The Federal Government's plans to establish uniform, national
consumer laws have been implemented through the recent enactment of
the Trade Practices Amendment (Australian Consumer Law) Act (No
1) 2010 (Act).
BACKGROUND
The Act came into effect on 14 April 2010, amending such acts as
the Trade Practices Act 1974, the Australian
Securities and Investments Commission Act 2001 and the
Corporations Act 2001. The provisions relating to unfair
contract terms (in standard-form contracts) will come into effect
on 1 July 2010. Broadly, the Act creates the national unfair
contract terms regime and introduces new penalties, enforcement
powers and consumer redress provisions.
The Act forms part of a national consumer law regime (the
Australian Consumer Law), with further amendments currently being
proposed under the Trade Practices Amendment (Australian
Consumer Law) Bill (No 2) 2010 (Bill). The
Bill aims to address general and specific consumer protections,
misleading and deceptive conduct, unconscionable conduct, unfair
practices, consumer transactions, statutory consumer guarantees and
a standard consumer product-safety law for consumer goods and
product-related services (as well as a proposed change of title of
the Trade Practices Act 1974 to the Competition and
Consumer Act 2010). If passed, the Bill may come into effect
in January 2011.
In Victoria, the Australian Consumer Law will replace the
existing unfair contract terms provisions in the Fair Trading
Act that have been in effect since 2003 (including the test
for what constitutes a 'consumer contract' in that
legislation).
WHAT WILL THE NEW SCHEME LOOK LIKE?
The scheme, as it applies to unfair contracts for consumer goods
and services and for the sale or grant of interests in land, amends
the Trade Practices Act. Such changes mirror amendments to
the Australian Securities and Investments Commission Act,
which introduces the unfair contract terms regime in relation to
financial services.
HOW WILL THE NEW LAW AFFECT CONSUMER CONTRACTS?
The unfair contract terms provisions will apply to all consumer
contracts in a standard form for the supply of goods and/or
services that are entered into or varied after 1 July 2010.
It is recommended that all suppliers of goods and/or services,
or financial products and/or financial services that are acquired
wholly or predominantly for the consumer's personal, domestic or
household use, review carefully their standard-form contracts to
ensure that terms within those contracts do not fall within the
definition of 'unfair' terms in the Act. This review will assist in
guarding against exposure to new penalties which the ACCC (in
relation to goods and services) and ASIC (in relation to financial
products and services) have been empowered to issue under the new
Act.
HOW WILL THE NEW LAW APPLY?
Threshold questions: contracts affected by the new consumer
laws
What is a consumer contract?
Under the Australian Consumer Law, a 'consumer contract' is a
contract for the supply of goods and/or services for an
individual's wholly or predominantly personal, domestic, or
household use or consumption. Therefore, contracts between
businesses are excluded from the scope of the new provisions,
except in relation to 'sole traders'.
What is a standard-form contract?
The Act does not define the term 'standard-form contract'.
However, it is generally understood that such a contract will be
one that has been prepared by one party to the contract and is not
subject to negotiation between the parties. Importantly, a consumer
contract will be presumed to be in standard form unless another
party to the proceeding proves otherwise.
Exempt contractual terms unaffected by the new
law
The new regime does not apply to terms in a standard-form
contract that: (i) define the main subject matter of a consumer
contract; (ii) set the 'upfront price' payable under the contract;
and (iii) constitute terms required, or expressly permitted, by
law.
Unfair terms
The three-step test for 'unfairness'
A term of a contract is 'unfair' if it: (i) would cause a
significant imbalance in the parties' rights and obligations
arising under the contract; (ii) is not reasonably necessary to
protect the legitimate interests of the party who would be
advantaged by that term; and (iii) would cause detriment (whether
financial or otherwise) to a party if it were to be applied or
relied upon.
Examples of terms that may be considered
unfair
The Act includes a non-exhaustive list of the types of terms in
a consumer contract that may be regarded as unfair. The list serves
as a guide only and does not create a presumption that specific
types of terms will be void under the new consumer laws. Any
assessment of a term, including a term on the list, is still
subject to the unfairness test set out above. Examples include:
(a) A term that
permits, or has the effect of permitting, one party (but not
another) to avoid or limit performance of the contract.
