Watch this space – unfair contracts legislation
Everyone is buzzing about the Federal Government’s next proposed changes to the Trade Practices Act (TPA). They are already almost as hotly debated as the Cartel Bill has been over the past year.
The first release to the public of the exposure draft of the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (the Unfair Contracts Bill) received more attention than the release of the latest Harry Potter™ movie and was reviewed by everyone from individuals to corporate heavyweights like Telstra and Westpac. As from 7 September 2009, the Bill is back before the House of Representatives and according to Graeme Samuel, it is slated to become law by 1 January 2010.
But how did this early screener fare in the critics’ eyes and what should we expect next?
Pre-production
In August 2008, representatives of Commonwealth, State, Territory and New Zealand Ministers responsible for fair trading, consumer protection laws and credit laws (the Ministry) met to discuss consumer policy as we know it. What emerged was a policy framework that included a single national consumer law with a provision regulating unfair contract terms which would:
- protect consumers from unfair terms in standard-form contracts; and
- bring a national consistent approach to the regulation of unfair contract terms.
The Ministry’s framework included new civil penalties for breaches of the Australian Consumer Law (including new civil penalties for breaches of various other provisions of the TPA protecting consumers), new enforcement powers for the Australian Competition and Consumer Commission (ACCC), and new powers for courts to put right any wrongs done to consumers.
With the growing shadow of the Global Financial Crisis looming over voters, the Council of Australian Governments (COAG) and the Rudd Government were quick to support this initiative and on 11 May 2009 the Federal Government released its exposure draft of the Unfair Contracts Bill.
Production
The Unfair Contracts Bill focused primarily on what were referred to as “unfair” terms in standard-form contracts across all sectors of the economy to all persons, including bodies corporate.
Broken down, the amendments applied if:
- a contract was “standard-form”; and
- a term was “unfair”.
A contract was “standard-form” if the terms were not negotiated between the parties. But it was unclear what degree of negotiation was needed to avoid a “standard form” status.
A term was “unfair” if it:
- caused significant imbalance in the parties’ rights and obligations; and
- was not reasonably necessary in order to protect the legitimate interests of the party that benefits from the term.
Of equal concern was that the Unfair Contracts Bill deemed a contractual term to be not reasonably necessary to protect legitimate interests of the business unless proved otherwise.
Exceptions were allowed in the case of terms which defined the main subject matter of the contract, set upfront prices, or which were required or permitted by law.
Comments from the audience
The Treasury received 96 submissions on the Unfair Contracts Bill, 86 of which are not confidential and available at http://www.treasury.gov.au/contentitem.asp?ContentID=1547&NavID=014.
The submissions included comments that:
- the existence of actual detriment to a consumer should be central to the issue of whether a term is “unfair”;
- the provisions should not apply to “business to business” transactions;
- the amendments should include a clear definition of what constitutes a “standard-form contract”;
- the proposed amendments undermined the sanctity of contract;
- the confidence of parties to a contract would be undermined by the amendments; and
- the costs of each party obtaining legal advice will be inhibitive.
Meanwhile, in offices across Australia, lawyers were keenly gazing into their crystal balls trying to advise clients on the ramifications of the amendments if they were passed in their draft format.
The business community waited with bated breath.
Take 2
Of course, all of this panic and agitation was premature. The Federal Government, having gauged the anxiety that the draft had caused, introduced the Unfair Contracts Bill into the House of Representatives on 24 June 2009 with a few tweaks.
Gone was the blanket application in favour of a narrower focus on contracts for supply of:
- goods and services to an individual (including financial services); and
- an interest in land wholly or predominantly for personal, domestic or household use.
The sanctity of contract in business to business transactions was safe – for now.
Exceptions were also expanded to include contracts that established the constitution of a company, a managed investment scheme or other similar entity.
But what about those contracts still caught by the proposed amendments? Is it too early to start throwing money into thorough review and re-drafting?
