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Focus: Competition Law – May 2008

Implications of VCAT decision in case examining unfair terms in a consumer contract

In brief: The Victorian Civil and Administrative Tribunal has delivered the first significant decision on the 'unfair contract' provisions of the Fair Trading Act 1999 (Vic). Partner David Brewster (view CV) and Articled Clerk Georgie Korman report. 

• Background
• The Matrix Pilates and Yoga case
• Decision
• Implications

How does it affect you? The Victorian Civil and Administrative Tribunal decision in Director of Consumer Affairs Victoria v Matrix Pilates and Yoga Pty Ltd [2008] VCAT 482 is the first case in which declaratory and injunctive relief have been ordered in relation to a contravention of the 'unfair contract' provisions in the Fair Trading Act 1999 (Vic). The case also illustrates an increasingly tough line being taken by Consumer Affairs Victoria towards unfair terms in standard form consumer contracts. The judge concluded that almost all of the challenged provisions in the standard gym membership contract were unfair and void. The fact that such terms may be relatively common in health club contracts was not a defence. An important finding was that a cancellation fee imposed by the gym was unfair, as it raises questions about fees and charges imposed in a wide variety of consumer contracts. In the United Kingdom, the Office of Fair Trading is investigating whether certain overdraft charges imposed by banks on their customers are unfair under very similar unfair contract laws.

Background

The Victorian Government introduced amendments to the Fair Trading Act 1999 (Vic) in 2003 to supplement consumer rights when faced with 'unfair' contract terms. The amendments included:

• the ability for unfair terms within consumer contracts to be declared void by the Victorian Civil and Administrative Tribunal (VCAT);
• making it an offence to use or recommend the use of a proscribed 'unfair' term;
• the Director of Consumer Affairs being able to initiate an action in VCAT for a declaration that certain terms are 'unfair'; and
• injunctions being issued by VCAT prohibiting the continued use of any terms proscribed as being unfair terms.

The Fair Trading Act defines an unfair term as one that is 'contrary to the requirements of good faith'¹. The concept of good faith itself is not defined, but Consumer Affairs Victoria has stated that it will be interpreted according to various factors, including:

• whether the contract has been individually negotiated;
• whether the contract as a whole is fair;
• whether the terms are ambiguous; and/or
• whether the terms create an imbalance between the rights and obligations of the parties within the contract.

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The Matrix Pilates and Yoga case

Interestingly, the new unfair contract provisions in the Fair Trading Act have gone largely untested in VCAT, until now. Although the case of Director of Consumer Affairs v AAPT in 2006 considered the new provisions, it is the decision of Director of Consumer Affairs Victoria v Matrix Pilates and Yoga Pty Ltd handed down in March 2008 that becomes the first case to involve a detailed analysis of why particular contractual terms were unfair for the purposes of the Fair Trading Act.

The case, brought by the Director of Consumer Affairs Victoria, involved a Melbourne-based fitness centre, which had allegedly used nine unfair terms in its standard gym membership contracts.

The Director of Consumer Affairs asserted that these terms provided an unfair advantage to the fitness centre and generally disregarded consumer rights. The Director also noted that these terms seem to have become a fitness and health industry norm, which Consumer Affairs ultimately wants stamped out.

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Decision

Judge Harbison recognised her unique and influential position as the first judge to consider the amended legislation in detail. In her consideration, Judge Harbison attempted to provide 'signposts' as to the type of terms that will be regarded as unfair, so as to provide certainty to traders when formulating contracts. The terms that Judge Harbison found to be unfair included:

• that gym membership was non-refundable and non-cancellable. This term was unfair as it did not allow the customer to cancel the contract, even if the gym was in breach of the contract;
• a term which allowed the gym to deduct funds from member's bank accounts if they failed to make payments by due dates. This term was unfair as it enabled the gym to deduct payments even where there was a legitimate dispute between the parties, and it gave the gym the unilateral right to determine what amount could be deducted;
• a term which entitled the gym to continue to receive monthly payments even after the expiry of the contract term, unless 30 days notice was given by the customer. This term was unfair as it converted a fixed term contract into an indefinite contract;
• a term which released and indemnified the club from any negligence or breach of contract. This term was unfair as it falsely denied the existence of statutory rights under the Fair Trading Act; and
• a term that if the customer wished to cancel their membership due to medical reasons or relocation that a cancellation fee of 50 per cent of the outstanding balance was payable. This term was unfair as was not a genuine pre-estimate of the gym's loss from early cancellation and constituted a penalty.

Judge Harbison also found that the membership agreement breached s163 of the Fair Trading Act which requires a consumer contract to be easily legible, clearly expressed and in a minimum 10-point font.

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Implications

The decision indicates the firm stance VCAT intends to employ when protecting consumer rights and should signal a warning to all corporations who utilise similar terms in consumer contracts. Care should be taken by companies currently drafting new consumer contracts to avoid including terms that removes the company from basic obligations or install unreasonable requirements on unassuming consumers. Traders should also be wary of using standard contract terms on the basis that 'everyone else in the industry uses them'. The Director of Consumer Affairs has made it clear that his organisation will challenge any contract that is deemed unfair, notwithstanding standard industry practice at the time.

The finding that particular fees that the gym imposed were unfair is also very important, and could have widespread implications. The United Kingdom Office of Fair Trading (the OFT) is currently investigating whether certain bank overdraft charges are unfair under the Unfair Terms in Consumer Contracts Regulations 1999 (UK). These Regulations are very similar to the unfair contract provisions in the Fair Trading Act. The OFT was successful before the United Kingdom High Court in April 2008 in a preliminary case in relation to various legal questions arising from its investigation.

Footnotes

1. Fair Trading Act, s32W.

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For further information, please contact:

David Brewster Partner, Melbourne Ph: +61 3 9613 8707 David.Brewster@aar.com.au		Fiona Crosbie Partner, Sydney Ph: +61 2 9230 4383 Fiona.Crosbie@aar.com.au
Andrew Pascoe Partner, Perth Ph: +61 8 9488 3700 Andrew.Pascoe@aar.com.au		Peter James Partner, Brisbane Ph: +61 7 3334 3360 Peter.James@aar.com.au

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