Chapter 7
Prohibited contract terms and contract terms exempt from the bill's provisions
7.1
This chapter looks at two aspects of the bill: the provision for the
Minister to prohibit certain contract terms and the provision to exempt certain
terms of a given contract from the bill's provisions.
Prohibited contract terms
7.2
The bill states that a prohibited term of a consumer contract is a term
of a kind prescribed by the regulations (subsection 6(4)). Subsections 6(2) and
6(3) state that:
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a person must not include, or purport to include, a prohibited
term in a consumer contract that is a standard form contract; and
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a person must not apply or rely on, or purport to apply or rely
on, a prohibited term of a consumer contract that is a standard form contract.
It adds that in both cases, a pecuniary penalty may be
imposed for a contravention (see chapter 8).
7.3
The EM states that no regulations are proposed to be made at the present
time and so there are no prohibited terms. Prohibited terms in the ACL may be
prescribed by the Minister in accordance with the requirements for the
amendment of the ACL (Part XI of the TPA and the Intergovernmental Agreement).
Any future prohibition of terms in regulations made by the Minister is subject
to a voting process for amending the ACL as set out in the IGA as well as the
Australian Government's best practice regulation requirements.[1]
7.4
Prohibited terms under the ASIC Act may be prescribed by the Minister in
accordance with the requirements for the amendment of the ASIC Act set out in the
Corporations Agreement 2002.[2]
Views
7.5
The Law Council of Australia has expressed concern at the potential for
the legislation to 'ban terms outright'. It argued that 'whether a term is fair
or unfair is wholly dependent on the relevant circumstances of each case'.[3]
Mr Dave Poddar, Chair of the Council's Trade Practices Committee, told the
committee that:
Whether or not a particular term is unfair should always be
dependent upon the assessment of that term in its context and take into account
all relevant circumstances. Other regulators have taken the view that a term
may be fair in one context but unfair in another. An approach which requires
assessment of all the relevant circumstances in every case would maintain the
flexibility required for efficient and effective regulation of consumer
contracts. Such an approach would be consistent with comparable regimes and
does not risk the unintended consequences that may occur, particularly given no
economic cost-benefit analysis appears to have been done.[4]
7.6
In this context, the Law Council defended the use of a unilateral
variation clause noting that while it may 'on its face' seem unfair, suppliers
clearly require some flexibility to vary the terms of their arrangement 'from
time to time'.[5]
It noted that suppliers cannot reasonably be expected to separately negotiate
and agree to variations with millions of customers. Nor would customers expect
this to be the case.
7.7
The Law Council cited the Victorian experience to support its argument
that an ability to ban terms outright is not needed under the national unfair
contract terms law. While there is provision in the Victorian Fair Trading
Act to proscribe and prohibit certain terms, no term has been proscribed in
the 6 years that the Act has operated.[6]
7.8
ABACUS has also argued that whether or not a term is unfair should be
judged on all the relevant circumstances of each case. In this context, it
feared that despite their efforts in trying to ensure that their standard-form
contracts are fair, it will not know until the contract has been signed as
subsequent proceedings taken against the term.[7]
7.9
Various submitters also expressed concern at what they saw as the bill's
inadequate basis for consulting with stakeholders in prohibiting a term. The
Law Council, notably, argued that the process by which the government proposes
to ban terms outright is:
...devoid of any independent or stakeholder consultation and
although the Minister has stated that the process will be subject to the
Government's "best practice regulation" processes and an
intergovernmental voting process, these alone do not amount to adequate
safeguards for what is a very important power, and one that has the potential
to have widespread detrimental effects if exercised incorrectly.[8]
7.10
Mr Poddar elaborated on these concerns to the committee:
...there will be government processes and, as part of COAG, the
government and the states will consider very carefully as to what provisions
are prohibited, but we have seen no other guidance. We have expressed concerns
that there is no economic analysis. There have been no underpinnings to show
that a government body’s decreeing that provisions are inappropriate has been
subject to any cost-weighting or benefit economic analysis. We also believe
that that is inappropriate because that does not go through parliament to
actually ban those types of provisions.[9]
7.11