On 25 June 2009, the Senate referred the Unfair Contracts Bill to the Economics Legislation Committee for report by 7 September 2009. In short, the Committee’s 7 September report recommended that the Unfair Contracts Bill be passed. However additional comments were made by the Coalition Senators and Senator Bushby as well as a minority report by Senator Xenophon. The Unfair Contracts Bill is now back before the House of Representatives.
Possibility of late showers
The Unfair Contracts Bill is inevitably going to pass Parliament in one form or another – and it is unlikely that any considerable further substantial amendments are going to be made. However, a number of issues remain to be tested in the field if passed over in Parliamentary machinations.
The legislation still does not address the degree of negotiation that will cause a contract to be outside of the definition of a “standard form contract”. Section 7 (2) of the Unfair Contracts Bill provides that a court can take into account “such matters as it thinks relevant” but must consider:
- 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 one party was, in effect, required either to accept or reject the terms of the contract (other than exempt terms);
- whether another party was given an effective opportunity to negotiate the terms of the contract (other than exempt terms); and
- whether the terms of the contract (other than exempt terms) take into account the specific characteristics of another party or the particular transaction.
It is obvious on reading these provisions that there are difficulties in identifying:
- what other matters a court might consider relevant;
- the bargaining power of a party; and
- what amounts to an “effective opportunity to negotiate”.
Until these issues have either been clarified in the legislation or tested in the courts it is far too early to be tearing up contract terms and replacing them with experimental clauses in the hope of compliance. At this stage, unless a contract to supply individuals with goods or services for personal, domestic or household consumption is blatantly one-sided, the best course of action is to “watch this space”.
Cartels The Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009 is now law.
In just about every other issue of this newsletter, we have talked about the Cartel Bill – it really is a significant change to the TPA and there will be a lot of information to take in over the next few months.
As most of you will have heard, the Bill is now law. As the ACCC has clearly emphasised, there are criminal sanctions for individuals involved in cartel conduct. In July, the ACCC released the guidelines ACCC Approach to Cartel Investigations (Investigation Guidelines). As the name suggests, the Investigation Guidelines provide guidance as to how the ACCC will approach its investigation of cartels. Importantly, the ACCC’s position is that serious cartel conduct should be prosecuted criminally whenever possible and the ACCC will distinguish serious cartel conduct from that which is less serious in nature. Serious cartel arrangements involve “conduct of the type that usually causes, or has the potential to cause, large scale or serious economic harm”. The non-exhaustive list of matters to which the ACCC will have regard when deciding whether the conduct is serious includes:
- Whether the conduct was longstanding or had (or could have had) a significant impact on the market in which the conduct occurred - an attempted cartel could still warrant criminal prosecution
- Whether the conduct caused significant detriment to the public or caused loss or damage to customers
- The participants’ previous involvement in any cartel conduct
- Whether the value of the affected commerce exceeded or would have exceeded $1million within a 12-month period
- In the case of bid-rigging, whether the value of the bid or series of bids exceeded $1million within a 12-month period.
What else? The amendments ensure that, while it is possible to prosecute criminal and civil proceedings, a person will not be in the position of having to defend two sets of proceedings for the same conduct – the civil proceedings would be stayed. Further, the ACCC is precluded from continuing civil proceedings seeking pecuniary penalties against a person who has already been convicted for that conduct. A couple of other things to note include, for the criminal offences, fault elements must be established and the conduct must be proved beyond reasonable doubt. Also, the proceeds of crime regime has been amended to expressly include the cartel offences in the definition of “serious offence” - so the offences are now also covered under that regime.
Remember: In broad terms, cartel conduct involves bid rigging, price fixing, market sharing, territory/customer/supplier allocations and restricting or limiting a party’s production or capacity to supply services, by parties that are in competition with each other. The “competition condition” is crucial here – all circumstances involving dealings with competitors should involve a quick mental analysis and a more detailed review if necessary.
