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Australia's New Regulation of “Unfair” Contract Terms

In the middle of 2010, Australia introduced a new legal framework to address unfair contract terms in consumer contracts. That framework is now included as Part 2-3 in the Australian Consumer Law which forms part of the Competition and Consumer Act 2010 (Cth).
The introduction of the new regulation is significant and fills a gap in Australia’s previous consumer protection scheme.

For business, and individuals engaged in consumer commerce, the new regulation of unfair contract terms means that there is a need to reassess any standard form contracts used in relation to consumers.

The aims of the new regulation
The core provision of the regulation of unfair contract terms in consumer contracts is s. 23(1) which reads as follows:
23(1) Unfair terms of consumer contracts
A term of a consumer contract is void if:
(a) the term is unfair; and
(b) the contract is a standard form contract.
Consequently, wherever a term is found to be “unfair” it will not bind the consumer. However, s. 23(2) makes clear that the contract continues to bind the parties if it is capable of operating without the unfair term.
Important definitions
As the regulation only applies in relation to so-called “consumer contracts”, it is important to note s. 23(3) which makes clear that a consumer contract is 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.
Furthermore, s. 27 contains a detailed definition of what amounts to a “standard form contract”. Also this definition is of crucial importance as the regulation is only aimed at contracts falling within this category. Essentially, any contract prepared by one party and presented to a consumer on a ‘take it or leave it’ basis is a standard form contract. It is also worth observing that there is a presumption in favour of an alleged standard form contract being classed as a standard form contract. That means that a business that uses a contract that a consumer alleges is a standard form contract bears the burden of proving that it is not such a contract.
When is a contract term “unfair”?
Part 2-3 of the Australian Consumer Law provides two different mechanisms to help us assess whether or not a contract term is unfair. First, s. 24(1) outlines what is taken into account in such an assessment:
24(1) Meaning of unfair
A term of a consumer contract is unfair if:
(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The transparency of the term – such as whether the term was presented clearly and expressed in reasonably plain language – is also of importance for the determination of whether or not a particular contract term is unfair (s. 24(2 and 3).
The second mechanism for assessing whether or not a contract term is unfair is found s. 25 which provides no less than 13 examples of types of contract terms that may be classed as unfair. Several of these examples are common in standard form contracts, not least amongst businesses engaging in e-commerce. For example, one example of a term of a type that may be classed as unfair is “a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract” (s. 25(1)(d)). Another is “a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract” (s. 25(1)(e)).
Concluding remarks
The above should have made clear that, any legal or natural person that deals with consumers must assess whether the terms in its standard form contracts meet the fairness tests set by the new regulation of unfair contract terms.
A failure to do so means that the person cannot be certain that all provisions in such contracts will be binding upon the consumer they deal with. Thus, the person may not be protected in the manner anticipated at the time the standard form contract was drafted.