Australian Consumer Law
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Russell Kennedy Special Counsel, David Littlejohn, takes us through the development of Australian consumer legislation, including: - Trade Practices Act 1974 - Competition and Consumer Act 2010 - Schedule 2: Australian Consumer Law
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Australian Consumer Law
- 1. Australian Consumer Law David Littlejohn Special Counsel 21 March 2014 3350069v1
- 2. • Trade Practices Act 1974 • Competition and Consumer Act 2010 • Schedule 2: Australian Consumer Law (“ACL”) 2 Development of Australian consumer legislation
- 3. • Protection • Fair trading • Consistency • Simple, clear and concise law 3 Purpose of the legislation
- 4. • Freedom of contract • Equal footing/bargaining power • Free to walk away • Genuine negotiation • Literacy 4 Assumptions in the current consumer market
- 5. • Standard form contracts • Little opportunity for negotiation • “Take it or leave it” 5 Realities of the consumer market
- 6. • Information asymmetry • Opportunity to read • Literacy 6 Realities of the consumer market (continued
- 7. • Goods • Services • Interest in land • Financial products or services • Personal, domestic or household use 7 Consumer contracts
- 8. • The elements of a standard form contract are generally considered to consist of a pre-printed form offered on a “take it or leave it” basis to all consumers for that particular type of transaction. 8 Standard form contracts
- 9. • Subject matter of contract • Upfront price • Terms required by law 9 Terms to which section 23 does NOT apply
- 10. • Under the ACL, a term is unfair if: • it would cause 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; and • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.31 10 When is a term unfair?
- 11. • Significant imbalance in the parties’ rights and obligations arising under the contract 11 Significant imbalance
- 12. • “Reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term” 12 Reasonably necessary
- 13. Would the term cause detriment if it were to be applied or relied upon? • It is not necessary that a term be enforced to be found that it is unfair. • The detriment caused by the term does not need to cause purely financial detriment. 13 Detriment
- 14. 14 The effect of “unfairness” in a contract The term once declared as being ‘unfair’ is void. If the term is not a fundamental term of the contract and is severable from the contract the term will be void and the contract will continue to operate as if the unfair term did not exist. If however, the term is an essential part of the contract and the contract is impossible to perform in the absence of the unfair term, the unfair term invalidates the entire contract.52 The assessment as to whether the contract can continue to operate without the term rests solely with the court.
- 15. 15 Mobile phone contracts Suppliers should ensure their contracts do not contain any of the following unfair contract terms, which Consumer Affairs Victoria considers unfair. These are terms that: - give suppliers the right to unilaterally vary prices and other terms and conditions - restrict the liability of the supplier or its employees or agents. - penalise the consumer for breach or termination of a contract. - prevent or restrict the consumer’s dispute resolution options.
- 16. 16 Gym membership contracts Suppliers should ensure their contracts do not contain any of the following contract terms, which Consumer Affairs Victoria considers unfair. These are terms that: - result in the automatic renewal of memberships - allow the health and fitness centre to vary any or all aspects of the services it provides - make it difficult for consumers to terminate memberships - penalise consumers for terminating memberships - penalise consumers for breach of contract.
- 17. 17 Unfair contract term: Yes or No?
- 18. Questions? 18
Editor's Notes
- The fundamental purpose of the legislation is to ‘protect consumers and ensure fair trading in Australia’,3 through the creation of a legislative regime that ensures that the protection afforded to consumers, and the obligations owed by businesses are consistent across the nation.4 The development of simple, clear consumer laws also aid in assisting businesses by making compliance easier.5 Footnotes: 3. Commonwealth of Australia. (2010). Australian Consumer Law, A Guide to the Unfair Contract Terms Law. Canberra: Commonwealth of Australia. 4. Commonwealth of Australia. (24 June 2009). Trade Practices Amendment (Australian Consumer Law) Bill 2009 Second Reading Speech. Parliamentary Debates, House of Representatives. Canberra: Parliament of Australia. 5. Above Note 4.
