Alert

A Bill has been introduced into the Victorian Parliament which will amend Part 2B of the Fair Trading Act 1999. Important changes include the application of the unfair terms provisions to consumer credit contracts and the removal of the need to consider good faith in considering if a term is unfair. The new provisions will come into effect the day after the Bill receives Royal Assent.

1. Key changes

A Bill has been introduced into the Victorian Parliament which will, among other things, amend in Part 2B of the Fair Trading Act 1999:

• to extend the operation of the unfair terms provisions to Consumer Credit Code regulated contracts

• to remove from the definition of an “unfair term” in section 32W, the requirement that the term be “contrary to the requirements of good faith”

• to include a new presumptive provision to the effect that if it is alleged that a contract will be presumed to be subject to Part 2B of the Fair Trading Act 1999 unless the contrary is proved, and

• to allow the Director of Consumer Affairs Victoria to apply to the County or Supreme Court (as well as the Victorian Civil and Administrative Tribunal) for a declaration or an injunction and to confer remedial order jurisdiction on those courts (for example, to order compensation).

The new provisions will come into effect the day after the Bill receives Royal Assent.

2. Extending Part 2B to credit contracts

An exemption from the unfair terms legislation currently exists for contracts regulated by the Consumer Credit Code. The Bill proposes to remove this exemption. This means that regulated credit contracts will no longer enjoy protection from unfair contract terms.

The Consumer Credit Code focuses on the incomplete or misleading disclosure of the terms, rather than their substantive content. The amendments ensure that the substantive, and not just the procedural, unfairness of any terms will be subject to rigorous review and potentially could be considered to be unfair and hence void under Part 2B of the Fair Trading Act 1999. In a Consultation Paper issued in May 2007, Consumer Affairs Victoria identified the following types of terms as priorities for consideration in this context:

• terms that allow unilateral variation

• in the case of small cash loans, terms that require excessive security

• in the case of credit cards, terms dealing with interest free periods and the order in which repayments are allocated

• provisions penalising consumers for breach of any terms of the agreement or when they terminate the contract

• default fees and charges including “over the limit” charges, and

• provisions allowing the supplier, but not the consumer to terminate the contract.

3. What are the implications of removing the concept of “good faith”?

Section 32W states that a “term in a consumer contract is to be regarded as unfair if, contrary to the requirements of good faith and in all the circumstances, it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer”.

In summary, the Second Reading Speech states that the removal of the concept of good faith was prompted by Justice Morris’ comments in Director of Consumer Affairs v Victoria. This decision was to the effect that the requirement of good faith is adjectival and not an element that needs to be proved separately to show that a term is unfair.

The recent Victorian Supreme Court decision by Justice Cavanough in Jetstar Airways Ltd v Free has overturned Justice Morris’ interpretation of the test for assessing whether a term is unfair. Justice Cavanough commented that although there is significant overlap between the elements of “contrary to good faith” and “significant imbalance” to the consumer’s detriment, they remain distinct limbs of what is a three pronged test and must be individually and separately satisfied.

As a result of the amendment, a term will now be unfair if “in all the circumstances, it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer”.

As a practical matter, the removal of the good faith requirement will mean that consumers will only need to establish there is a “significant imbalance” arising from the operation of the terms before it will be “unfair”. They do not need to further establish that the term is contrary to “good faith”. This is likely to make it considerably easier for any allegation of “unfair” consumer contract terms to be sustained.

This approach is consistent with a recommendation of the Ministerial Council on Consumer Affairs that the proposed new national consumer law approved by the Council of Australian Governments should include a definition of an unfair term that does not have in it a good faith element.