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In Competition

Unpacking unfair: What is an unfair contract term?

18 April 2023

This post is the second in a series where we unpack the new unfair contract term (UCT) regime in the Australian Consumer Law (ACL). Keep an eye out over the next few weeks for upcoming deep dives into certain types of clauses in standard form consumer and small business contracts that may be caught by the UCT regime.

The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 passed into law late last year and outlines amendments to the Competition and Consumer Act 2010 (Cth). You can read a summary of those amendments in a previous blog post here.

The amendments include significant changes to the UCT regime which will take effect on 9 November 2023. These changes include prohibiting the proposal, application or reliance on an unfair term in standard form consumer or small business contracts, and applying substantial penalties if this prohibition is breached.

Under the current law, UCTs are void, but there are no direct pecuniary consequences for parties who include or try to enforce them.

You can read about the new pecuniary penalties that will apply from 9 November 2023 in our client alert here.

When should you care if it’s unfair?

The UCT regime applies to standard form contracts with consumers or small businesses. The new amendments clarify the scope of a standard form contract and expand the meaning of a small business contract. We recently wrote about the meaning of a standard form contract here.

What’s the test for an unfair term?

The amendments to the UCT regime will not change the meaning of ‘unfair’. The ACL sets out a test for determining whether a term is unfair, the matters that a Court must take into account when considering whether a term is unfair, and a ‘grey list’ of terms that may be found to be unfair.

Under ACL s 24(1), a term of a standard form consumer or small business contract is unfair if it meets each of the following three limbs of the test:

(a) It would cause a significant imbalance in the parties’ rights and obligations arising under the contract.

The onus is on the party alleging an unfair term to prove that the term would cause a significant imbalance. This is a question of fact. Courts have looked at the following factors to determine whether there is a ‘significant’ imbalance:

  • whether the customer can opt-out of the relevant term;
  • whether the contract as whole gives one party a right without a corresponding duty or without giving any substantial corresponding right to the other party; and
  • whether the party advantaged by the term (e.g. a big business) is better placed to manage the risk imposed by the term than the disadvantaged party (e.g. a consumer or small business).

(b) It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.

If there is a significant imbalance caused by the relevant term, this next limb requires the Court to consider whether there is reasonable justification for that imbalance.

There is a presumption that a term is not reasonably necessary to protect the advantaged party’s interests. The onus is on the advantaged party to rebut that presumption by providing evidence that the term is necessary to protect its legitimate interests. The party may provide evidence about the business’ costs and structure, the need for risk mitigation, industry practices or other reasonable justification for the term.

Courts have determined a wide range of interests to be ‘legitimate interests’. What is legitimate depends on the nature of the particular business of the relevant supplier and the context of the contract as a whole [1]. For example, Courts have considered a wide range of business interests (such as protecting the continuing success of the business and the protection of goodwill) and other intangible interests (such as contractual performance) to be legitimate interests – while these are largely cases decided outside of the UCT space, some UCT cases have referenced them [2]. However, the term and any loss it might cause to another party must be proportionate to the interest being protected. To determine this, the Court might look at whether there were other available alternatives to protect that interest that would not cause detriment to another party [3].

Terms that have been found not to be reasonably necessary to protect legitimate interests include allowing the advantaged party to increase prices in order to increase its revenue or profitability, exclusivity clauses, indemnity clauses and termination clauses [4].

(c) It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The onus is on the party alleging an unfair term to prove that the term would cause detriment. There remains uncertainty about what might constitute detriment. It is likely to include financial detriment (such as a penalty for termination) or imposing a liability. However, it may also include non-financial detriment such as inconvenience, delay and distress. Importantly, the relevant time to assess whether a term “would cause detriment” is at the time that the contract is made.

What will the Court take into account?

The court must take into account the extent to which the term is transparent and the contract as a whole, though it may also take into account any other matters it thinks are relevant: ACL s 24(2).

A term is transparent if it is expressed in reasonably plain language, is legible, is presented clearly, and is readily available to any party affected by the term. However, transparency does not necessarily mean that the term is fair, or vice versa. Explanatory Memorandum guidance suggests that transparency on its own cannot cure unfairness.