- Classical contract theory has as its foundation the principle of the ‘freedom of contract’.6 It asserts that a contract is an expression of the will of the parties consisting of self-imposed obligations which do not require intervention by the state, other than to facilitate the creation of a structure in which parties are free to contract.7 The notion of freedom of contract assumes that the parties to the contract come to negotiate the terms of the contract on an equal footing, capable of knowing what is in their own best interests; it also assumes that parties are free to walk away from the contract negotiations if the terms offered are not in their best interests. Zumbo argues that this approach is simplistic and that it ignores the disparity of bargaining power between a business and a consumer in the modern market.8 Further, in cases where consumers do choose to walk away from the standard form contract that is offered, they are generally faced with ‘little choice but to agree to an industry wide standard form contract’.9 Businesses and consumers are entitled to have terms in contracts that have the sole aim of protecting each parties’ legitimate interest. Genuine negotiation that apportions the risk and obligations between the parties is an aspiration of the notion of ‘freedom of contract’. This notion however presumes that both parties have equal bargaining power, that both parties have the same level of knowledge and understanding regarding the meaning of the terms within the contract and the same or similar levels of resources to devote to the negotiation of the terms.10 This level of purity of a freedom of contract is ‘unattainable’,11 and does not occur in the development of standard form contracts. Footnotes: 6. Paterson, J. M., & Robertson, A. (2012). Principles of Contract Law (4th Ed.). Sydney: Thomson Reuters LawBook Co., at 35. 7. Above Note 6. 8. Zumbo, F. ((2005) 13 TPLJ 70). Dealing with unfair terms in consumer contracts: Is Australia falling behind? Trade Practices Law Journal , 70-89. 9. Above Note 8. 10. Paterson, J. (33 [2009] 934). The Australian Unfair Contract Terms Law: The Rise of Substantive Unfairness as a Ground for Review of Standard Form Consumer Contracts. Melbourne University Law Review, 934-956. 11. Trebilcock, M. (1993). The Limits of Freedom of Contract. Massachusetts: Harvard University Press, at 79.
- The standard form contract is familiar to most consumers and is a now a permanent part of the modern day market. The standard form contract has been developed to reduce transaction costs and to standardise transactions.12 Generally the terms in a standard form contract are not open for negotiation.13 The representatives of the business rarely have the authority to alter the terms of the contract.14 Consumers are not afforded the opportunity to negotiate the terms and enter into these contracts in an atmosphere where even reading the contract itself may be discouraged.15 These contracts are presented on a ‘take it or leave it’ basis, it is doubtful that negotiation in regard to this type of contract would really be ‘genuine’. It is the very nature of the market and of the increase in the use of standard form contracts that prompted the overhaul of the consumer protection legislation and the focus of unfair contract terms within the ACL.16 Footnotes: 12. Above Note 11. 13. Robertson, A. ((2005) 29 MULR 179). The Limits of Voluntariness in Contract. Melbourne University Law Review , 180-181. 14. Above Note 13. 15. White, A. M., & Mansfield, C. L. (2002). Literacy and Contract. Stanford Law and Policy Review, 13.2.233-266, and Above Note 10. 16. Above Note 4.