Similarly, FOXTEL has observed the process of subjecting a term to a
general test of unfairness (subsection 3(1)) before prescribing a term as
prohibited 'is not clearly drafted in the ACL'. It noted that Victoria's Fair
Trading Act 1999 provides for the Governor in Council to make regulations
for or with respect to prescribing unfair terms which are unfair terms for the
purposes of Part 2B of the Act. FOXTEL recommended that the regulation
making power should 'mirror the approach' taken in Victoria.[10]
7.12
Colonial First State Property Management has argued that the (draft)
bill give a court 'extraordinarily wide discretion' to determine what an unfair
contract is or when a contract is not a standard form contract.[11]
7.13
Mr Ian Tonking SC noted in his submission that there is nothing in the
exposure draft of the bill which provides any criteria for the proscription of
a prohibited term. He drew the committee's attention to the clause in
subsection 6(3) of the bill that 'a person must not apply or rely on, or
purport to apply or rely on, a prohibited term', and the EM's definition of the
expression 'rely on' as including 'asserting the existence of a right
conferred, or purportedly conferred' by a term.[12]
He argued that:
It is clear from this definition that the prohibition in s.6
would prevent a person from disputing in a court of law or elsewhere whether a
particular term was a prohibited term and whether the contract in which it was
included was a standard form contract...
One of the consequences of s.6(3) therefore is that, once
another party to at [sic] contract has made an assertion that a particular term
of the contract has the characteristic of being a prohibited term of a standard
form contract, regardless of whether that assertion is made genuinely or has
any proper foundation, the other party will be prohibited, under pain of
exposure to a pecuniary penalty (and presumably an injunction if applied for),
from asserting the contrary, whether in negotiations or in a court of law. A further
consequence will be that any legal representative of the party against whom
such an assertion is made will be exposed to the possibility of a pecuniary
penalty if that person is knowingly involved in asserting the existence of a
right conferred, or purportedly conferred, under the contested term, even if
appearing in court!
It surely was not the intention to alter the rights of
parties to a contract to this extent, namely that, by mere assertion, one party
can achieve the result that a particular term of a contract is automatically
rendered void because the other party risks exposure to a civil penalty if that
party seeks to contest the assertion.[13]
7.14
The BCA focused its criticism on the compliance costs: every time a new
term is deemed 'unfair', businesses will need to review all their standard-form
contractual agreements and prepare new documents.[14]
Contract terms that are exempt from the bill's provisions
7.15
Section 5 of the bill exempts terms from the unfair contract term
provisions in section 2 if they define the subject matter of the contract,
establish the upfront price payable under the consumer contract or are required
or expressly permitted by a law of the Commonwealth, State or Territory.[15]
7.16
Terms that define the main subject matter or upfront price are often
referred to as the 'core terms' of the contract.[16]
The Consumer Action Law Centre has noted that the exclusion for core terms is
based on the rationale that consumers are much more likely to be 'aware of,
consider and negotiate' over these terms than other contract terms.
7.17
However, the Law Council has argued that the bill's exclusion of the
upfront price may lead to unintended consequences. As Ms Bodger from the
Council's Trade Practices Committee explained:
‘Up-front price’ does not include the payment of any charge
or fee which is contingent on an event. For example, it would not pick up an
early termination charge. The issue is that a lot of those sorts of charges go
into the whole cost modelling for businesses. If they are carved out, it will
lead to uncertainty as to whether that charge would be able to be relied upon
and therefore whether or not businesses need to redo their pricing models for
certain goods and services and bring all the prices up front. It is also
thought that if these prices are made very clear, up front, fully disclosed,
clearly disclosed, transparent, the ability for a consumer to argue that it was
unfair when they had knowledge of it may not be the right balance between
supplier and consumer.[17]
'Excluded assessment' and 'excluded term'
constructions—subsection 5(1)
7.18
The Consumer Action Law Centre has expressed concern that while section
5 is intended to be based on the similar provision in the 1999 UK regulations,
it is drafted differently. Whereas the UK regulations provide that the
assessment of fairness of a term 'shall not relate to' the subject matter or
price, the bill states that:
Section 2 does not apply to a term of a contract to the
extent that, but only to the extent that, the term: ... (b) sets the upfront
price payable under the contract.
