

(c)           Either:

  1. The upfront price payable under the contract does not exceed $300,000; or
  2. If the contract exceeds 12 months, the upfront price payable does not exceed $1 million.[9]

A casual employee is not counted for the purposes of the section above, unless he or she is employed by the business on a regular and systematic basis.[10]

  1. A term that is unfair

A term of a small business contract is ‘unfair’ if:

(a)    It would cause significant imbalance in the parties’ rights and obligations arising under the contract; and

(b)    It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c)     It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.[11]

Types of terms that may be unfair

It is up to the court to decide whether a term is unfair by taking into account the matters that the court deems relevant. However, the court must take into account the following:

(a)    The extent to which the term is transparent (expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term);[12] and

(b)    The contract as a whole.[13]

Schedule 2, section 25 of the CCA 2010 (Cth) provides examples of the types of unfair terms that may be deemed as ‘unfair’ by the law. Such terms include those which permit, or have the effect of permitting one party (but not another) to:

–          Avoid or limit performance of the contact;

–          Terminate the contract;

–          Vary the terms of the contract;

–          Renew or not renew the contract;

–          Vary the upfront price payable without the right of another party to terminate the contract;

–          Unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted under the contact;

–          Unilaterally determine whether the contract has been breached or to interpret its meaning;

–          Assign the contract to the detriment of another party without that other party’s consent.

Other terms can include a term which penalises, or has the effect of penalising one party (but not another) for a breach or termination of the contract, or a term which imposes the evidential burden on one party in proceedings relating to the contract.

Finally, terms which limit, or has the effect of limiting:

–          One party’s vicarious liability for its agents;

–          One party’s right to sue another party; or

–          The evidence one party can adduce in proceedings relating to the contract,

are further examples of terms which may be deemed as ‘unfair’ under the legislation.

Practical examples of terms that may be unfair

–          Automatic rollovers renewing contracts for excessive periods

–          Unilateral price increases

–          Excessive liquidated damages

–          Fee farming i.e. terms requiring small businesses to pay a brokerage fee even if the broker’s conduct contributes to the small business failing to obtain a loan

–          Equity stripping where a small business in default has its debt refinanced and becomes liable to pay excessive interest and default fees

–          Unnecessarily high interest rates

–          Compulsory acquisition of franchises at less than the market rate

–          Terns allowing suppliers of telephone or internet services to unilaterally vary the amount of available data or calls.[14]

What are the effects of having an unfair contract term?

If the contract can operate without the unfair term, the remainder of the contract will still be binding. The small business can make an application to the Australian Competition and Consumer Commission, the Australian Securities and Investment Commission, or a state or territory regulator.

It is not an offence to include an unfair term in a small business contract. However, if a court or tribunal finds that a term is ‘unfair’, the term will be void i.e. no longer binding on the parties and the term will be unenforceable and treated as if it did not exist. However, the contract will continue to bind parties if it is capable of operating without the unfair term or clause.[15]

No fines or pecuniary penalties à but remedies include injunctions, compensation orders, and damages.

Proceedings may be brought seeking:

–          A declaration that a term is unfair;[16]

–          An injunction;[17]

–          A compensation claim on behalf of a party suffering loss;[18] and

–          An order to redress loss or damage to a non-party consumer.[19]

Declarations

Jurisdiction to grant a declaration under the CCA in Queensland is conferred on the District Court.[20] The Commonwealth’s jurisdiction to grant a declaration under the CCA is conferred on the Federal Court, the Federal Magistrates Court, the District Court and the Supreme Court.

The word “term” is not defined. Where a term has several parts, but only one part is found to be unfair, the offending part is void and the remainder of the term will be enforced, if the contract is capable of operating without the unfair part of the term.[21]

Injunctions

Applications for an injunction to be granted can be made by any person, and is a discretionary matter for the court to determine.

–          Interim injunctions can be granted pursuant to section 234 of the CCA 2010 (Cth)

–          Final injunctions can be granted pursuant to section 232 of the CCA 2010 (Cth).

Jurisdiction to grant an injunction under the CCA 2010 (Cth) in Queensland is conferred on the District Court, so long as the injunction is sought in conjunction with another proceeding on under the ACL. However, if an injunction is sought alone, then the Supreme Court has jurisdiction to hear the matter.[22]

The Commonwealth’s jurisdiction to grant an injunction under the CCA 2010 (Cth) is conferred on the Federal Court, the Federal Magistrates Court, the District Court and the Supreme Court.

Exclusions

There are some contracts and terms which ACL does not apply to:

  1. Excluded contracts

 

–          Shipping contracts e.g. contracts of marine salvage or towage, charterparty of a ship or a contract for the carriage of goods by ship;[23]

–          Contract that is the constitution of a company, managed investment scheme or other kind of body;[24] or

–          Contract of insurance governed by the Insurance Contracts Act 1984.[25]

  1. Excluded terms

 

–          Terms that define the main subject matter of the contract;

–          Terms that set the upfront price payable under the contract; or

o   The ‘upfront price’ does not include any consideration that is contingent on the occurrence or non-occurrence of a particular event.[26]

–          Terms that are required or expressly permitted by a law of the Commonwealth, a State or a Territory.[27]

Practical implications

Businesses should consider reviewing any of their low-value standard form contracts which potentially might be used in transactions involving businesses that employ fewer than 20 persons. The new protections will cover small business-to-small business contracts, and big-business-to-small business contracts.[28]

Business should consider whether they will be affected by the changes, and thoroughly then plan to respond. Some business may choose to comprehensively review their contracts or amend some of the more obviously unfair terms.

