On 1 July 2010 the Trade Practices Amendment Act (No 1) 2010 brought into effect new provisions of the Trade Practices Act 1974 (the Act), which render a term of a consumer contract void if the term is unfair and is contained in a standard form contract[1] (Unfair Terms Provisions).

These new provisions will have a significant effect on businesses and may introduce an element of uncertainty in respect of key terms in contracts which come within the ambit of the Unfair Terms Provisions.

For businesses that use standard form contracts in their dealings with consumers, the Unfair Terms Provisions can significantly increase the risk of litigation brought by consumers under the Act. It is also anticipated that the Australian Competition and Consumer Commission (ACCC) will be vigorous in its investigation and prosecution of consumer complaints made to it in respect of alleged unfair terms.

It is important for businesses to review their standard form consumer contracts now to minimise the risk of litigation that has been created by the introduction of the Unfair Terms Provisions.

The Unfair Terms Provisions are set out in Schedule 2 Part 2 of the Act, and a reference in this article to a section is a reference to a section in the Schedule.

What types of contracts are captured by the Act?

The Unfair Terms Provisions only apply to consumer contracts that are standard form contracts.

What is a consumer contract?

A consumer contract is 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.[2]

What is a standard form contract?

Section 7(2) stipulates that a court must take into account six criteria for determining whether a contract is a standard form contract, although it may also take into account other matters which it considers relevant. These criteria are:

  • 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 either to accept or reject the terms of the contract in the form in which they were presented;
  • whether another party was given an effective opportunity to negotiate the terms of the contract;
  • whether the terms of the contract take into account the specific characteristics of another party or the particular transaction;
  • any other matter prescribed by the regulations.

Onus of proof regarding standard form contracts

Be aware that if a party alleges that a contract is a standard form contract, the court will presume that it is a standard form contract unless the other party proves otherwise.[3]

What is an unfair term?

Pursuant to Section 3(1), a term of a consumer contract is unfair if it would:

  • cause significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it is 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.

It is important to note that for a term to be considered unfair, the party alleging unfairness must prove the first and third elements listed above. With respect to the second element, the Act presumes that a term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by that term, unless that party proves otherwise.[4]

Section 3(2) provides that in determining whether a term is unfair, a court may take into consideration such matters as the court thinks relevant, but must take into account:

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

A term is transparent if it is expressed in reasonably plain language, is legible, presented clearly and is readily available to any party affected by the term.[5]

Effectively Section 3(2) provides that a term may not be considered unfair if:

  • the consumer can easily locate, read and understand it;
  • there are other terms in the contract  which offset the detriment which the alleged unfair term may cause to the consumer; and/or
  • the alleged unfair term operates to provide some benefit as well as a detriment to the consumer.[6]

If a court finds that a term is unfair and therefore void, but the contract can still operate without the unfair term, then the remaining terms of the contract will continue to bind the parties.[7]

The Act provides a list of examples of what may be unfair contract terms, which can be found in Section 4.

Some terms are unaffected

The Act will not affect terms of a contract, to the extent that such terms:

  • define the main subject matter of the contract;
  • set the upfront price payable under the contract; or
  • are required or expressly permitted by law of the Commonwealth, a State or Territory.[8]

Potential for class actions

Depending on the size of its customer base and volume of commerce, a business may enter into the exact same standard form consumer contract with hundreds, if not thousands of consumers in a given period.

Thus the nature of standard form contracts and the effect of the Unfair Terms Provisions have now rendered those who utilise standard form contracts susceptible to class actions on a potentially massive scale.

In addition, the ACCC (or the Australian Securities and Investment Commission in the case of financial contracts) has the power to seek orders from a court for the benefit of a class of persons, where those persons are not parties to the litigation initiated by the ACCC.

Thus “a ruling that a term in a contract is an ‘unfair term’ and void for that reason can have momentous consequences for a respondent, and perhaps for other persons who supply goods or services in the same industry, if a standard form contract is involved, even if the amount claimed by the applicant is small.”[9]

If you use standard form contracts…

  • Review the terms of your standard form contracts to determine whether any could be considered to meet the definition of “unfair” contained in the Act, and if they do:
    • consider whether the term is reasonably necessary to protect your legitimate interests, and if it is not,
    • redraft the term to level the playing field between yourself and the other party; or
    • ensure that other terms in the contract offset potential detriment to the consumer which may be caused by the alleged unfair term.
  • Ensure that any key terms which you would want to enforce follow the criteria for transparency as expressed in the Act.

Remember, the Act automatically places the onus on the party relying on the disputed term to prove that the term is reasonably necessary to protect its legitimate interests.

For more information contact Daniel Fleming on d.fleming@pigott.com.au.

This article is intended to provide general information in summary form on a legal topic, current at the time of publication.  The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.