Alert

Who does this affect?

Consumers and small and large businesses nationwide and across all sectors.

What do you need to do?

All businesses will need to review their standard form contracts, and quickly. The Bill is scheduled for introduction to Federal Parliament in the winter sittings. We can help.

Author
Amanda Bodger  
Partner

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Amanda Bodger  
Partner
T +61 3 9643 4069

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Sydney
Sharon Henrick  

Melbourne
Caroline Coops  
Katherine Forrest  

Perth
Nicholas Creed  

Brisbane
Aaron Bourke  

Canberra
Stephen Jaggers  

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In February 2009, we reported a key milestone in the Rudd Government’s quest towards a national consumer protection law: the announcement by the Minister for Competition and Consumer Affairs to fast track the proposed national unfair terms regime. Yesterday, Minister Bowen released part of the blueprint for this regime - the Trade Practices Amendments (Australian Consumer Law) Bill 2009 (Exposure Draft), which will amend both the Trade Practices Act 1974 (Cth) and Australian Securities Investment Commission Act 2001 (Cth).

The proposed unfair terms regime has broad application. It will apply nationally across all sectors of the economy and to both consumers and small and large businesses. All businesses will need to review their standard form contracts, and quickly. The Bill, together with key reforms to consumer protection enforcement powers, is scheduled for introduction to Federal Parliament in the winter sittings, which could be as early as June.

What is the scope of the proposed regime?

According to the Exposure Draft, the national unfair terms regime:

• will apply to standard form contracts;

• is not confined to business-to-consumer transactions and will apply to businesses, both large and small;

• can be relied on by both the buyer or supplier to the transaction;

• will not apply to terms that define the main subject matter of the contract or the “upfront price” of goods or services; and

• will apply to financial services and financial products, including credit contracts.

What is an unfair term?

A term will be “unfair” if it causes a significant imbalance in the parties’ rights and obligations arising under the contract and is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.

The onus of proof will be on the person advantaged by the term to show that it is reasonably necessary to protect their legitimate interests.

In assessing the unfairness of a term, a court may have regard to any matters it thinks fit but must have regard to:

• 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”; and

• the contract as a whole.

Transparency is a new concept. A term will be “transparent” if it is expressed in reasonably plain language, is legible, presented clearly and is readily available to any party affected by the term. This could have a number of consequences for the way companies actually draft their contracts, particularly in the business-to-business arena.

“Examples” of unfair terms

The Exposure Draft lists “examples” of unfair terms but the term “example” is perhaps a misnomer. The Consultation Paper explains that the examples given are indicative only and are not a blacklist of prohibited terms. Not surprisingly, the list contains the usual suspects, including unilateral variation, penalty and limitation clauses.

What is a “standard form contract”?

The Exposure Draft does not define the concept of “standard form contract” in order to “avoid opportunities for avoidance” by companies who could otherwise structure their commercial arrangements to fall outside the definition. Rather, the draft provisions provide that a contract is presumed to be a standard form contract unless a party can prove otherwise. In determining whether a contract is a standard form contract, the court must have regard to a number of 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 occurred between the parties; and

• another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented.

What is the “upfront price”?

The “upfront price” has been excluded from the regime and cannot be challenged as an unfair term. The Exposure Draft defines “upfront price” as consideration that:

• is provided, or is to be provided, for the supply, sale or grant under the contract; and

• is disclosed at or before the time the contract is entered into;

but does not include any other consideration that is contingent on the occurrence or non-occurrence of a particular event. The “upfront price” is the “basic price” of goods or services and would cover the cash price or a series of payments for goods or services. Amounts to be paid subsequently, such as early termination payments or maintenance costs, even if clearly disclosed would appear to fall outside the concept of “upfront price”.

Detriment

Among the Productivity Commission’s 2007 recommendations was that the detriment suffered be material in order for an unfair terms claim to succeed. Interestingly, the Government claims to have adopted the Productivity Commission’s recommendation that there needs to be material detriment, but this has not been clearly reflected in the drafting. While a court must consider “the extent to which” the term would cause detriment, it appears that a term could still be unfair even if the detriment is trivial or insignificant.

Impact on the financial services sector

The proposed unfair terms regime will apply to standard form contracts for financial products or standard form contracts for the supply or possible supply of financial services, including credit contracts where the borrower is a business. The proposed regime does not make any distinction between standard form contracts with “retail” and “wholesale” clients. The amendments are especially significant in the financial services sector as many aspects of the unfair terms regime will be new for the sector.

Transitional provisions

The regime will not apply to standard form contracts entered into before 1 January 2010 except where a standard form contract entered into before this date is renewed or varied on or after 1 January 2010. In that case, the regime will apply to such contracts as renewed or varied.

The way ahead

Since announcing his plans to reform Australia’s consumer protection laws on 17 February 2009, the Minister’s cause has not lost any momentum. Stakeholder comments on the Exposure Draft are due quickly, by 5pm on Friday 22 May 2009. The Government is particularly interested in comments on issues that may arise in the practical application of the provisions of the Exposure Draft. We have extensive experience in this area and have assisted a range of clients with previous submissions to the Government on unfair terms, as well as advising a range of clients on existing unfair terms legislation in Victoria. Please contact us if you need assistance.