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New laws deal with unfair contract terms

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The new Australian consumer law (ACL) will overhaul the current regime of regulation of consumer protection and unfair business practices.  The ACL not only streamlines the current system of consumer protection but also introduces a number of new concepts into a national scheme of regulation.

These reforms take place in two stages, the first being the enactment of law reforms in respect of unfair trading terms in standard form consumer contracts, which took effect from 1 July 2010.  The remainder of the ACL will commence on 1 January 2011.

Unfair Contract Terms

The new unfair contract terms regime aims to prevent companies from seeking to impose onerous burdens on customers when using standard form contracts.  Unfair terms in contracts can be declared void and those seeking to rely on them can face enforcement action.

The unfair terms provisions apply to consumer contracts for :

  • the supply of goods or services
  • sale or grant of an interest in land
  • supply of a financial product
  • supply of financial services

which is wholly or predominantly for personal, domestic or household use or  consumption.

Under the new provisions, a consumer contract is void if a term of the contract is deemed to be unfair and the contract is a standard form contract.

The legislation assumes that all contracts are standard form contracts unless the supplier proves otherwise.  Reasons why a court may find a contract not to be in ‘standard form’ include:

  • the bargaining power of the parties
  • whether the party had an opportunity to negotiate
  • whether the contract was prepared before any discussions took place
  • whether the contract is prepared specifically for the transaction.

A consumer contract will be deemed to be “unfair” if it is found that the term:

  • causes a significant imbalance in the parties’ rights and obligations
  • is not necessary to protect the legitimate interests of the party who would be advantaged by the term
  • would cause detriment to a party if it was to be applied or relied upon.

When determining if a term is unfair a Court can take into account the extent to which the term is transparent and the contract as a whole.  The notion of transparency is based on foundations of clarity, legibility, clear presentation and access by the affected party.

The legislation does carve out an exception to terms that defines the main subject matter of the contract.

The new law does not apply to terms that:

  • define the main subject matter or
  • establish the up front price payable or
  • is required or expressly permitted by a State or Commonwealth law.

The upfront price is the consideration that is provided or to be provided under the contract and which is disclosed before or at the time the contract is entered into.  Consideration that is contingent upon the happening or occurrence of a particular event after the contract is entered into is not considered to the part of the ‘up front price’.

The legislation contains a non exhaustive list of examples of unfair terms including:

  • a term that permits one party, but not the other, to terminate the contract
  • a term that has the effect of penalising one party, but not the other for breach or termination of the contract
  • a term that permits one party, but not the other, to vary the terms of the contract.

If a term is unfair it will be void and the contract will continue to bind the parties if it can continue to operate without the unfair term.

Action required:

  • Consider whether you use standard form contracts in your business
  • Have the terms of your contracts reviewed to determine whether you are at risk of being declared to be unfair, either in substance or because the term is unclear
  • If your contracts are due to be renewed, care must be taken to ensure the renewed versions do not contain unfair terms or if a contract is to be varied, you must ensure that both the varied terms and the manner in which the document is varied are not unfair
  • Particular attention should be paid to unilateral termination and variation clauses and terms which seek to limit or exclude liability.  The review needs to ensure that the terms are necessary to protect the legitimate interests of your business as opposed to having the effect of unjustly awarding compensation to you or of providing an unfair advantage in your favour.

Author:  Fotini Kypraios