Let them eat cake (so long as it is labelled correctly)
All you need to know about the new food labelling guidelines
The ACCC has in the past issued various Guidelines for those in the food and beverage sector.
These Guidelines include:
- Food and Beverage Industry: Country of Origin Guidelines to the Trade Practices Act (June 1995);
- Genetically modified organisms and foods, news for business, December 2001;
- Food and Beverage Industry: Food Descriptors Guideline to the Trade Practices Act (November 2006).
In May 2009, the ACCC published a Food Labelling Guide. The Food Labelling Guide reminds marketers yet again of the importance of looking at the overall impression created by marketing communications - just in case that wasn’t clear from all the cases and settlements involving misleading and deceptive conduct.
Importantly, the Food Labelling Guide also provides information for businesses in the food and beverage industry on the interaction between the TPA and the Food Standards Code.
The Food Standards Code, administered by Food Standards Australia New Zealand (FSANZ), forms the basis of technical compliance with labelling and composition to ensure delivery of safe products to consumers. FSANZ monitors and surveys the food supply but it is not so concerned with whether advertising or marketing is or is not appropriate. This is where there is a tension as to the interaction between the Food Standards Code and the TPA.
Essentially, the main point established by the Food Labelling Guide is that it is not sufficient simply to make sure your packaging complies with the Food Standards Code. It must also comply with the TPA.
The Food Labelling Guide provides a clear example of this when it discusses percentage labelling. The Food Standards Code requires that when characterising food ingredients, food manufacturers should use percentage labelling on their products, unless an exemption applies. Percentage labelling requires that the proportion of the “characterising components” and/or ingredients of that food or beverage should be declared on the label. This information may be presented in a variety of ways, including within the ingredients list, in conjunction with the product name or in the nutrition information panel.
A component or ingredient is considered to be “characterising” and therefore must be declared on the food label as a proportion when the component or ingredient is:
- mentioned in the name of the food (e.g. strawberry may be the characterising ingredient in strawberry yoghurt);
- customarily associated with the name of the food by the consumer (e.g. fish may be the characterising ingredient in Fisherman’s Pie); or
- emphasised on the label of the food in words, pictures or graphics (e.g. fruit juice may be the characterising ingredient in real fruit juice sweets).
The Food Standards Code requirement that characterising ingredients and components be declared on food labels enables consumers to identify how much of a characterising ingredient or component is present in the product. However, even when a food or beverage manufacturer ensures that its product complies with the Food Standards Code by providing the correct information on the food label, the TPA requires further steps to be taken to ensure that the marketer does not make any representations on the product’s labelling, packaging or advertising likely to mislead a consumer into believing that a particular ingredient is prominent when it is not. The ACCC quotes in its Guide the April 2008 case involving Arnotts Biscuits.
In the Arnott’s case, the Court declared (by consent) that the packaging of a number of Arnott’s Biscuits Ltd’s Snack Right products, including Snack Right Apple and Blackberry Fruit Pillow and Snack Right Apricot Fruit Slice, falsely conveyed a particular overall impression. The Court declared the packaging falsely conveyed an overall impression that the filling in the biscuits consisted predominantly of the fruits referred to in the product name and on its packaging when in fact the filling mainly consisted of other fruits. For example, the Apple and Blackberry Fruit Pillow filling only comprised around 1.7 percent blackberry concentrate, along with almost 40 percent sultanas, 12.9 percent apple concentrate and 8.6 percent dried apple concentrate. In the Apricot Fruit Slice filling, only 1.7 percent was apricot, while 64.8 percent was sultana. The labelling for the products complied with the Food Standards Code. It did not however comply with the TPA.
The point of the new Food Labelling Guide is to make that fact clear. While compliance with the Food Standards Code is one thing, ignore the TPA at your peril.
Implied Warranties
Another issue hot on the ACCC’s agenda is statutory rights granted to consumers under the TPA. You may recall that in March this year the ACCC published an updated guide to warranties and refunds and the TPA. The ACCC is keen to ensure that companies are not only aware of the prohibition on excluding implied warranties and rights to refund available to consumers under the TPA, but also that there is a serious issue with misleading a consumer to believe that he/she does not in fact have those implied rights.