- There exists an information asymmetry in relation to businesses offering goods and services through standard form contracts and the consumers that sign these contracts.17 The opportunity for the consumer to read and comprehend what they are signing in relation to these contracts is very limited.18 White and Mansfield’s research on the ability of American adults to understand and use standard form contracts revealed that even if a consumer could read the contract terms, they were unable to understand what the terms meant or use the numerous disclosure statements and schedules attached to the contract.19 Whilst it is acknowledged that the literacy data relied upon by these authors was US based, and as such may not be comparable to Australian literacy levels, the research does demonstrate how literacy levels impact on the ability for a consumer to understand the terms within a contract. Behavioural economists apply observations from psychology to economic issues to assist in providing a broader understanding of the consumer’s motivations and behaviours within the market place.20 Behavioural economists assert that it is an assumption that consumers are able to make better decisions if they are provided with more information.21 Instead consumers can become confused by lengthy disclosure documents and schedules to contracts. The research of White and Mansfield found that 90 million American adults could not reliably extract the information regarding the terms in a contract from the disclosure documents.22 The disclosure documents were not provided as a single document but rather as a multiplicity of documents. This made the contract a more complex transaction. Further, White and Mansfield found that the consumers required a high level of literacy to enable them to understand the terms and attached disclosure documentation.23 White and Mansfield claim that most consumers ‘cannot and do not understand the pre-printed forms when they sign a consumer contract’. Actual assent is not just a fiction because of voluntary choices by consumers, it is effectively impossible’.24 The attached documentation provided to make the contract understandable, neither makes the contract understandable, nor does it achieve a purer form of consent. The law is at odds with the realities of the modern consumer market primarily as a result of the failure to recognise that consumers cannot and do not understand these standard form contracts and are in a position whereby attempts to negotiate terms are futile. The unfortunate position that has been created by reliance on standard form contracts within the market is that these contracts are generally not read, are not understood and are in some instances unavoidable due to there being a lack of alternatives. Footnotes: 17. Above Note 15. 18. Above Note 13. 19. Above Note 15. 20. Productivity Commission. (2008). Behavioural Economics and Public Policy. Canberra: Round Table Proceedings, Productivity Commissions. 21. Above Note 20. 22. Above Note 15. 23. Above Note 15. 24. Above Note 15.
- A consumer contract is a contract whereby an individual acquires goods, services, an interest in land, financial products or financial services wholly or predominantly for personal, domestic or household use.25 The use of the term ‘interest’ is broadly defined under s2(1) and includes a legal or equitable estate or interest in the land, a right power or privilege over, or in connection with the land.26 Section 28(1) of the ACL provides that the UCTL does not apply to contracts that deal with marine salvage or towage, chartering of a ship or the carriage of goods by ship. Footnotes: 25. Australian Consumer Law Part 2-3, Section 23(3). Note all further references to legislation refer to the Australian Consumer Law Part 2-3 of Schedule 2 of the Competition and Consumer Act 2010 unless otherwise stated. 26. Schedule 2, Chapter 1, Section 2 Definitions.
- The UCTL does not define what a ‘standard form contract’ consists of. Parliament has however included a list of factors that the courts must take into consideration when deciding if a contract is a standard form contract: (a) whether one of the parties has all or most of the bargaining power relating to the transaction; (b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; (c) whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented; (d) whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1); (e) whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction; (f) any other matter prescribed by the regulations.27 The elements of a standard form contract are generally considered to consist of a pre-printed form offered on a ‘take it or leave it basis’ to all consumers for that particular type of transaction.28 The ACL provides a rebuttable presumption that a contract is a standard form contract. Where the ACCC or a consumer asserts that the contract contains unfair terms it is open for the respondent to assert by way of a defence that the contract is not a standard form contract. As such the burden of proof will shift to the respondent to show that the contract is not a standard form contract.29 Footnotes: 27. Section 27(2) 28. Above Note Error! Bookmark not defined. at 39-700. 29. Section 27(1)
- Section 23 of the ACL does not apply to terms in consumer contracts that define the main subject matter of the contract, that sets the upfront price or that is a term that is required or permitted by State or Commonwealth law.30 Footnotes: 30. Section 26(1).