(b) A term
that permits, or has the effect of permitting, one party (but not
another) to terminate the contract.
(c) A term
that permits, or has the effect of permitting, one party (but not
another) to vary the terms of the contract.
(d) A term
that permits, or has the effect of permitting, one party (but not
another) to avoid or limit performance of the contract.
(e) A term
that permits, or has the effect of permitting, one party (but not
another) to renew or not renew the contract.
(f)
A term that penalises, or has the effect of penalising, one party
(but not another) for a breach or termination of the contract.
(g) A term
that permits, or has the effect of permitting, one party (but not
another) to vary the upfront price payable under the contract
without the right of another party to terminate the contract.
Considerations of a court in determining whether a
contract is 'unfair'
A court may take into consideration any matter that it considers
relevant in determining whether a term in the contract is unfair.
However, the court must consider the extent to which the term would
cause detriment (financial or otherwise) to the party if it were
relied on, the extent to which the term is transparent, and the
contract as a whole.
(a)
Detriment
Courts will have regard to whether the term has caused detriment
to consumers (individually or as a class), or whether there is a
substantial likelihood that detriment will result.
(b)
Transparency
A lack of transparency in a term may be found to cause a
significant imbalance in the parties' rights and obligations. A
term is likely to be considered transparent if it is expressed in
reasonably plain language, legible, presented clearly and readily
available to any party affected by the term.
(c)
The contract as a whole
The fairness of a term will not be considered in isolation; it
must be assessed as part of the whole contract and in context. A
term may be seen as less or more fair in light of another
counterbalancing term within the contract.
The effect of including an unfair term
A term in a consumer contract that is unfair will be void.
However, the contract will continue to bind the parties if the
unfair term can be severed, with the balance of the contract
operating without the term.
The Act permits the ACCC or a party to a standard contract to
apply to court for a declaration that a term is unfair. If a party
subsequently seeks to rely on the unfair term, the court may grant
an injunction, an order prohibiting payment, an order providing
redress, or any other order the court considers
appropriate.
ENFORCEMENT OF THE AUSTRALIAN CONSUMER LAWS
The Act introduces new civil penalties, new enforcement powers
for regulatory bodies and the power for courts to order redress for
consumers affected by breaches of the Act.
Contracts for consumer goods and services
Importantly, in a number of respects, the Act expands the powers
of the ACCC. The consumer laws give the ACCC new enforcement powers
including the ability to issue or seek civil monetary penalties,
disqualification orders, substantiation notices, infringement
notices, refunds for consumers, public warning notices and court
orders requiring a supplier to provide redress.
It appears likely that the ACCC and state and territory consumer
protection agencies will work together to ensure compliance with
the unfair contract terms regime. In contrast, the role of
tribunals and courts will be to determine whether a term is unfair
and to order the appropriate relief if a contravention of the Act
has occurred. It will not be the role of the ACCC or any other
regulators to determine whether a term is unfair.
Contracts for financial products and financial services
Financial products and services are regulated by ASIC. The
Act gives ASIC greater enforcement powers in relation to the unfair
contract terms regime for financial products and services. New
enforcement powers include the ability to issue or seek civil
pecuniary penalties, banning orders, substantiation notices,
infringement notices, refunds for consumers, public warning notices
and court orders requiring a supplier to provide redress.
In this context, the role of courts will be to determine whether
a term is unfair and to order the appropriate relief if a
contravention of the unfair contract terms provisions has
occurred.
TIMING AND TRANSITIONAL MATTERS
The Act will apply to terms within standard-form consumer
contracts entered into on or after 1 July 2010. A contract entered
into prior to that date will not be subject to the Act unless it is
varied after 1 July 2010 (in which case the Act will apply to the
contract as varied) or is renewed after that date (in which case
the Act will apply to the contract as renewed).
For more information, please contact:
Ian Sinclair, Partner
Phone (direct): +61 3 9608
2166
Email:
i.sinclair@cornwalls.com.au
or
Carolyn Falcone, Senior Associate
Phone (direct): +61 3 9608 2252
Email:
c.falcone@cornwalls.com.au