In May this year, the ACCC accepted a court-enforceable undertaking from G.A.F. Control (Sales) Pty Ltd (GAF), a supplier of small electrical appliances. GAF enclosed a warranty card with its small appliances that included statements to the effect that consumers were only entitled to have the product serviced if the product was faulty and that consumers had to return the goods with a receipt and the warranty was only valid for 12 months. The TPA implies warranties into every consumer contract including warranties that goods are of merchantable quality, are fit for their intended purpose and match any description or sample shown to the consumer. The type of remedy available can include refunds, replacements, compensation for loss etc. The ACCC’s view was that the statements made by GAF in the warranty card purported to restrict consumers’ statutory warranty rights and could mislead consumers about those rights. GAF undertook to replace its warranty cards, send a letter to its retailers, place a notice on its website, refrain from making false or misleading representations about warranties and implement a trade practices compliance program.
During this process, the ACCC has highlighted another area of concern - the sale of extended warranties, which occurs particularly in the motor vehicle industry. Apart from the potential competition issues (such as third line forcing that may form part of these warranties), the ACCC will take action where businesses deny or misrepresent the existence of a warranty, for example where a business misleads consumers about the value of extended warranties being in the place of statutory warranties.
The Commonwealth Consumer Affairs Advisory Council (CCAAC) has commenced a review of the adequacy of existing laws on conditions and warranties. Under its terms of reference, CCAAC was asked to examine the existing laws on implied terms in the TPA and state and territory fair trading and goods legislation. On 26 July 2009, an issues paper was released on behalf of the CCAAC. In broad terms, the issues paper explores the adequacy of the current laws on implied terms and the need for amendments to improve existing laws and to empower regulators to ensure compliance with these laws. The CCAAC raises a series of important questions, such as whether the implied warranties are clear, whether we should have a “lemon law”, whether warranties apply to on-line auctions and whether the existing remedies are adequate.
The discussion on this issue is only just beginning. In the meantime, the ACCC will continue to target enforcement action in relation to warranties. Just remember:
- Avoid a blanket 'no refunds' policy - you cannot simply deny all claims for a refund;
- Consumers are not required to present a receipt or a warranty card (although you can require a customer to provide proof that they purchased the product from you);
- Don’t specify a set time period within which to claim a refund
- Be careful not to misrepresent the value of extended warranties (for example, by representing that extended warranties are the only warranties available).
Can you contract out of section 52?
Section 52, exclusion clauses and disclaimers
Introduction
The prohibition against misleading and deceptive conduct in section 52 of the TPA is cast in simple language, but that simplicity belies the fact that the section can create liabilities which can reach into every aspect of your commercial dealings. When the risk of liability is ever present, it makes sense to try to control that risk by attempting to limit or exclude it. But how far can you limit or exclude liability for misleading and deceptive conduct? And what should you do if offered a contract in which the other party seeks to escape liability for conduct of which you might have been the victim?
Some recent cases, including the decisions of the High Court of Australia in Campbell v Backoffice Investments Pty Ltd (delivered on 29 July 2009), have shed some light on these questions. The cases emphasise (the somewhat frustrating proposition) that the effectiveness of disclaimers and exclusion clauses will always vary depending upon the surrounding facts. However, the cases do also provide more useful guidance as to the sorts of factual scenarios in which disclaimers and exclusion clauses will be effective to contract out of liability under section 52.
Types of Clauses
In considering the effectiveness of particular clauses, it is necessary to distinguish between disclaimers and exclusion clauses.
Disclaimers will usually accompany a statement of fact or opinion. For example, a document may set out certain information but then say “Potential purchasers should make their own enquiries” or “This information has been provided to us and we cannot guarantee its accuracy”.