When taking into account the contract as a whole, a Court may look at, for example, whether terms that seem unfair are counterbalanced by a corresponding right to determine whether there is a ‘significant imbalance’. However, the fact that a customer does not have a corresponding right in the contract does not necessarily mean that there is a significant imbalance in the parties’ rights and obligations. The contract must be considered as a whole with the transparency of the term, and the other relevant matters set out above must also be evaluated on a case-by-case basis.

It’s not black and white: looking at the ‘grey list’ terms

Section 25 of the ACL sets out examples of terms that may be unfair, which are commonly referred to as ‘grey list’ terms. The grey list only provides guidance to Courts in determining whether or not a term is unfair, but does not create a presumption that these terms are unfair. In encountering a grey list term, Courts will still consider each term against the test for unfairness, in light of the transparency of the term and the contract as a whole, and any other relevant matters.

The majority of terms in the grey list are unilateral variation or termination clauses, or terms that otherwise permit one party (but not another) to do something. These include terms that permit one party (but not another) to:

  • avoid or limit performance of the contract (s 25(a))
  • terminate the contract (s 25(b))
  • penalise for a breach or termination of the contract (s 25(c))
  • vary the terms of the contract (s 25(d))
  • renew or not renew the contract (s 25(e))
  • vary the upfront price payable under the contract with no corresponding right for the other party to terminate the contract (s 25(f))
  • vary the characteristics of the good or services or the interest of land to be supplied, sold or granted under the contract (s 25(g))
  • determine whether the contract has been breached or interpret its meaning (s 25(h)).

Other terms in the grey list include terms which:

  • limit one party’s vicarious liability for its agents (s 25(i))
  • permit one party to assign the contract to the detriment of another party without that other party’s consent (s 25(j))
  • limit one party’s right to sue another party (s 25(k))
  • limit the evidence one party can adduce in proceedings relating to the contract (s 25(l))
  • impose the evidential burden on one party in proceedings relating to the contract (s 25(m)).

The ACL also refers to other examples of terms that may be prescribed by regulations (s 25(n)). To date, no terms have been prescribed by regulations.

The grey list is non-exhaustive and Courts have found terms other than the above to be unfair. The ACCC (and ASIC, under similar provisions in the Australian Securities and Investments Commission Act 2001 (Cth)) have been successful in both contested and non-contested cases under the UCT regime, building a solid body of law identifying what an unfair term looks like. Terms which have previously been found to be unfair include unilateral termination and price variation rights, indemnities and limitations of liability, automatic renewal rights and terms which allow a business to avoid meeting its obligations under the contract, such as an exclusion clause.

Over the next few weeks, keep an eye out for our upcoming deep dives into some of the above ‘grey list’ terms, including unilateral termination terms, unilateral variation terms, one-sided penalty clauses, and indemnities and limitation of liability clauses, and other terms that courts have considered, such as clauses dealing with limitation of jurisdiction, collection of data, automatic renewal, exclusive dealing, non-disparagement, and extraneous contractual terms.

What should businesses do?

To prepare for the implementation of pecuniary penalties for UCTs on 9 November 2023, businesses should review their portfolio of contracts to determine which may be caught by in the UCT regime.

By way of warning, ACCC Chair Gina Cass-Gottlieb flagged in a speech to the Committee for Economic Development of Australia on 7 March 2023 that:

In anticipation of the new provisions, we are undertaking a review of business terms and conditions across a number of different sectors. This proactive review will be used as the basis for future enforcement cases.

See our client alert for tips on how to prepare for these changes.

[1] ACCC v Ashley & Martin Pty Ltd [2019] FCA 1436 at [48].

[2] ACCC v Ashley & Martin Pty Ltd [2019] FCA 1436 at [49].

[3] ACCC v Ashley & Martin Pty Ltd [2019] FCA 1436 at [52] citing ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224 at [57(h)], [53], [54] citing ASIC v Kobelt [2019] HCA 18 and [55].

[4] ACCC v Ashley & Martin Pty Ltd [2019] FCA 1436 at [52] citing ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224.

Image credit: Damaged Cardboard Box Labelled Fragile.jpg by Meanwell PackagingWikimedia Commons and Flickr / Creative Commons Attribution 2.0 / Remixed to B&W and resized

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