Review

Who does this affect?

All businesses using standard form consumer contracts in Australia are affected by the unfair terms regime, regardless of industry sector. All businesses are also affected by the new enforcement powers for regulators.

What do you need to do?

Review your standard form consumer contracts and identify terms that may be “unfair”. Determine if and how they can be amended to comply with the new regime. We can help.

Author
Caroline Coops  
Partner

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Caroline Coops  
Partner
T +61 3 9643 4097

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Sydney
Sharon Henrick  

Melbourne
Amanda Bodger  
Katherine Forrest  

Perth
Nicholas Creed  

Brisbane
Aaron Bourke  

Canberra
Stephen Jaggers  

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The Minister for Competition Policy, Craig Emerson, today introduced the much-anticipated Trade Practices Amendments (Australian Consumer Law) Bill 2009 (Bill) into Federal Parliament.

The Bill will:

• introduce a national unfair contract terms regime applying across all industry sectors (including financial services) but which is limited to consumer contracts;

• introduce new civil penalty provisions for consumer law breaches; and

• add a series of enforcement tools to the ACCC and ASIC’s existing artillery.

The new unfair terms laws are intended to take effect from 1 January 2010. The new enforcement powers and civil remedies will take effect on the day after Royal Assent (which may be prior to 1 January 2010).

New national unfair contract terms regime

In many respects, the Bill is consistent with the Exposure Draft released by Treasury on 11 May 2009. However, there has been a significant change resulting from many submissions made to Treasury on the Exposure Draft which raised concerns about the application of the regime to standard form contracts with businesses. On 5 June 2009, Treasury proposed a resolution - limiting the regime to contracts where the “upfront price” of the good, service or land is less than $2 million. However, the Bill now limits the unfair terms regime to “consumer contracts” being a contract:

• for the 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. For financial services, at least one of the parties to the contract must fall within this class in order for it to be a consumer contract.

Minister Emerson also revealed that the Government plans to review the unconscionable conduct provisions in the TPA and the Franchising Code of Conduct to afford protections to businesses (especially small businesses) when dealing with other businesses that have greater bargaining power.

Overview of the regime

The Bill proposes a national unfair contract terms regime that will apply to standard form consumer contracts across all industries and sectors of the economy (including financial services). A contract will be presumed to be a standard form contract unless the party advantaged by the term can prove otherwise. The regime will apply to contracts entered, renewed or varied after 1 January 2010.

As foreshadowed in the Exposure Draft, the regime will not apply to:

• terms that define the main subject matter of the contract or that are required or expressly permitted by law;

• terms that set the “upfront price” payable under the contract;

• employment contracts, shipping contracts or the constitutions of companies, managed investment schemes or other bodies.

The Explanatory Memorandum to the Bill also states that the effect of section 15 of the Insurance Contracts Act 1984 is that the unfair contract terms provisions do not apply to contracts of insurance covered by that Act to the extent that the Act applies.

Test for an unfair term

A term in a “standard form contract” will be “unfair” if:

• it causes 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.

The party advantaged by the term will be required to prove that the term is reasonably necessary to protect their legitimate interests. The court can have regard to any matter it thinks fit, but must have regard to the following factors when determining the question of unfairness:

• 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 the term were to be applied or relied upon;

• the extent to which the term is “transparent” (ie expressed in reasonably plain language, legible, presented clearly and readily available); and

• the contract as a whole.

The regime also includes an indicative list of “examples” of potentially unfair terms, which is not intended to service as a blacklist of prohibited terms. However, the Government (via the Minister) does have the ability to ban terms outright as “prohibited terms”, in accordance with the Government’s best-practice requirements and an intergovernmental voting process. No terms have been suggested for outright banning under the Bill.

Consequences of an unfair term

A term that is found to be unfair will be void. In addition, the regulator may apply to the Court to have a term declared an unfair term. Where the Court declares a term to be unfair:

• a regulator will be able to apply for injunctive relief to prevent a party to the contract from applying or relying (or purporting to apply or rely) on a declared unfair term; and

• the Court may make remedial orders where a party to the contract applies or relies on (or purports to apply or rely on) a declared unfair term.

Civil pecuniary penalties will apply to including, applying or relying on a prohibited term in a consumer contract that is a standard form contract.

Impact = uncertainty in consumer transactions

The Bill introduces a high level of uncertainty into consumer transactions conducted in Australia. This is because the concept of a "standard form contract" is broad and flexible and extends beyond typical "take it or leave it" arrangements. There is also little precedent to guide businesses, regulators or courts on the key concepts used in this regime (for example, what is actually required in order for a term to be "transparent" term and what types of interests are "legitimate"). Moreover, there is little a claimant must do to bring a claim for unfairness as there is no requirement that any detriment be actually suffered by claimants. This means that parties who suffer minor financial detriment and even non-financial detriment can bring an action. We expect an unfair terms allegation to be included in most contractual disputes involving a standard form contract.

Many businesses that will be affected by this regime have already gone to lengths (and incurred costs) to comply with the Victorian unfair terms regime and industry-specific regimes. However, the proposed national regime is different in many respects, which will require a complete re-review of many contracts.

Ultimately, the regime affects commercial decision-making on the risk and pricing of many consumer contracts. Businesses will need to reassess their contractual positions and approaches to contracting as a result. This will need to occur now due to the Government's continued commitment to have this regime up and running in the next 6 months.

New civil penalties

The Bill introduces also the following:

• civil penalties (to complement existing criminal penalties): civil pecuniary penalties of up to $1.1 million for corporations and up to $220,000 for individuals for breaches of provisions relating to unconscionable conduct and certain consumer (or investor) protection provisions (excluding section 52); and

• courts making disqualification orders: the courts will be able to make orders disqualifying a person from managing corporations for a certain period if the Court is satisfied that the person has committed a contravention of certain provisions, including the unconscionable conduct provisions and certain consumer (or investor) protection provisions (excluding section 52).

New enforcement powers for regulators

The Government has proceeded to grant the regulators new enforcement powers which will enable consumer regulators (currently the ACCC and ASIC) to:

• issue substantiation notices to require a person who makes a claim or representation promoting (or intending to promote) the supply of goods or services to give them information and/or produce documents to substantiate or support the claim or representation. There is no threshold trigger for an exercise of this power.

• name and shame corporations by issuing a public written notice where the regulator has “reasonable grounds to suspect” that a corporation’s conduct “may” constitute a contravention of the unconscionability and consumer (or investor) protection provisions and is satisfied that a person has suffered (or is likely to suffer) detriment as a result. The regulator must also believe that issuing the notice is in the public interest.

• issue infringement notices to enable the regulators to issue infringement notices where it has “reasonable grounds to believe” that a person has contravened the unconscionability provisions and certain consumer (or investor) protection provisions.

• take action on behalf of non party consumers for conduct in contravention of the unconscionable conduct and certain consumer (or investor) protection provisions, and obtain redress. The Court may make any such orders “it thinks fit” (except an award for damages) and the Bill states that this redress could include orders directing the other party to refund money or return property to a non-party consumer or to supply services to the non-party consumer at the party’s expense.

These enforcement powers will eventually be available to all State and Territory consumer regulators when the Australian Consumer Law is finalised.

What you need to do

The Government will submit the Bill to a Senate Committee for further consideration. However, it is inevitable that these reforms will become law and it is important that businesses start preparing now.

We assisted many clients with submissions to the Government on these reforms. We also have extensive experience advising on compliance with the Victorian and industry-specific unfair terms regimes, including reviewing and amending contracts for compliance. We would be happy to assist you to prepare for these new laws or to make submissions to the Senate Committee.