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Focus: Car rental agreement crashes out under the unfair contract terms regime

27 April 2016

In brief: In proceedings brought by the ACCC, the Federal Court declared a number of terms in Europcar Australia’s 2013 standard rental agreement to be unfair, and therefore void. Partner John Hedge (view CV) and Lawyer Jessica Rusten review the unfair contracts terms regime, and consider the implications of this latest decision for business contracts to which the regime will extend later this year.

How does it affect you?

  • The unfair contract terms regime results in terms in standard form contracts being void where they are found to be unfair by the court. This regime currently only applies to consumer contracts, but will also apply to contracts with small business entered or renewed from 12 November 2016 (and any terms in earlier contracts varied after that date).
  • In this case, the relevant terms were found to be unfair because they held consumers liable for loss or damage when they breached the rental agreement regardless of the materiality of the breach or whether the breach had any connection to the loss or damage caused.
  • The decision provides greater insight into how the courts will apply the unfair contracts regime, which has been the subject of limited judicial consideration since its introduction in 2010.
  • The decision may have consequences for small business contracts that include broad indemnities in favour of the party with the stronger bargaining position.
  • The decision demonstrates that the ACCC may, in addition to seeking declarations that terms are void for being unfair, also include other grounds in any proceedings (like misleading representations) so that financial penalties may also arise.

The unfair contract terms regime and extension to small business contracts

The unfair contract terms regime currently regulates standard form consumer contracts. From 12 November 2016, it will be extended to include contracts with small businesses entered or renewed after that date (and terms in earlier contracts varied after that date).

A term is unfair if it will:

  • cause a significant imbalance between the rights and obligations of the parties;
  • is not reasonably necessary to protect the legitimate interests of the business imposing it; and
  • would cause the consumer (or following extension of the regime, small business) detriment if enforced.

A term's 'unfairness' is assessed taking into account the extent to which the term is transparent and the term's context in the contract as a whole.

Importantly, the regime contains two statutory presumptions:

  • that a contract is a standard form contract; and
  • that a term is not reasonably necessary to protect the legitimate interests of the party advantaged by the term.

These presumptions leave the onus on the party defending the contract term to prove otherwise.

For the purposes of the extension of the regime to small businesses, a 'small business contract' will be a contract:

  • for a supply of goods or services, or a sale or grant of an interest in land;
  • where a party is a business that employs fewer than 20 persons; and
  • which has either an upfront price of less than $300,000 or a duration of more than 12 months and an upfront price payable of less than $1,000,000.

The decision

The ACCC sought declarations that certain liability and indemnity clauses contained in Europcar's standard form car rental agreement were unfair, and therefore void.

While the ACCC sought the declarations under the unfair contract terms regime contained in part 2, subdivision BA of the Australian Securities and Investment Commission Act 2010 (Cth) (the ASIC Act),1 those provisions mirror the unfair contract terms regime contained in the Australian Consumer Law (the ACL).2

The terms alleged to be unfair allowed Europcar to impose no fault liability on its customers, and to make its customers' liability unlimited in cases of breach of contract, no matter how trivial or removed from the loss suffered by Europcar.3 The terms did this by providing that:

  • the customer must return the rental vehicle at the end of the rental period in the same condition as it was in at the start of the rental period and the customer must pay all reasonable costs to return the vehicle to the condition it was in at the start of the rental period;
  • if the customer breached the rental agreement, there was no cover and the customer was liable for damage, theft and third party loss, even if such breach did not cause the loss or damage to the vehicle;
  • damage included a daily fee for Europcar's loss of use of the vehicle while the vehicle was being repaired or replaced, and third party loss included any loss or damage to third party property, including any claim for loss of income or consequential loss; and
  • customers were liable to pay a damage liability fee (which was $3650) and (if applicable) a single vehicle accident liability fee for each separate event, regardless of whether the customer was at fault.

The court found that:

  • terms allocating liability up to $3650 to customers irrespective of fault on the part of the customer caused a significant imbalance in the rights of the parties;
  • terms allowing Europcar, as a consequence of any breach, to terminate and impose unlimited liability for loss or damage on the customer caused a significant imbalance in the rights of the parties; and
  • neither type of terms was demonstrated to be reasonably necessary in order to protect the legitimate interests of Europcar and both would cause detriment through making a customer liable for amounts they would not otherwise have been liable for.

Because the proceedings were resolved by consent (with agreed facts being submitted to the court for consideration), Europcar did not make submissions about whether the terms concerning breach or liability were reasonably necessary to protect its legitimate business interests.

The unfair contract terms regimes in the ASIC Act and the ACL do not include penalties. However, as part of the agreed outcome, Europcar agreed that the conduct also contravened provisions in the ASIC Act which prohibit the making of misleading representations in relation to financial services.4 Consequently, a pecuniary penalty of $100,000 was imposed on Europcar for the associated misleading representations.

Lessons learned

The decision provides some useful lessons for all businesses regulated by the unfair contracts regime, including those preparing for its extended application to small business contracts from 12 November 2016. Specifically:

  • The court emphasised that it was not the mere fact that the terms imposed no fault liability, but rather the way in which the impugned terms operated which rendered them unfair.5
  • Despite this, the decision confirms that the legislation proceeds on the assumption that some terms in consumer contracts may be inherently unfair, regardless of how transparent they are or how comprehensively they are drawn to the attention of the counter party to the contract.6
  • In that regard, broad indemnities that are not limited by the extent of fault or not reflective of the resulting loss will require careful consideration.
  • The court indicates that the application of the unfair contract terms regime in Victoria and the United Kingdom were of assistance when determining whether a term was 'unfair' for the purposes of the ASIC/ACL.
  • There is potential for the ACCC to, in addition to seeking declarations that terms are void for being unfair, also include other grounds in any proceedings so that financial penalties may also arise.

These factors should inform businesses if they are reviewing the operation of their standard form contracts with small businesses in anticipation of the extension of the regime (or preparing new standard form contracts for consumer or small business contracts).

Footnotes
  1. The case was brought under the ASIC Act because the conduct related to the limitation of the customer's liability for damage to a rental vehicle (which was held to be a financial service), and not to the provision of the rental cars themselves (which would be a financial product).
  2. Schedule 2, Competition and Consumer Act 2010 (Cth).
  3. Australian Competition and Consumer Commission v CLA Trading Pty Ltd [2016] FCA 377, [37].
  4. Section 12DB, Australian Securities and Investment Commission Act 2001 (Cth).
  5. Australian Competition and Consumer Commission v CLA Trading Pty Ltd [2016] FCA 377, [37].
  6. Australian Competition and Consumer Commission v CLA Trading Pty Ltd [2016] FCA 377, [54].

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