“Unfair” contract terms in consumer contracts to become unenforceable in Australia
The Commonwealth Trade Practices Act 1974 is undergoing substantial amendment in order to introduce a National Consumer Law. By and large, these amendments come into effect on 1 January, 2011 and on that day the Act becomes known as the Competition and Consumer Act 2010.
The proposed National Consumer Law is contained in 3 bills of which 2 have been passed by Parliament and the third has lapsed as a consequence of the recent election. However, it is expected that because the reforms had bipartisan support, the newly formed government will reintroduce the third raft of amendments and that they will be passed in due course. The changes contained in the lapsed bill relate to reforms to the law of unconscionable conduct and, if passed, will eliminate the current distinction between consumer transactions and business transactions. The provisions will continue not to apply to the conduct of a person in relation to the supply or possible supply of goods or services, to or the acquisition or possible acquisition of goods or services from, a listed public company.
The two pieces of legislation which have been passed consolidate the existing provisions as to misleading and deceptive conduct, unconscionable conduct, unfair practices and statutory guarantees into a new Part XI and introduce a prohibition on “unfair contract terms” in standard form consumer contracts. In addition there are a number of changes made to the remedies available to the Australian Competition and Consumer Commission to deal with offending conduct. It is the introduction of the prohibition on unfair contract terms in standard form consumer contracts which is the major change brought about by the legislation.
The new provisions declare to be void any term in a standard form consumer contract if it is “unfair”.
A “consumer contract” is one where the acquisition of goods, services or an interest in land is wholly or predominantly for personal, domestic or household use or consumption. However, the legislation does not define what constitutes a “standard form contract”. In deciding whether or not a contract is a standard form contract, the Court is directed to take into account whether one of the parties had all or most of the bargaining power in negotiating the contract, whether the contract was prepared by one party before any discussions relating to the transaction occurred, whether a party was required either to accept or reject the terms of the contract in the form presented, whether there was an effective opportunity to negotiate and whether the terms take into account the specific characteristics of another party or the particular transaction. Furthermore, in any case where it is alleged that a contract is a standard form contract, the onus of establishing that it is not moves to the defendant or respondent. Thus, on the assertion of a standard form contract, the onus of proof moves to the other party.
A contract term is “unfair” if it would cause a significant imbalance in the party’s rights and obligations under the contract, is not reasonably necessary in order to protect legitimate interests of the party who is advantaged by the term and would cause detriment to the other party if it were to be applied or relied upon. The legislation sets out examples of the kinds of terms that may be unfair including a term that permits one party (but not another):
- to avoid or limit performance of the contract;
- to terminate the contract;
- to vary the terms of the contract;
- to renew or not renew the contract;
- to vary unilaterally the characteristics of the goods or services to be supplied or the interest in land to be sold or granted or to limit a party’s liability for its agents or to sue.
Terms will not be regarded as being unfair to the extent that they define the main subject matter of the contract, set the upfront price payable or are required or permitted by a relevant law; such as the Insurance Contracts Act.
Furthermore, the legislation does not apply to contracts of marine salvage or towage, charter-parties, contracts for the carriage of goods by ship or the constitution of a company, managed investment scheme or other kind of body.
Where the Australian Competition and Consumer Commission or a person believes that a contract term is unfair, an application may be made to the Court for a declaration to that effect. If the Court makes a declaration that a term is unfair and a party subsequently seeks to rely upon or apply the term, it is a contravention of the Act and the Court has the power to enjoin that conduct and make other orders as it considers appropriate but the application of or reliance on the unfair term does not give rise to a civil penalty or fine. However, if the third part of the National Consumer Law is reintroduced into Parliament and passed, the prospect arises that the conduct of applying or relying on a contract term which has been declared to be unfair could amount to unconscionable conduct. If that legislation is passed, then pecuniary penalties to a maximum of $1,100,000.00 for corporations and $220,000.00 for individuals would become relevant.