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Client Update: Government moves to amend unfair contract terms legislation

2 November 2009

In brief: The Federal Government has tabled in the Senate material changes to the regulation of unfair contract terms in consumer contracts. Partner Catherine Parr reports.

Key changes

The key changes to the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (please see our summary of the Bill and our comments on its application to financial services) include:

  • deferral of the legislation's commencement to 1 July 2010 (or, if the Bill is not passed and assented to before 1 January 2010, the earlier of a date after 30 June 2010 to be proclaimed and six months after Royal Assent);
  • removal of the Minister's power to prohibit terms by regulation;
  • amendment of the key test of unfairness so that a term of a consumer contract can only be unfair if:
    • it would cause a significant imbalance in the parties' rights and obligations arising under the contract;
    • 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.

Given the introduction of the third limb into the core test, the extent to which the term would cause, or there is a substantial likelihood it would cause, financial or other detriment to a party if it were to be applied or relied on will be removed from the list of factors the court must take into account in determining whether a term is unfair. The concept of a substantial likelihood of detriment has been removed altogether;

  • a new requirement that before a regulation may be made to add a new term to the 'grey list' of examples of potentially unfair terms, the Minister must have taken into consideration the detriment that a term of that kind would cause consumers, the impact on business generally of prescribing that kind of term, and the public interest;
  • amendment of the transitional provision dealing with pre-commencement contracts to provide that if a pre-commencement contract is varied after commencement, the regime will apply only to the varied term and not to the whole contract; and
  • giving individuals power to apply to the court for a declaration that a term of a consumer contract is unfair, in addition to the Australian Competition and Consumer Commission's (ACCC) and the Australian Securities and Investments Commission's (ASIC) existing power to apply to the court.

In addition to these amendments moved by the Government, independent Senator Nick Xenophon moved two sets of amendments. The first set proposes, among other things:

  • extension of the regime to contracts with corporations, and other types of entity, where the upfront price under the contract does not exceed $2 million (the Senator's amendments don't seem to suggest that individuals acquiring goods or services for business purposes where the upfront price is less than $2 million should also be protected);
  • provision for 'safe harbour' terms approved by the ACCC or ASIC to be exempt from the legislation; and
  • extension of the regime to contracts of insurance.

The second set of amendments Senator Xenophon proposed would prohibit:

  • charging a fee for a payment made in cash; and
  • a term that enables, or has the effect of enabling, one party to a contract to transfer personal information about another party outside Australia without that other party's written, informed consent. This amendment is consistent with a separate Private Senator's Bill Senator Fielding introduced into the Senate, the objects of which include ensuring that personal information held by businesses in Australia is not transferred overseas without the informed consent of the individual to whom the information relates.

What next?

The Government's changes will largely be welcomed by industry. The deferral of the commencement date from the current date of 1 January will give industry more time to review standard form contracts. The removal of the provision for a 'black list' of prohibited terms will also be well received, although the Government had indicated that it did not intend that there would be a black list at commencement. The requirement that a claimant establish that a term would cause detriment (whether financial or otherwise) if it were to be applied or relied on should reduce the risk of challenge to a term where its impact on the customer is less than clear. However, the new laws will still require substantial changes to some contracts, and create a degree of uncertainty and increase compliance requirements for many businesses.

All the amendments have yet to be moved or debated. The Senate sits again in the week beginning 16 November 2009.

For further information, please contact:

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