Use of unfair contract terms prohibited

From 1 July 2010, consumers will be able to get out of ‘standard form’ contracts which contain ‘unfair’ terms. 

The unfair contract terms amendments apply to standard form contracts between business and a consumer entered after 1 July 2010.

The changes arise from amendments to the Trade Practices Act 1974, being the Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010 (Act).

Amendments

A consumer contract is a contract for the 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 is ‘unfair’ if:

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

The onus is on the party relying on the clause to prove that the term is reasonably necessary to protect its legitimate interests.

Examples of unfair contract terms provided in the Act are terms which may have the effect of permitting one party to unilaterally vary the terms of the contract or avoid performance of the contract or terminate the contract.

Practical effect

Unfair contracts legislation has been in force in NSW since 1980.

That legislation has resulted in a significant amount of disputation and litigation by consumers seeking to avoid their contractual obligations.

All Australian consumers, not those just in NSW, will now have additional grounds upon which to challenge their contractual obligations.  In many cases consumers will rely on the provisions to defend claims for payment.

The Act will:

  • significantly increase compliance costs for business;

  • cause uncertainty over the enforceability of contract terms (the definition of ‘unfair’ is loose); and

  • increase disputes and litigation.

Those who purchase goods or services over the internet will now have some degree of recourse.  Clicking the ‘Agree and Proceed’ icon without reading the extensive fine print which invariably accompanies internet sales may not be as fatal as it once was.

What can businesses do?

Businesses should address those concerns by:

  1. reviewing standard form consumer contracts to ensure that the terms are not ‘unfair’ and that the terms are reasonably necessary;

  2. adopt even more rigorous procedures to ensure that its consumers understand contract terms;

  3. document the explanation provided; and

  4. tailor ‘standard form contracts’ to reflect individual circumstances.

Lavan Comment: The amendments give consumers increased contractual rights.  In practice, the only consumers who will benefit are those who default in their payment obligations and then attempt to use the ‘unfair’ terms provision to avoid or negotiate their way out of payment.

The legislation will increase compliance costs to business but otherwise will have little practical effect for the vast majority of consumers who honour their contractual obligations.

For further information please contact:
Associate Cecilia Camarri on 08 9288 6757 / cecilia.camarri@lavanlegal.com.au.