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Fair go: unfair contracts

By David Jacobson

Partner Patrick Dwyer’s article on unfair contracts is the cover article for this month’s NSW Law Society Journal. Here it is.

Life may be unfair, but contract terms cannot be. Under provisions of the new Australian Consumer Law commencing on 1 July, unfair contract terms in standard form consumer contracts will be void. The contract will continue to bind the parties, however, if it can still operate without the unfair term.

When is a term unfair?
A term 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 to protect the ?legitimate interests? of the party advantaged by the term (this is presumed to be the case, unless disproved by the advantaged party); and
? it would cause detriment (financial or otherwise) to a party if it were to be applied or relied on. (To ?rely on? an unfair term here means attempting to enforce it, or exercising a right conferred or purportedly conferred by the term, or asserting the existence of such a right. )

When deciding if a term is unfair, the court can take into account any matters it thinks relevant, but must consider the transparency of the term and the contract as a whole. A term is transparent if it is legible, clearly presented, in reasonably plain language and readily available to any party affected.

Examples
The legislation includes examples of contract terms that ?may? be unfair. Some of them are:
? a term permitting only one party to avoid or limit performance, terminate, vary the terms, or renew or not renew;
? a term penalising only one party for a breach or termination;
? a term permitting one party to vary the upfront price payable without the right of another party to terminate;
? a term permitting one party unilaterally to vary services to be supplied, or determine whether the contract has been breached or to interpret its meaning;
? a term that limits one party?s vicarious liability for its agents;
? a term that lets one party assign the contract to the detriment of another party without consent;
? a term limiting one party?s right to sue another;
? a term limiting the evidence one party can use in proceedings relating to the contract;
? a term imposing the burden of evidence on one party in proceedings about the contract; and
? terms prescribed by the regulations (there are none as yet).

According to the Explanatory Memorandum, including these examples in the legislation does not create a presumption that such terms are unfair. They must still satisfy the definition of unfairness to be void. However, they provide ?statutory guidance on the types of terms which may be regarded as being of concern.?

The ACCC has also released a guidance paper on the new law.

Standard form consumer contracts
Only consumer contracts are covered: at least one of the parties must be an individual, acquiring the product or service wholly or predominantly for personal, domestic or household use or consumption. The contract may be for the supply of goods or services (including financial services), or for a sale or grant of an interest in land, or it may be a financial product.

The contract must also be ?standard form?. This is not defined in the legislation, but it usually means that the same terms are offered to all without negotiation.

If a party in proceedings alleges a contract is a standard form contract, the onus is on the other party to disprove it.

When deciding if a contract is ?standard form?, the court can take into account any matters it thinks relevant, but it must always consider certain factors:
? Does one of the parties have all or most of the bargaining power?
? Was the contract prepared by one party before any discussion about the transaction?
? Was a party required to accept or reject the terms of the contract as presented?
? Was a party given an effective opportunity to negotiate the terms?
? Do the terms take into account the specific characteristics of the party or the transaction?

Many contracts, probably most of them, are standard form. And suppliers don?t always use different contracts depending on whether the goods or services are for commercial or consumer purposes: the same standard terms often apply to all customers.
The range of contracts affected by the new law is therefore very wide.

Exempt terms
Contract terms will be exempt where they:
? are required or expressly permitted by law; or
? define the main subject matter of the contract (e.g. what the consumer is buying); or
? set the upfront price payable under the contract (e.g. the purchase price).
The upfront price includes any consideration provided, or to be provided, for the supply under the contract, and disclosed at or before the time the contract is entered into. It does not include any other consideration contingent on a particular event.

Existing contracts
Existing contracts are affected only when they are renewed or varied after commencement. For renewed contracts, the new law will only apply to the contract as renewed, in relation to conduct that occurs on or after the renewal day. For varied contracts, the new law will only apply to a term as varied, in relation to conduct on or after the date of variation.

Exempt contracts
The new law will not apply to the constitution of a company, a managed investment scheme or other kind of body. Also exempt are contracts of marine salvage or towage, ship charterparties, and contracts for the carriage of good by ship.

Insurance contracts
The law does not apply to insurance contracts, because the Insurance Contracts Act 1984 (Cth) provides that an insurance contract cannot be the subject of relief under any Commonwealth Act on grounds of unfairness. However the Commonwealth Government has released an options paper canvassing whether insurance contracts should also be subject to the Australian Consumer Law.

What can happen?
If you apply or rely on an unfair term in a standard form consumer contract (or you purport to do so), in addition to the term being void, the court may make a declaration that the term is unfair. The consumer or the regulator (the ACCC, ASIC, or a State or Territory authority as applicable) can apply for the declaration. Once the declaration is made, the court may award other remedies, including an injunction and damages, and it would be a contravention of the Australian Consumer Law to continue apply or rely on the term (or purport to do so).

Is the same term also void in all of your other contracts using the same standard form? Not necessarily. It may be that a term that is unfair when applied or relied on in one way under a particular contract does not meet the test of unfairness when applied or relied on in a different way under other contracts. But clearly you would want to have a close look at the term.

Other related laws
There are other laws in Australia, including common law and equitable principles, which address concepts such as unjustness and unconscionability, concepts which bear some similarity to the concept of unfairness (and may overlap). For example, one of the tests of statutory unconscionability is ?whether, as a result of conduct engaged in by the supplier, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier,? which is similar to one of the elements of the definition of an unfair term.

Victoria has an existing law on unfair contract terms. It varies slightly from the new national law, and will be replaced when Victoria adopts the Australian Consumer Law. The other States and Territories will also adopt the Australian Consumer Law in due course.

What to do
Businesses should review the terms of their standard form consumer contracts and consider if those contracts should be revised to reduce the risk of terms being held unfair. That risk should be weighed against the risk of loss from giving up rights under the contract that may be needed in some cases.

Full post as published by Australian Regulatory Compliance Review on July 11, 2010 (boomark / email).