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Focus: Australian Consumer Law Bill passed by Parliament

23 March 2010

In brief: The Trade Practices Amendment (Australian Consumer Law) Bill 2009 was passed by both Houses of Parliament last week. The Bill, which is the first phase of the Australian Consumer Law, introduces an unfair contracts regime and additional enforcement remedies. The regime will commence on 1 July 2010 if it receives royal assent by that date; otherwise it will commence on a date to be fixed by proclamation or six months from royal assent. Partner Jacqueline Downes (view CV) and Senior Associate Caterina Cavallaro report.

How does it affect you?

  • There will be a single unified Australian Consumer Law dealing with unfair contract terms that will take effect after 1 July 2010.
  • Businesses will need to review standard form business-to-consumer contracts to ensure they comply with the new provisions regulating unfair contract terms.
  • The amendments have not changed the fact that the law will not (at this stage) regulate terms in business-to-business contracts.
  • The core test of unfairness will include a requirement that the term, if relied on, would cause financial or other detriment.
  • The decision not to include a 'black list' of prohibited terms means that the new civil penalties, enforcement powers, and powers for the court to order redress for consumers affected by breaches of the national consumer law will not apply to unfair contract terms.
  • Terms found to be unfair will be void but the contract will continue if it is capable of operating without the unfair term.

Australian Consumer Law

Allens has previously issued Focus publications discussing the new Australian Consumer Law: see Focus: New Australian consumer law and funds management; Focus: Australian Consumer Law Bill; Focus: ACCC review of the product recall system; and Client Update: Government moves to amend unfair contract terms legislation.

Key provisions of the Bill

When a term of a contract is unfair

The unfair contract terms regime will only apply to business-to-consumer contracts.

Under the unfair contracts regime, a term of a consumer contract will be void if it is:

  • unfair; and
  • the contract is a standard form contract.

A contract is presumed to be a standard form contract unless that presumption is rebutted by the supplier. A consumer contract is defined as a contract for:

  • a 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.

A term in a consumer contract will be unfair if:

  • it would cause a significant imbalance in the parties' rights and obligations arising under a contract; and
  • it is not reasonably necessary to protect the legitimate business interests of the party who would be advantaged by the term (ie the supplier); and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

'Detriment' was previously only a factor that a court would take into account when determining if a term was unfair. According to the Explanatory Memorandum accompanying the Bill, a claimant will need to make out more than a 'hypothetical case': there must be a substantial likelihood of detriment relating to the application of, or reliance on, the term.

The other factors that a court must take into account when determining whether a term is unfair are:

  • the extent to which the term is transparent; and
  • the contract as a whole.
The 'black list' of prohibited terms

In its original version, the Bill would have allowed the Minister to prohibit certain terms altogether. These were known as the 'prohibited terms'.

The Government decided not to include the prohibited terms on the basis that it would run counter to other elements of the Bill that require the court to take into account the 'transparency of a specific term and the context of the term in the contract as a whole.' The remedies that were proposed for a contravention of the 'prohibited terms' have been removed.

The 'grey list' of terms

The removal of the prohibited terms list leaves a 'grey list', which sets out examples of unfair contract terms. It is a non-exhaustive, indicative list of terms that may be declared to be unfair. These include terms that permit or have the effect of permitting only one party to a contract to:

  • avoid/limit performance;
  • terminate or renew;
  • penalise the other party for terminating the contract;
  • vary the terms of the contract, including the upfront price, characteristics of goods or services;
  • determine whether the contract has been breached or interpret its meaning;
  • limit a party's vicarious liability for its agents or its rights (including to sue or seek redress);
  • unilaterally vary the characteristics of the goods or services to be supplied or the interest in land to be sold;
  • assign the contract to the detriment of the other party without that party's consent; and
  • limit the evidence a party can adduce in proceedings relating to the contract.

One of the amendments the Government passed was to impose 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 amust consider the:

  • detriment that a term of that kind would cause consumers;
  • impact on business generally of prescribing that kind of term; and
  • public interest.

What are the consequences of a term being unfair?

The Bill allows a court, on application of a party to a consumer contract (which must be a standard form contract) or on the application of the Australian Competition and Consumer Commission (ACCC) or Australian Securities and Investments Commission (ASIC) (as applicable), to declare that a term of a contract is an unfair term.

The changes to the proposed legislation are welcome but there are still a number of uncertainties and risks for businesses and it is likely that substantial changes will be needed to be made to some contracts. For example, the definition of a 'consumer' poses particular problems for businesses whose customers are mostly businesses but may include some individuals. It will be necessary for a business to consider each separate contract with a consumer and determine whether it is for that consumer's personal or business use.

The proposed legislation introduces civil pecuniary penalties for unconscionable conduct and certain consumer protection provisions – the maximum penalties are $1.1 million for corporations and $220,000 for individuals. The ACCC and ASIC will also have new enforcement powers, including the power to issue public warning notices, substantiation notices and infringement notices. These penalty provisions will come into effect the day after the Act receives Royal Assent.

Second Australian Consumer Law Bill

A second Bill, the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010, was also introduced into the House of Representatives on 17 March 2009 to implement the remaining provisions of the Australian Consumer Law, which aims to reduce the number of differing regulatory regimes governing consumer transactions in Australia. The Australian Consumer Law is expected to be fully implemented by 1 January 2011.

Please contact any of the following if you require assistance in the review of your standard form contracts.

For further information, please contact:

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