Australian Consumer Law to adopt prohibitive stance on Unfair Terms
The definition of unfair has arisen as a complex topic in proposed new Australian Consumer Law.
Those in favour of the inclusion of an ‘unfair terms’ provision in the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth), argue that it provides a streamlined and timely response to terms that are simply unfair in substance, while others argue it creates uncertainty for businesses and increase costs through the inability of business to protect their interests. Both Victoria and the UK already have an ‘unfair term’ provision of which there is a requirement of ‘good faith’. However, the proposed Australian model drops the good faith requirement which has been the product of much confusion and states that a term is unfair if it would cause a significant imbalance in the parties’ rights and obligations is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.
In Jetstar Airways Pty Ltd v Free [2008] VSC 539 the purchase online of plane tickets, of which the terms of such were automatically attached and not open to individual negotiation was held to be unfair by the Victorian Civil and Administrative Tribunal. As such it would appear that an imbalance in a party’s rights and obligations will occur where a term being relied upon by one party is weighted in that person's favour and the imbalance is deemed to be significant. To determine such will require use of case specific factors rather then just looking at the term in isolation.
Business contracts safe from ‘unfair terms’
The unfair contract term provisions now will be limited in application to the operation of new standard form consumer contracts.
This will only apply to those coming into existence after the enactment of the legislation. Parliament’s intention is that these provisions will not affect business to business contracts whatsoever. Contracts that fall under the title of standard form consumer contracts will be contracts for the 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 purposes.
Representations and contractual warranties: mutually exclusive?
The High Court decision in Campbell v Backoffice Investments Pty Ltd (2009) HCA 25 demonstrated that where protective contractual mechanisms such as warranties and performance bonuses are included to displace the effect of pre-contractual negotiations, this will not necessarily exclude the operation of a statutory claim for misleading and deceptive conduct against a vendor.
The appellant was a director of the company, Healthy Water, where the respondent, Backoffice Investments Pty Ltd (‘Backoffice’), sought to purchase one of two issued shares in Healthy Water. This decision was based upon representations of the company’s commercial viability in consideration of financial information supplied by the appellant. Backoffice had requested contractual warranties for these documents. The relationship between the parties quickly broke down as did the company, Healthy Water itself, and a provisional liquidator was appointed. The respondent commenced proceedings in the Supreme Court of New South Wales alleging that among other things, that the appellant had engaged in misleading and deceptive conduct with respect to the corporation's commercial viability under section 42 of the Fair Trading Act 1987 (NSW).
The case progressed through the Courts, with the primary Judge finding that no claim of misleading/deceptive conduct could be sustained due to a lack of reliance, as the respondent was a sophisticated business man. The Court of Appeal however, reversed this decision based on the pre-contractual negotiations and a finding that there had been reliance on the facts. The Court of Appeal found that pre-contractual representations and the warranties contained in the contract were not mutually exclusive in terms of reliance.
The case then proceeded to the High Court where it was ultimately agreed that the respondent had relied only on contractual warranties, not on any pre-contractual representations. It was clear however, that the representations were misleading and deceptive, but the respondent could not prove that had he known the truth he would not have proceeded anyway. The High Court did however, note that entire agreement clauses and clauses that exclude reliance on pre-contractual negotiations will not necessarily negate or nullify the effect or the existence of conduct which is misleading and deceptive prior to execution of a contract which results in loss or damages.
Properly drafted ratchet clauses found to be legally effective in Queensland
The Court of Appeal (Queensland) has recently held in the case of Connor Hunter (A Firm) v Keencrest Pty Ltd & Ors [2009] QCA 156 that a “ratchet clause” was not prohibited by the Retail Shop Leases Act 1994 (Qld) (‘The Act’).
As per s36(e) of The Act, a provision of a retail shop lease is void to the extent that it provides for the rent to change on a particular review of rent in accordance with whichever of 2 or more methods of calculating the change would result in the higher or highest rent. This works conjunction with s27 of The Act which provides that rent review must be made on a single basis.
In this particular case two clauses were at the centre of the investigation:
- Clause 2.3 – Provided for rent review to CPI with a qualification that the rent could not decrease; and
- Clause 16.2 – Provided for a market review following exercise of an option term with a qualification that the rent could not decrease.
The trial judge held that the qualification contained in these clauses were to be considered methods of calculating changes in rent within the meaning of The Act. That is, for the rent reviews, the two methods were the ‘rent previously paid’ and the ‘rent as increased in accordance with CPI’. These were thus held to be in contravention of s36(e).
On appeal however, the majority saw this differently and allowed the appeal. They concluded these clauses only provided for one method of calculating the change in rent and if that method did not apply, because it would lead to a decrease in rent, then there was no change in the rent. This was based on the argument that the ‘rent previously paid’ method was a limitation on the single method of calculating the rent, rather than being a second method for the purpose of s36(e). This effectively meant that saying the rent could not fall below a specific amount was not in itself a ‘review’.
In relation to s27, the majority held that the ratchet clauses did not amount to a basis for reviewing the rent in the sense of adjusting or revising it, rather, they defined the circumstances in where there will be no change in rent.
