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Focus: Draft legislation to regulate unfair contract terms

12 May 2009

In brief: The Federal Government has released The Australian Consumer Law – Consultation on draft provisions on unfair contract terms. The draft provisions have been developed by the Federal Treasury to reflect the proposals in the Discussion Paper An Australian Consumer Law Fair markets – Confident consumers released in February 2009. Partner Catherine Parr reports.

How does it affect you?

  • All suppliers of financial services will need to review carefully their standard form contracts to consider whether terms in them could be attacked as unfair.
  • Even business-to-business arrangements will have the protection of the new regime, so standard form documents used with all types of customers will need to be reviewed.

Background

Our Focus: National regulation of unfair contract terms and consumer credit contracts summarises the background to this regulatory change and the proposals set out in the February Discussion Paper. The new consultation package reflects many of the proposals in the Discussion Paper.

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What will the new regulatory scheme look like?

The scheme insofar as it applies to financial services including credit will be contained within the investor protection provisions of the Australian Securities & Investments Commission Act 2001 (Cth) (the ASIC Act). The Government has committed to maintaining consistency between the new provisions in the ASIC Act and the scheme as it will apply to goods and services other than financial services (which will be contained within the Trade Practices Act 1974 (Cth)).

The scheme will provide that an unfair term in a standard form contract is void.

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What is the test for unfairness?

A term will be 'unfair' when it causes a significant imbalance in the parties' rights and obligations arising under the contract and is not reasonably necessary to protect the legitimate interests of the party that would be advantaged by the term.

There will be a rebuttable presumption that a term is not reasonably necessary in order to protect the interests of a party who would be advantaged by the term. This means that, once the issue has been raised by a customer, the supplier must show on the balance of probabilities that the use of the term in the relevant standard form contract was reasonably necessary to protect their legitimate business interests.

The legislation will direct a court, in determining whether a term is unfair, to take into account such matters as it considers relevant but will require the court to take into account:

  • the extent to which the term would cause, or there is a substantial likelihood that the term would cause, detriment (financial or otherwise) to a party if the term were to be relied on;
  • the extent to which the term is transparent; and
  • the contract as a whole.

For this purpose, a term will be 'transparent' if it is expressed reasonably in plain language, legible, presented clearly and readily available to any party affected by it. This definition is based on a similar definition in equivalent legislation in the United Kingdom.

The legislation will set out a list of examples of the types of terms that may be unfair. The list is not intended to be either conclusive or exhaustive. The list in the draft legislation includes a term that:

  • permits one party but not the other to terminate the contract;
  • penalises one party but not the other for a breach or termination of the contract;
  • permits one party but not the other to vary the terms of the contract;
  • permits one party to vary the upfront price payable under the contract without the other party having a right to terminate;
  • permits one party unilaterally to vary financial services to be supplied under the contract;
  • permits one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
  • limits one party's vicarious liability for its agents;
  • permits one party to assign the contract to the detriment of the other party without the other party's consent; and
  • limits one party's right to sue another.

Certain core terms will be excluded from the application of the regime. These are terms which concern the main subject matter of the contract and the 'upfront price'. For this purpose, 'upfront price' will be the consideration that is provided, or to be provided, for the supply under the contract and is disclosed at, or before, the time the contract is entered into. The upfront price will not, however, include any consideration that is contingent on the occurrence or non-occurrence of a particular event (so, for example, the upfront price exclusion will not operate to exclude exception fees from the regime). The draft legislation provides that the 'consideration' in relation to credit includes the total amount of principal that is owed under the contract.

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Who will be protected?

Recourse to the unfair contract terms regime will not be limited to consumers, or even to consumers and small businesses. It will apply for the benefit of all types of entities, including corporations. The Consultation Paper has some comments about why the regime has been extended to business-to-business transactions. The reasons given include that the existing unconscionable conduct and misleading and deceptive conduct provisions in the ASIC Act are not limited so that they apply only for the benefit of consumers and that, in practice, business-to-business arrangements may obtain limited protection because in that context individual negotiation is more likely to occur and a 'significant imbalance' may be more difficult to show.

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What is a 'standard form contract'?

The Consultation Paper states that a deliberate decision was made not to define 'standard form contract'. The draft legislation provides for a rebuttable presumption that a contract is a standard form contract when it is alleged by the customer that it is. The supplier must then show, on the balance of probabilities, that the contract is not in a standard form. The legislation will direct a court, in determining whether or not a contract is a standard form contract, to take into account factors including whether:

  • one of the parties has all or most of the bargaining power relating to the transaction;
  • the contract was prepared by one party before any discussion relating to the transaction commenced;
  • the party other than the supplier was required to accept or reject the terms on a 'take it or leave it' basis; and
  • the terms of the contract as offered by one party take into account the specific characteristics of the other party or the particular transaction.

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No banned terms at commencement

There is provision for terms to be prohibited by Regulation. Any terms that are so specified will be void and a party must not include, or rely on, a prohibited term in a standard form contract. The Consultation Paper suggests that, after the consultation process earlier this year, it was decided not to prohibit any terms at this time. However, the power to proscribe unfair terms has been included to facilitate the banning of terms in the future.

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Enforcement

The Consultation Paper states that national guidance on unfair contract terms is being developed through a collaborative process undertaken by the Australian Consumer & Competition Commission, ASIC and the state and territory Offices of Fair Trading. This guidance is expected to be available before the unfair contract terms provisions commence. The Paper also suggests that a finding that a contract term is void under the general test of unfairness will not be a 'contravention' of the ASIC Act but if terms are prohibited in the future, use of those terms will be a contravention and subject to a civil pecuniary penalty.

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Transitional provisions

The new regime will apply to arrangements entered into on standard form contracts on or after commencement, which is currently contemplated to be 1 January 2010. If a contract entered into before that date is renewed on or after commencement, the regime will apply to it as renewed. If a contract entered into before commencement is varied on, or after, the commencement date, the regime will apply to the contract as varied from the date on which the variation takes effect in respect of conduct occurring on or after that date.

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What happens next?

There is an extremely short timeframe for submissions, which close on 22 May 2009. The Consultation Paper specifically seeks comments on the text of the draft legislation with specific regard to issues that may arise in their practical application. This statement, together with the very short timeframe for submissions, suggests that there is unlikely to be any move away from the policy behind the draft provisions or from their substantive effect. However, following the passage of the Bill through the House of Representatives, the Government will be referring the Bill to a Senate Committee to allow further scrutiny and consultation.

Published 12 May 2009

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