The first tranche of the Australian Consurmer Law (ACL) which is currently proposed to come into operation on 1 January 2010 implements a national unfair contract terms law by amending the provisions of the Trade Practices Act and ASIC Act to introduce parallel provisions regulating consumer contracts.
Amendments to the legislation are proposed which could defer the commencement of the legislation until 1July 2010 will be debated by the Senate when it next sits on 16November 2009.
The second tranche will be introduced later in 2010 and will implement the reforms including transferring the existing consumer protection and related provisions of the Trade Practices Act into the ACL.
This paper outlines the current position of the Bill without reference to the proposed amendments.
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.
The ASIC Act amendments apply so as to include as a consumer contract a financial product or, a contract for the supply, or possible supply, of services that are financial services.
Application
The unfair contract terms law is intended to apply to standard form business to consumer contracts made, renewed or varied from 1January 2010.
A term of a consumer contract is void if:
- the term is unfair; and
- the contract is a standard form contract.
Certain exemptions exist including:
- insurance contracts covered by the Insurance Contracts Act, 1984;
- employment contracts.
Standard form contract
“Standard form” contract is not defined.
The considerations in determining whether a contract is standard form include:
- whether one party has all or most of the bargaining power;
- whether the contract was prepared by a party before any discussion;
- whether the counterparty had an effective opportunity to negotiate terms or is it a “take it or leave it” contract;
- whether the terms take into account the particular transaction or specific characteristics of the counterparty.
The onus in on the party to show that its contract is not a standard form contract.
Unaffected terms
The unfair terms provisions do not apply to a term of a consumer contract to the extent that the term:
- defines the main subject matter of the contract; or
- sets the upfront price under the contract; or
- is a term required, or expressly permitted, by law of the Commonwealth or a state or territory.
The upfront price payable under a consumer contract is the consideration that:
- is provided, or is to be provided for the supply, sale or grant under the contract; and
- is disclosed (but not necessarily paid) at or before the time the contract is made.
- may be expressed as a rate or formula;
- does not include consideration contingent on the occurrence of an event;
For financial products and services upfront price includes:
- the total amount of principal that is owed under the contract; and
- interest payable under the contract.
There is no ability to challenge the interest rate or any varied interest rate on the basis that it is unfair.
Meaning of unfair
A term of a consumer contract is unfair if:
- it would cause a 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.
Relevant considerations
In considering whether a term is unfair, a court must take into account:
- the extent to which the term would cause, or there is a substantial likelihood that it would cause, detriment (whether financial or otherwise) to a party if applied or relied on;
- the extent to which the term is transparent (readily available, clearly presented, legible, in reasonable plain English);
- the contract as a whole.
The onus is on the party asserting the term is reasonably necessary to protect its interests.
A claimant does not need to have proof of having suffered actual detriment.
Types of terms which may be unfair
Examples include:
- one party (but not another) may avoid or limit the performance of the contract, vary its terms, renew or not renew, or terminate the contract;
- terms penalising one party (but not another) for a breach or termination of the contract (reflects the common law concept of “penalties” – must be a genuine pre-estimate of the loss likely to be suffered by the party as a result of the breach or early termination and should not be an arbitrary sum);
- permitting one party to vary the upfront price payable under the contract without the other party being permitted to terminate the contract
- limiting one party’s rights to sue another party;
- permitting one party to assign the contract to the detriment of other party without that party’s consent;
- permitting one party unilaterally to vary the characteristics of the goods or services to be supplied under the contract;
- permitting one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
- limiting the vicarious liability for its agents.
Effect of a term to be held unfair
- Term is void.
- Remainder of contract continues to bind parties if it can operate without the unfair term.
- Inclusion of, or reliance on, an unfair term (if not a prohibited term) is not a contravention of ACL.
- Restitutional remedies would apply.
- ACCC or ASIC can seek a declaration that a term is unfair.
Prohibited terms
- Regulations can prescribe that certain terms of a consumer contract are prohibited.
- No prohibited terms either prescribed or proposed in the Regulations at this stage.
Effect of including or relying on a prohibited term
When a term is prohibited, including or relying on such a term is a contravention of ACL and attracts civil penalties and other remedies.
Enforcement actions are far ranging and include:
- civil pecuniary penalties – maximum $1.1 million for corporations and $220,000 for individuals;
- pecuniary penalties plus criminal offences;
- civil action by ACCC, ASIC or any other person – injunction and awards of damages to any party who suffers loss;
- disqualification orders;
- substantiation notices;
- infringement notices – maximum $6,600;
- public warning notices;
- ASIC may seek court orders requiring a supplier to provide redress to consumers who are not parties to a particular enforcement proceeding. Redress includes refunds and variation of contract or orders to honour representations made.
Recommendations / course of action
- Need to review all consumer contracts.
- Identify classes of terms at risk of unfair classification.
- Identify commercial importance of current drafting of terms/contracts.
- Consider the “substantial likelihood to cause detriment” for identified terms.
- Evaluate commercial impact of using potentially “unfair” terms in contracts.
- Consider and determine lower risk alternative drafting.
Most likely affected contracts
Dibbs Financial Services Partner, Peter Ryan, spoke to Boardroom Radio Australia on this topic. To listen to the broadcast, visit the link below.
http://www.brr.com.au/event/62321?popup=true
