Will Your Contracts Be Unfair? The Australian Consumer Law

• On 24 June 2009 the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Bill) was introduced to Federal Parliament
• The new legislation applies to standard form contracts and provides that 'unfair' contract terms are void. All manner of standard form contracts including credit contracts are covered by the initiative. A contract containing an unfair term will continue to bind the parties to the extent that the contract is capable of operating without the unfair term.
• The law will apply to all standard form consumer contracts being contracts 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. The consultation papers contemplated that the initiative would apply to business to business contracts, but that proposal has been dropped.

• It is proposed that the law will commence on the date the corresponding legislation commences which should is expected to be between 1 January 2010 and 1 January 2011
• As it is almost certain this initiative will become law, you should ask Gadens Lawyers now to review your standard form contracts to determine whether any changes need to be made.

When is a contract term unfair?

A contract term will be 'unfair' when all of the following three tests are satisfied:

• the term is used in a standard form contract;
• the term would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
• the term is not reasonably necessary to protect the legitimate interests of the party advantaged by the term.

How is the test applied?

In determining whether a contract term is unfair, a court may take into account any matter they think is relevant, but the court must take the following into account:

• the extent to which the term would cause, or whether there is a substantial likelihood that the term would cause, detriment (whether financial or otherwise) to a party if the clause was to be applied or relied on;
• how transparent the clause is;
• the contract as a whole.

Contracts with businesses are less likely to be found unjust, compared to contracts with consumers.

What is a standard form contract?

The draft legislation provides no definition for 'standard form contracts'. Treasury's explanation document states that this omission is intentional as it wants to stop parties from trying to structure their contractual arrangements in ways which would seek to avoid the legislation.

Treasury recognises that the lack of a definition may lead to disputes. Therefore if a claimant states that a contract was a standard form contract, it is up to the respondent to prove otherwise.

The legislation provides for matters which the court must take into account when determining whether a contract is a 'standard form contract' including whether:

• one party has more bargaining power than the other;
• the contract was prepared by one party prior to discussions with the other party commencing;
• the contract was 'take it or leave it';
• the terms were negotiated;
• the terms are specific to the transaction; and
• any other matters referred to in the regulations.

Are there any clauses that cannot be held to be unfair?

The short answer is yes. The following terms cannot be found unfair.

• terms which define the main subject of the contract (ie a consumer cannot buy goods and then later assert that they changed their mind and it was unfair that they had to proceed with the purchase, or borrowed money and then later claimed it was unfair that the lender enforced the mortgage);
• terms which set the upfront price payable under the contract (ie the consideration for the supply or sale provided it is disclosed at or before the contract is entered into) but does not include amounts which are contingent on the occurrence or non-occurrence of an event; and
• terms required by law,

What sort of clauses is the legislation aimed at preventing the use of?

The legislation provides examples of the types of clauses that may be 'unfair'; but they won't necessarily be unfair – this will be assessed on a case by case basis. Some of the examples include clauses:

• allowing one party to terminate but not another;
• allowing one party to unilaterally vary the contract;
• allowing one party to renew or not renew a contract;
• allowing one party to unilaterally determine that a breach has occurred;
• limiting a party's right to sue;
• allowing assignment of rights to the detriment of another party;
• allowing one party to vary the upfront price without allowing the other party to terminate;
• imposing the evidential burden on the other party in court proceedings (eg 'the certificate of the lender is final').

Are there any clauses that are always unfair and are therefore banned?

The legislation provides that the regulations may prescribe contract terms that are prohibited. At present the regulations contain no such provisions.

What is the impact on existing contracts?

The legislation provides that it will only apply to contracts entered into after the new legislation takes effect. However, the new legislation will apply to contracts:

• renewed on or after that date, in relation to conduct occurring after the renewal; and
• varied on or after that date, in relation to conduct occurring after the variation.

This means that if renewing or varying existing contracts, you should be very careful.

For more information, please contact:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.