Practical implications
This decision illustrated that when properly drafted, ratchet clauses are currently legally effective in Queensland. Landlords need to clarify whether their review clauses operate to provide for more than one method of calculating change in the rent and thus offend s36(e), or, they preserve the status quo so no review will apply if the relevant method of rent review does not produce an increase in rent, thus not offending s36(e).
This obviously therefore highlights that landlords will need to think carefully and seek legal advice before including ratchet clauses in retail leases as an incorrect clause could lead to an inability to review the rent at all during the term of the lease.
Blackout trading, is there a risk?
There are no laws against a director trading shares held in a company of which he/she is a director during ‘a blackout period’ however such action can cause problems for both the company and the director.
A blackout period is usually between the end of the financial year (or half year) and the publication of the company’s annual or half yearly results.
The ASX corporate governance rules require companies to publish a director’s trading policy online, and this typically will prohibit trading during a blackout period. The purpose of this is to prevent insider trading and to assure investors and the market that the company sees insider trading as a serious issue and will not sanction contravention.
Although blackout trading is not illegal the ASX alleges that by doing so a director threatens the reputational benefit of a company’s trading policy and the integrity of the market. Recent review by the ASX has shown that one third of directors’ trades occur during blackout periods. The result of this was the receipt of a ‘please explain letter’, from the ASX to the companies involved which cuts into management time and resources as directors are required to deal with the matter or risk further investigation by ASIC.
The ASX is now calling for compulsory disclosure of share trading during blackout periods. The Corporations and Market Advisory Committee (CAMAC) recommended that the period for disclosure of trades of directors be reduced to two days, from the current five business days to 14 calendar days. These proposals, however, are simply that and whether these changes will be implemented is unclear.
For now, the ASX recommends that all companies review their existing trading policy to ensure its adequacy. The ASX also suggests that where blackout trading is likely to occur the company should advise the ASX in advance and only do so in exceptional circumstances.
Recent News
TPA changes make it easier for clients to sue planners.
Recent financial advisory firm failures have resulted in amendments to the Trade Practices Act 1974 (Cth) to better allow investors to claim damages from financial planners. The six-year limitation period now commences the date the loss or damage was suffered by the client.
ACCC gains investigative powers under cartel laws
With the introduction of the new anti-cartel legislation the ACCC has been provided with greater powers for investigation and enforcement:
- ‘phone tapping’
- the ‘executing officer’ of a warrant no longer needs to be present
- removal of an item for 72 hours to determine if it can be seized, and
- authorisation of force where necessary by the AFP.
Extending the extraterritorial reach of the TPA
The new cartel legislation has broadened the scope of the extra-territorial application of the Trade Practices Act 1974 (Cth). The new provisions no longer require such parties to be involved ‘in a market’, of which under Australian legislation, is an ‘Australian Market’. The omission of this aspect gives the broad extraterritorial scope to the new legislation and may allow the Courts to look outside Australia to determine whether parties are in collusion. Changes as to ‘party’ now mean foreign corporate entities can also be captured under the new legislation.
When is an employee knowingly concerned in a company’s contravention?
In the case of Australian Competition and Consumer Commission v ATS All Trades and Services Pty Ltd [2009] FCA 647 found that where an employee has extensive knowledge of a business enough to impute knowledge that certain representations are false he will personally be in contravention of the TPA as well as the corporation itself.
An example of an unfair contract
In Caterpillar of Australia v Gough & Gilmour Holdings Ltd [2008] NSWIRComm 3 it came to light that Caterpillar terminated a dealership agreement with Gough and Gilmour (G&G) who lodged an unfair contract claim in the Industrial Relations Commission (IRC). The issue of whether the work done was in ‘an industry’ arose, and it was determined that G&G were not merely investors but were senior managers, and that their work had no ‘industrial context’ as required for a claim to fall under the auspices of the Industrial Relations Act 1996 (NSW). This case illustrates the importance of franchisors removing terms of an ‘industrial character’ from franchise agreements.
When price advertising becomes misleading
The Federal Court recently heard Specsavers Pty Ltd (ACN 097 147 923) v The Optical Superstore Pty Ltd (ACN 095 737 894) [2009] FCA 692 whereby one retailer accused its competitor of false/misleading/deceptive advertisements in regards to a ‘special offer’. The Court held that where such advertisements are made, they will only be such where the comparison the advertisement invites is with a fictional or illusory price.
Business Law in Practice Seminar Series 2010
Full Day CPD Event
Speakers: Partners, Senior Associates and Special Counsel for DibbsBarker
When: February 2010
Time: 8:00am- 4:00pm
Where: Level 14, 120 Edward Street, Brisbane, QLD 4000
Further details to be circulated.
Please contact for more information:
Alicia Hill
Partner, Commercial – Dispute Resolution
T 61 7 3100 5103
Scott Guthrie
Partner, Financial Services
T 61 7 3100 5019
Derek Sutherland
Partner, Commercial – Franchising
T 61 7 3100 5065
Jim Holding
Partner, Commercial – Government
T 61 7 3100 5165
David Richardson
Partner, Commercial – IP / IT
T 61 7 3100 5037
www.dibbsbarker.com