- The Court, when determining if a term is unfair may take into consideration any matters that it thinks is relevant, but must consider ‘the extent to which the term is transparent’ and ‘the contract as a whole’.32 The requirement of ‘transparency’ is met if the term is ‘expressed in reasonably plain language’, ‘is legible’, ‘is presented clearly’ and ‘is readily available to any party affected by the term’.33 The matters that the court may take into consideration when determining if a term is unfair may include notice given to consumers regarding the terms, the manner in which the contract was explained to the consumer, whether the consumer had a reasonable opportunity to consider the contract and information contained therein prior to entering into the contract and whether the consumer could have sought professional advice.34 This further supports the need for appropriate interpretation and application of the legislation by the judiciary that considers the findings of academic research. As discussed, consumers are not afforded or do not take the opportunity to read the contract prior to signing and that even if time was taken to read the contract, the consumer may not understand the terms within the contract or the attached disclosure or schedule documentation.35 Footnotes: 31. Section 24(1). 32. Section 24(2)(a) and 24(2)(b). 33. Section 24(3). 34. Law Commission and Scottish Law Commission. (2002 Discussion Paper No 199 ). Unfair Terms in Contracts: A Joint Consultation Paper No 166. Scottish Law Commission, 95-96. 35. Above Notes 13 and 15.
- The court must consider if the term that is alleged as being unfair would ‘cause a significant imbalance in the parties’ rights and obligations arising under the contract’; the court must make a factual determination as to whether any imbalance exists. The applicant is required to prove on the balance of probabilities that the term would cause a significant imbalance.36 Lord Bingham, in Director General of Fair Trading v First National Bank plc [2002] 1 AC 481 observed that the test of significant imbalance is met when the term or terms in a contract are weighted in favour of the supplier so that it results in the parties’ rights and obligations under the contract being skewed in the supplier’s favour.37 In Jetstar Airways Pty Ltd v Elizabeth Winfred Free [2008] VSC 539 (‘Jetstar’), Cavanough J discussed the meaning of the word ‘significant’.38 Cavanough J differed in opinion from President Morris in Director of Consumer Affairs Victoria v AAPT Limited (‘AAPT’) [2006] VCAT 1493,39 and asserted that it was not simply a meaning of ‘important’ or ‘of consequence’, but rather ‘ that it means, principally at least, “significant in magnitude”, or ‘sufficently large to be important”, being a meaning not too distant from “substantial”’.40 President Morris in AAPT commented that there is even the potential for there to be a significant imbalance arising from an information imbalance. He asserted that there is potential for a term in fine print, or in a schedule or in Latin to be overlooked or misunderstood by the consumer.41 The ACL provides a list of examples of terms that may be found to be unfair.42 This list is not exhaustive, but is to provide a demonstration of instances of terms that characterise an imbalance between the rights and the obligations of the parties’.43 Footnotes: 36. Commonwealth of Australia. (2010). Australian Consumer Law, A Guide to the Unfair Contract Terms Law. Canberra: Commonwealth of Australia, at 11. 37. Director General of Fair Trading v First National Bank plc [2002] 1 AC 481 (House of Lords). 38. Jetstar Airways Pty Ltd v Elizabeth Winfred Free [2008] VSC 539 at 104-105. 39. Director of Consumer Affairs Victoria v AAPT Limited (‘AAPT’) [2006] VCAT 1493 at 31-48. 40. Above Note 38 at 105. 41. Above Note 39. 42. Section 25. See Annexure two. 43. Above Notes Error! Bookmark not defined. at 39-310, and Note 36 at 13.
- Following the consideration of whether a term would cause a significant imbalance, the second test requires the consideration of whether the term is ‘reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term’.44 To be considered as being reasonably necessary to protect the legitimate interests of the supplier, a term must ‘represent a proportionate response to the risk it addresses’.45 The onus is on the respondent to establish on the balance of probabilities that the term is reasonably necessary to protect their legitimate interests. In Jetstar, the Appellant introduced evidence that demonstrated that the terms within their contract was common market practice. In this case Jetstar asserted that whilst the fare purchased by the Respondent was the least flexible fare, there were other more flexible fares available at a higher cost. Jetstar argued that the cheap price was traded off by limited flexibility and further that this was common market practice across the industry.46 Recently the Federal Court in ACCC v Bytecard Pty Limited (‘Bytecard’),47 held that terms that allowed the respondent to unilaterally alter the amount payable by the consumer, that indemnified the respondent from any liabilities and that allowed the respondent to terminate without notice and without reason were not reasonably necessary to protect the legitimate interests of Bytecard. Footnotes: 44. Section 24(1)(b). 45. Above Note 10 at 945. 46. Above Note 38 58-66 and Note 36. 47. VID301/2013, Order, dated 24 July 2013.
