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New Unfair Contract Prohibition warnings for SMEs

Law StuffConsumer law nationally has been radically changed with the passing of new laws that prohibit standard form consumer contracts which contain unfair terms. These changes are likely to have a significant impact on SMEs and how they interact with their customers.

The new prohibition will be inserted into the Trade Practices Act 1974 and is expected to start operation on 1 July 2010. This articles aims to explain the changes and what they mean for SMEs.

What is a consumer contract?

The prohibition on unfair terms will only apply to a “consumer contract”. A consumer contract is defined as a contract between a supplier and a person who is acquiring the product wholly or predominantly for personal, domestic or household use or consumption. This means that in deciding whether a particular person is a “consumer” it is necessary to know the reason for which the individual person is acquiring the product.

This is different to the current prohibition on unfair terms in consumer contracts under the Victorian Fair Trading Act 1999 (Vic), which defines a consumer contract as an agreement for goods or services of the kind ordinarily acquired for personal, domestic or household use or consumption and is acquired for one of those purposes. Under this definition both the nature of the product and the purpose of the individual person must be for personal, domestic or household use or consumption.

This means that the definition of consumer contract under the new provisions will be broader and may capture more contracts than those that fall within the Victorian legislation. This highlights the need for companies who operate in Victoria and currently comply with the unfair contracts provisions of the Fair Trading Act to review their standard form contracts for products that might not ordinarily be acquired by consumers but there is a possibility that the product would be acquired by a person who intends to use it for personal, domestic or household use or consumption.

Some examples of products which are likely to fall within the definition of a “consumer contract” include airline tickets, gym memberships, non-business telecommunications contracts, “off the plan” domestic property contracts, home delivery terms and conditions and computer licensing terms for individuals.

What is a “standard form” consumer contract?

There is no specific definition of “standard form” in the new legislation. However, the legislation does say that a court in deciding whether a particular contract is a standard form contract should take into account the following:

  • whether the supplier has all or most of the bargaining power;
  • whether the contract was prepared by the supplier before any discussion between the two parties;
  • whether the supplier adopts a “take it or leave it” approach;
  • whether the consumer has any opportunity to negotiate or influence the terms of the contract; and
  • whether the contract takes into account any specific circumstances relating to the individual consumer.

One area where there is a higher risk of a contract being found to be a “standard form” contract is the sale of products over the internet. In a case which occurred under the Victorian Fair Trading Act against Jetstar (Free v Jetstar Airways Pty Ltd [2007] VCAT 1405) the Victorian Civil and Administrative Tribunal found that a booking over the internet clearly involved a standard form contract as there was no opportunity for consumers to negotiate and the only choice that the consumer had was either to book the flight or not book the flight.

The legislation makes it easier for consumers to prove that the contract was a standard form contract by reversing the onus of proof. This means that if a consumer alleges that a contract is a “standard form” contract then a court will assume that the contract is a standard form contract unless the supplier can prove that the contract was not a standard form contract.

What is an “unfair term”?

An unfair term is one which:

  • causes a significant imbalance in the parties’ rights and obligations under the contract; and
  • is not reasonably necessary in order to protect the legitimate interests of the supplier; and
  • the term would cause a detriment to the consumer (whether the detriment is financial or otherwise).

It is necessary for all three of these matters to be satisfied before a term can be found to be an unfair term. The legislation contains a “grey” list of specific clauses which may be unfair terms. The reason the list is grey is that the terms are not prohibited outright but are only prohibited if the above three matters also apply to the term. The grey list includes:

  • a term permitting the supplier to avoid or limit its performance but not the consumer (for example, a term which allows the supplier to deliver a different colour of the product than the colour ordered without the consumer’s agreement);
  • a term permitting the supplier to terminate the contract but not the consumer (for example, a gym membership contract which allows the supplier to terminate the contract at any time but the consumer cannot terminate before 12 months has expired);
  • a term permitting the supplier to penalise the consumer for breach of contract but there is no similar penalty for the supplier breaching the contract (for example, a gym membership contract which requires the consumer to pay a cancellation fee of 50% of the balance outstanding but has no similar right if the supplier cancels the contract);
  • a term permitting the supplier to unilaterally vary the contract but not the consumer;
  • a term permitting the supplier to renew (or not renew) a contract at its discretion but the consumer does not have a similar right;
  • a term permitting the supplier to vary the price payable under the contract without the consumer having a right to terminate the contract;
  • a term permitting the supplier to unilaterally determine whether the contract has been breached or to interpret the meaning of the contract;
  • a term limiting the supplier’s liability for its agents;
  • a term permitting the supplier to assign the contract to the detriment of the consumer without the consent of the consumer;
  • a term limiting the ability of the consumer to sue the supplier;
  • a term limiting the evidence that a consumer can adduce in a court proceeding relating to the contract;
  • a term attempting to impose the evidential burden on the consumer in a court proceeding; and
  • any other term prescribed by regulations.

For example, in “off the plan” domestic property contracts, this may include clauses allowing the developer to change the size or nature of the individual property (without consent), variation clauses, default provisions, termination clauses, “no objection” clauses, disclaimer clauses, liability releases and indemnities.

Will the new legislation apply to existing contracts?

The new legislation will not apply to contracts which exist at the time that the new prohibition starts. However, it will apply to contracts which are entered into after the start date of the legislation (currently expected to be 1 July, 2010), contracts which are renewed after the start date and to any clause of a contract which is varied after the start date.

If a contract existed at the date that the new prohibition starts but a clause is varied after the start date then the new prohibitions will apply only to the clause, which is varied, and not to the whole contract.

What should I do now?

Every company who has standard term consumer contracts should review and amend those contracts to remove any unfair terms. This should be done even if the contracts have already been reviewed to comply with the Victorian Fair Trading Act. In particular, the supply of goods or services to consumers over the internet should be carefully reviewed as these contracts are highly likely to be found to be “standard form” contracts.

Alternatively, companies could review the way in which their contracts are agreed to allow for a process of negotiation with consumers so that contracts will no longer be “standard form” contracts.

–Joanne Daniels is a partner with Middletons, an Australian full service commercial law firm.


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Joanne Daniels

Joanne Daniels

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