The first part of national consumer law reforms – unfair contract provisions

Australian consumer law took a step closer to national uniformity last week when the Commonwealth Parliament passed the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth).  The reforms are designed to create a unified national consumer law to apply to consumer transactions.  The legislation will introduce new penalties, enforcement powers and consumer redress options and it aims to promote consistency across all Australian jurisdictions.  In this edition, we discuss the issue of unfair contract terms in consumer contracts.  In later editions, we will focus on other areas of reform such as the introduction of substantial new penalties and the safety of consumer goods and product related services.

National consumer law

Australian consumer law took a step closer to national uniformity when the Commonwealth Parliament passed the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth) on 17 March 2010.  Known as the Australian Consumer Law (ACL) Bill, the legislation will amend the Trade Practices Act 1974 (Cth) to insert a new Part XI, which will apply the ACL as national law.  In particular, the ACL Bill contains provisions that address the use of unfair contract terms in consumer contracts.

A consumer contract is defined in the ACL Bill as a contract for a supply of goods or services, or a sale or grant of an interest in land, to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.  Contracts between businesses are excluded from the scope of the unfair contract terms provisions, except in respect of sole traders.

In brief, a term in a contract will be void if:

• the term is unfair; and
• the contract is in a standard form contract (Contract).

Ultimately, the decision of whether or not a Contract term is unfair and therefore void is one for a court to make.  However, the ACL Bill does contain provisions to assist in determining whether or not a Contract term is unfair and therefore void.

The overarching approach as set out in the ACL Bill is that a term in a Contract is unfair if the term:

• would cause a significant imbalance in the parties’ rights and obligations arising under the Contract;
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
• would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

In determining whether a Contract term is unfair, a court may take into account any matter which it thinks relevant.  However, the ACL Bill requires a court to take into account the following matters, namely:

• the extent to which the term is transparent; and
• the Contract as a whole.

A Contract term will be transparent, for the purposes of the ACL Bill, if the term is expressed in reasonably plain language, is legible, is presented clearly and is readily available to any party affected by the term.

The ACL Bill provides some examples of unfair terms to assist in determining whether or not a Contract term is unfair, eg. a term that permits one party (but not another party) to terminate the Contract, or a term that permits one party unilaterally to vary the characteristics of the goods or services to be supplied are examples of terms that may be unfair.  However, the list is indicative and non-exhaustive; the examples given in the ACL Bill do not prohibit the use of those terms in all Contracts.

It is important to note that the ACL Bill expressly states that Contract terms which:

• define the main subject matter of the Contract;
• set up the upfront price payable under the Contract; or
• are required or expressly permitted by a law of the Commonwealth, State or Territory, are not subject to the unfair contract term provisions.

When a court finds that a term in a Contract is unfair, the Contract will continue to bind the parties to the extent that the Contract is capable of operating without the unfair term.

What are the implications for business?

The unfair contract term provisions in the ACL Bill apply to new Contracts entered into on or after the commencement of the provisions, which at this stage is likely to be from 1 July 2010.  However, the provisions may apply to Contracts entered into before that date if those Contracts are renewed or varied after that date, but only to the extent of the actual renewal or variation.

The implications for business are significant in that consideration must now be given by businesses to the purposes for which a consumer may be purchasing goods or services, rather than focusing merely on the nature of the good or service itself, for the purposes of determing whether or not the unfair contract provisions apply.  As a general proposition, if a Contract term between a business and its consumer is found to cause a significant imbalance in the consumer’s rights, is not reasonably necessary to protect the legitimate interests of the business, and it causes detriment to the consumer, then the Contract term will held to be void.

The intervening period between now and the proposed commencement date of the ACL Bill will provide a window in which a business can review its standard terms and conditions to ensure compliance by 1 July 2010. If you would like further information please contact one of our Corporate Advisory lawyers.

Authors: Paul Dawson and Susan Reece Jones