- The final test as to whether a term is unfair requires that the term would cause detriment, ‘if it were to be applied or relied on’.48 It is not necessary that a term be enforced to be found that it is unfair. The ACCC and not a consumer initiated proceedings against Bytecard alleging that terms in their standard form contracts were unfair. The ACCC initiated a collaborative compliance approach to the introduction of the new regime and allowed a ‘grace period’ for businesses to alter their contracts to comply with the ACL. However, the ACCC has now moved into an enforcement role with relation to the businesses that chose not to ‘fully cooperate with the ACCC during the review’.49 The detriment caused by the term does not need to cause purely financial detriment. Section 24(1)(c) of the ACL defines detriment as ‘(whether financial or otherwise)’. Bytecard provides an example of non-financial detriment namely, that the detriment caused by one of the terms that the court declared unfair involved the ‘unexpected cessation of internet connectivity and the unexpected loss of an email address account’.50 Footnotes: 48. Section 24(1)(c). 49. Australian Competition and Consumer Commission. (March 2013). Unfair Contract Terms - Industry Review Outcomes. http://www.accc.gov.au/system/files/Unfair%20Contract%20Terms%20-%20Industry%20Report.pdf: Commonwealth of Australia, at 1-2. 50. Order, dated 24 July 2013 VID301/2013 at 3.5.
- A term in the contract that satisfies the above three tests, namely that the term causes a significant imbalance; that it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term and that the term would cause detriment if applied or relied upon is an unfair term. The court has the power to declare a term ‘unfair’ under s250(1) of the ACL. The term once declared as being ‘unfair’ is void. If the term is not a fundamental term of the contract and is severable from the contract the term will be void and the contract will continue to operate as if the unfair term did not exist.51 If however, the term is an essential part of the contract and the contract is impossible to perform in the absence of the unfair term, the unfair term invalidates the entire contract.52 The assessment as to whether the contract can continue to operate without the term rests solely with the court.53 Footnotes: 51. Section 23(2). 52. Section 23(2). 53. Above Note Error! Bookmark not defined. at 39-140.
- Suppliers should ensure their contracts do not contain any of the following unfair contract terms, which Consumer Affairs Victoria considers unfair. These are terms that: give suppliers the right to unilaterally vary prices and other terms and conditions restrict the liability of the supplier or its employees or agents. penalise the consumer for breach or termination of a contract. prevent or restrict the consumer’s dispute resolution options.
- Suppliers should ensure their contracts do not contain any of the following contract terms, which Consumer Affairs Victoria considers unfair. These are terms that: result in the automatic renewal of memberships allow the health and fitness centre to vary any or all aspects of the services it provides make it difficult for consumers to terminate memberships penalise consumers for terminating memberships - penalise consumers for breach of contract.
- Can go onto individual slides and have a bit of audience participation……… - Are you penalised, but the supplier is not, if the contract is terminated? - Can the supplier change or vary contract terms, the price, the product or the service without asking you? - Does the supplier have the sole right to interpret the meaning of the contract? - Can the supplier avoid, limit, terminate or renew the contract, but you cannot? - Can the supplier determine whether the contract has been breached, but you cannot? - Is your right to sue the supplier over the contract limited? - Is the font size and style difficult to read? - Does the contract contain long sentences, clauses or paragraphs? - Does the contract contain confusing jargon and technical terms? - Is there a lot of cross-referencing within the contract?