7.19
The Centre explains in its submission that the UK provisions only exclude
core terms from assessment for unfairness to the extent that the unfairness is
alleged to relate to the main subject matter or upfront price. They are
otherwise assessable for unfairness. This is called the 'excluded assessment'
construction of the provisions. Conversely, the bill's approach entirely
excludes core terms from any assessment for unfairness, regardless of whether
the unfairness is alleged to arise from a different aspect of the terms. This
approach is known as the 'excluded term' construction.[18]
7.20
The Centre recognises that the bill's phrase 'only to the extent that'
may mean that the bill follows an 'excluded assessment' approach. However:
...because it is drafted differently to the UK provision this
is less clear, and will probably only be determined following a superior court
decision on the issue.[19]
7.21
The Centre argued that it needs to be made clear that section 5 only
excludes terms from the unfairness test to the extent that any unfairness
relates to the main subject matter or the upfront price. These terms are void
for other types of unfairness.
Views on other aspects of
Section 5
7.22
The Consumer Action Law Centre is strongly supportive of subsection 5(2)
of the bill. This subsection states that the 'upfront price' payable under a
consumer contract is disclosed at or before the time the contract is entered
into 'but does not include any other consideration that is contingent on the
occurrence or non-occurrence of a particular event'. It noted in its submission
that it had concerns that exempting the core term of 'upfront price' would risk
creating a loophole for suppliers to avoid scrutiny by imposing additional fees
and charges. The Centre is satisfied that this loophole has been closed.
7.23
GE has argued that the exemption on terms which establish the upfront
price payable is not sufficiently drafted. It claims that 'clear upfront
disclosure, and transparency to the consumer, of the price of products or
services under an agreement, should be sufficient to indicate that a price is
not unfair'. In other words, in these circumstances, the consumer would enter
(or not enter) into an agreement with a clear understanding of the effect of
the relevant term. GE argues it is unjustifiable for these prices to be
reviewed at a later stage as 'unfair'.[20]
7.24
GE has also criticised the bill's exemption of 'terms required or
expressly permitted by law' for being too narrow. It argued that the exemption
should be broadened to exempt terms 'where it is clear that such terms are
consistent with, and contemplated by, a law or laws'.[21]
7.25
While strongly supporting the exclusions in section 5 of the bill,
ABACUS has argued that the exclusion of price terms in subsection 5(1b) should
be broadened to exclude all price terms. It noted that financial institutions
need to set and re-set fees on a regular basis and feared that 'without a carve
out for price terms a major fee challenging industry will develop'.[22]
7.26
The Investment and Financial Services Association (IFSA) is concerned
that the bill applies to standard form contracts for financial products and
financial services. It argued that the concepts in the bill will create overlap
with other Acts to which the sector is bound and will thereby result in greater
uncertainty within the sector. Accordingly, IFSA recommended that:
-
clause 5 of the
exposure draft which excludes certain terms in a standard form contract should
be expanded beyond the use of certain terms to exclude specified types of documents.
They would include, but should not be limited to, a standard form document:
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that is required by law to be provided to a consumer/investor in
relation to the provision of a financial product or service; and
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the content of which is prescribed by law; and
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that is subject to regulatory supervision under the relevant law; and
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in respect of which the consumer/investor has statutory right of
redress.
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