Suggestions business can take in response to the Act:

–          Review contracts which might be used in transactions involving businesses with less than 20 employees;

–          Review new contracts and existing contracts which a business intends to renew or vary;

–          Consider creating a separate set of contracts for big businesses;

–          Consider structuring the price to exceed the financial threshold;

–          Consider asking the other party how many people it employs; and

–          Calculate the upfront price.[29]

Common terms of concern

The ACCC has examined standard form contracts in the advertising, telecommunications, retail leasing, independent contracting, franchising, waste management, and agriculture industries.[30]

  1. Advertising[31]

Advertising is used by a majority of Australian businesses to promote their goods and services. Some potentially unfair terms raised in relation to advertising include:

–          Right to remove advertisements

–          Unilateral variation

–          Limited liability and wide indemnities

–          Termination clauses

–          Automatic renewal

  1. Telecommunications[32]

Telephone and internet services are essential for doing business as they enable businesses to undertake day-to-day activities such as receive payments, place and receive orders, pay bills and attract new customers.[33] Clauses that have been identified as being potentially unfair include:

–          Unilateral variations

–          Early termination charges

–          Limited liability and wide indemnities

  1. Retail leasing[34]

Retail leasing has been identified as potentially problematic industry. Some clauses that have been identified as being potentially unfair include:

–          Right to unilaterally vary shopping centre rules

–          Termination clauses

–          Right to recover costs from a tenant

–          Rights to property at expiry of lease

–          Wide indemnities

  1. Independent contracting[35]

Some clauses that have been identified as being potentially unfair include:

–          Unilateral variation

–          Limited liability and wide indemnities

–          Termination clauses

–          Misleading statements about rights at law

  1. Franchising[36]

Franchising covers a diverse range of industries, such as food retailing, health, accommodation, administration and support services. Some clauses that have been identified as being potentially unfair include:

–          Right to unilaterally vary operations manual

–          Liquidated damages

–          Restraint of trade

–          Termination

  1. Waste management[37]

The waste management industry has been identified as an industry where the existence of unfair contact terms has become more prevalent. Some clauses that have been identified as being potentially unfair include:

–          Automatic renewal

–          Unilateral variation

–          Limited liability and wide indemnities

  1. Agriculture[38]

Significant power imbalances can exist between farmers and the businesses they deal with (e.g. buyers, processes and agents). Common standard form contracts includes contracts from traders of the horticulture, beef and cattle, viticulture, honey, cotton, poultry, grain and sugar industries. Some clauses that have been identified as being potentially unfair include:

–          Unilateral variation

–          Terms allowing unrestricted access to property

[1] S G Corones, The Australian Consumer Law (LawbookCo, 2nd ed, 2013) 223.

[2] Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act 2001”); Competition and Consumer Act 2010 (Cth) (“CCA 2010”) Schedule 2.

[3] Australian Securities and Investments Commission, Unfair contract terms for small business (28 September 2016) <http://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/unfair-contract-terms-for-small-business/>.

[4] Tanwar Enterprises Pty Ltd v Cauci (2003) 217 CLR 315, 325; Corones, above n, 222.

[5] Corones, above n 1, 222.

[6] ASIC Act 2001 s 12BF(1); CCA 2010 Schedule 2, s 23(1).

[7] Ibid s 12BK(1); Ibid Schedule 2, s 27(1).

[8] Ibid s 12BK(2); Ibid Schedule 2, s 27(2).

[9] Ibid s 12BF(4); Ibid Schedule 2, s 23(4).

[10] Ibid s 12BF(5); Ibid Schedule 2, s 23(5).

[11] Ibid s 12BG(1); Ibid Schedule 2, s 24(1).

[12] Ibid s 12BG(3); Ibid Schedule 2, s 24(3).

[13] Ibid s 12BG(2); Ibid Schedule 2, s 24(2).

[14] CCH, Australian Contract Law Commentary, vol 1 (at 39-890).

[15] Australian Competition and Consumer Commission (“ACCC”), Unfair contract terms <https://www.accc.gov.au/business/business-rights-protections/unfair-contract-terms>.

[16] CCA 2010 (Cth) Schedule 2, s 250.

[17] Ibid Schedule 2, s 232.

[18] Ibid Schedule 2, s 237.

[19] Ibid Schedule 2, s 239.

[20] Fair Trading Act 1989 (Qld) s 51.

[21] Corones, above n 1, 621.

[22] Fair Trading Act 1989 (Qld) s 51.

[23] CCA 2010 (Cth) Schedule 2, s 28(1).

[24] ASIC Act 2001 s 12BL(1); CCA 2010 (Cth) Schedule 2, s 28(3).

[25] CCA 2010 (Cth) Schedule 2, s 63(b).

[26] ASIC Act 2001 s 12BI(2); CCA 2010 (Cth) Schedule 2, s 26(2).

[27] Ibid s 12BI(1); Ibid Schedule 2, s 26(1).

[28] Explanatory Memorandum, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth), 3.145.

[29] CCH, Australian Contract Law Commentary, vol 1 (at 39-890).

[30] ACCC, Unfair terms in small business contracts: A review of selected industries (November 2016) <https://www.accc.gov.au/system/files/B2B%20UCT%20-%20Final%20-%20Unfair%20terms%20in%20small%20business%20contracts%20%20A%20review%20of%20selected%20industries_0.PDF> 2.

[31] Ibid 5.

[32] Ibid 8.

[33] Ibid 8.

[34] Ibid 11.

[35] Ibid 14.

[36] Ibid 17.

[37] Ibid 20.

[38] Ibid 23.