Where such a disclaimer is used, it qualifies the statement of fact or opinion which it accompanies. The question of whether the statement of fact or opinion is misleading or deceptive is considered in the context of the accompanying disclaimer, and if the maker of the statement is merely passing on information “for what it is worth”, then that conduct will, in many cases, not be misleading or deceptive.
This is because the test for misleading and deceptive conduct is whether the conduct is likely to lead the recipient of the conduct into error. If the disclaimer makes it clear that the disclaiming party is not attesting to the truth of the fact or opinion, the mere passing on of the fact or opinion will not be the source of any error which arises. Disclaimers operate to modify the conduct which they accompany.
Exclusion clauses, which are often found in the form of “entire agreement” clauses (that is clauses stating that the parties have not relied upon any representations or promises other than those expressly set out in the contract) operate differently. They do not affect the characterisation of the conduct as being misleading or deceptive, but seek to exclude reliance on the conduct.
When a party which claims to have been misled or deceived wants to recover damages (or obtain some other remedy) as a result of the impugned conduct, this party will need to show that there is a casual connection between the conduct and the damage; or, to put it another way, to show that the damage was caused by reliance on the conduct. An exclusion clause seeks to sever the causal chain, so that when a purchaser says, “You promised me that the takings were $50,000 a week and they are less; I relied upon what you said about takings when I entered into the contract and you have deceived me”, the vendor can say, “The contract says nothing about takings. You agreed in the contract that you were not relying on any pre-contractual representations. This means you did not rely upon what I said about takings, and that what I said about takings did not cause you to enter into the contract. Therefore, you have no claim.”
As this example shows, the question of whether an exclusion clause will operate to protect the party who is seeking to rely on it will be a factual question – did the innocent party, in fact, rely upon the misleading and deceptive conduct, even if the entire agreement clauses says that they have not? If the answer to this question is “yes”, then the exclusion clause may be disregarded and thus might not be available as a defence.
Of course, there is often a very high degree of artificiality involved in trying to argue that, where particular things have been said in an attempt to conclude a contract, those things can be unsaid (or at least, “unrelied” upon) because of an entire agreement clause. To borrow the words of one decision striking down such a clause:
“If it were permissible to avoid the operation of [the Act] by such a clause, it would be all too easy to make representations in the confidence that they would be acted upon, and then withdraw them in the confidence (equally important for the securing of the desired business) that the withdrawal would not be acted upon." [emphasis in original]
This does not mean that exclusion clauses will always be ineffective; for example, an exclusion clause which fixes onto certain specified conduct, rather than seeking to exclude liability for all conduct is likely to have a better chance of success. Equally, the identity of the parties to the contract will often be relevant, so that an exclusion clause may be more likely to be upheld in a contract between two commercial parties than in a consumer transaction.
Lessons from the cases
- When you are drafting disclaimers: remember that there is a tension between a disclaimer which is too wide (casting doubt upon the reliability of all information to which the disclaimer might apply) and one which is too narrow (and provides no protection). Because an effective disclaimer modifies the conduct which it accompanies, ensure that the disclaimer is directly referable to the conduct – this is no occasion for “one size fits all” drafting. And use a font size which is legible – if the fine print is so small as to be microscopic, then it is likely that the value of the disclaimer will be held ineffective as well.
- When you are presented with a disclaimer: a disclaimer is a red flag that the information which is being presented to you may need further investigation. Consider what further information is required.
- When you are drafting exclusion clauses: fit the clause as closely as possible to the conduct which you are trying to exclude; for example, if representations have been made in a briefing sessions prior to the contract being entered into, refer to the briefing session directly. Remember, however, that an exclusion clause won’t always solve the problem (of course, the best way to do that is to avoid being misleading and deceptive in the first place).
- When you are presented with an exclusion clause: don’t assume that the clause will be disregarded by a court if a dispute arises – make sure that if there are promises which you have relied upon in entering into the contract, they are expressly referred to in the contract, either directly or by reference.
