Contract Hampered by Unfair Term

Edelman J’s decision in ACCC v Chrisco Hampers [2015] FCA 1204 provides guidance on how courts will approach the unfair contract term provsions of the ACL.

Australian Competition and Consumer Commission v Chrisco Hampers Australia Ltd [2015] FCA 1204

Last Christmas I gave you my heart, but the very next day you gave it away.

So sang George Michael. He might well have sung:

Last Christmas you gave me a hamper, but the very next day you direct debited again.

about Edelman J’s decision in ACCC v Chrisco Hampers Australia Ltd [1] — although it doesn’t have the same ring about it.

Edelman J’s decision that an unfair automatic direct debit rollover provision in a pro forma contract was unfair is one of the few decided cases on unfair contract terms under the ACL.[2] On 12 November 2016 The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) came into effect, extending the scope of the ACL’s unfair contract provisions from consumers to small businesses of 20 employees or less.

Purpose of the Reform

The rationale for the reforms was a perceived lacuna in the ACL. Existing provisions prohibited unconscionable conduct surrounding the formation of an unfair contract, but not substantive unfair terms.

Parties are ordinarily held to agreements freely made. The Explanatory Memorandum to the amendments cited The Cult of the Market — Economic Fundamentalism and its Discontents to support the proposition that disparities in bargaining power can mean a party agreeing to an adhesion contract is not really free to negotiate, let alone contest the terms:

The ideology of voluntariness has been seen to provide the more powerful party to a contract a freedom of manipulation and motivation, a freedom from any onus of articulation and a freedom from any other legal duties that cannot be fitted under the rubric of contract as promise. Consequently, there has been a growing reluctance to concede to big business the right to dictate contract terms to less powerful parties — particularly consumers — through standard-form contracts. Equally, there is a problem of deciding to what extent deception and concealment of information in contractual negotiations are also to be regarded as legitimate.[3]

Unfairness

To be unfair a term must:

1. cause a significant imbalance in the parties’ rights and obligations;
2. not be reasonably necessary to protect the legitimate interests of the advantaged party; and
3. cause financial or other detriment to the business affected if it were applied or relied on.[4]

The onus is on the applicant to prove the elements of imbalance and detriment, and on the respondent to prove the term is reasonably necessary.

Chrisco’s standard form contracts with its customers contained a “HeadStart” term that required customers to allow Chrisco to continue withdrawing funds from the customer’s bank account for next Christmas’s hamper after the customer had fully paid for last Christmas’s hamper, unless the customer opted out.

Edelman J found that the term caused a significant imbalance in the parties’ rights and obligations, adopting Lord Bingham’s approach in Director General of Fair Trading v First National Bank plc to significant imbalance:

The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty. [5]

The “benefit” conferred on customers in paying lesser instalments over a longer period was negligible given that Chrisco accumulated interest on the payments and there was no corresponding discount on next year’s Christmas hamper.

Transparency

The court is required to consider the transparency of the particular term. Lack of transparency may be a strong indicator of significant imbalance.[6] A term is transparent if it is:

• expressed in reasonably plain language;
• legible;
• presented clearly; and
• readily available to any party affected by the term.

In Director General of Fair Trading v First National Bank plc Lord Bingham held:

Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer.[8]

Incomprehensible legalese buried in fine print will most probably be considered opaque. Nonetheless, if a term is opaque, it is not necessarily unfair. Conversely if a term is transparent, it is not necessarily fair.[7] The HeadStart term was not transparent because it did not identify the amount to be debited nor how it would be calculated, and the term was buried in a densely packed page of small print terms and conditions.

Comment

The amendments increase the upfront price threshold for a “small business contract” to $300,000 for contracts shorter than a year, and to $1,000,000 for contracts longer than a year. It would be prudent for parties entering into contracts with small businesses to refrain from engaging in “take it or leave it” negotiations about one sided pro forma contracts, and to draft clear, legible, readily accessible terms in light of the amendments. Small businesses now have greater protection under the ACL, and more bargaining power in negotiating the removal of unfair terms that overreach the legitimate interests of the advantaged party.

[1] [2015] FCA 1204.

[2] See also NRM Corporation Pty Ltd v Australian Competition and Consumer Commission [2016] FCAFC 98 [187] –[203] (Flick, Murphy and Griffiths JJ). Cf: Jetstar Airways Pty Ltd v Free [2008] VSC 539 [112] (Cavanough J); Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35 [331] (Gordon J).

[3] Lee Boldeman, The Cult of the Market — Economic Fundamentalism and its Discontents (ANU Press, 2007), 254-255 (footnote omitted). Explanatory Memorandum, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth), [3.76].

[4] Section 24(1) of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth) (the ACL)).

[5] [2001] UKHL 52; [2002] 1 AC 481, 494 [17].

[6] Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 (Cth), [5.38].

[7] Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 (Cth), [5.39].

[8] At 494 [17]. Note the Unfair Terms in Consumer Contracts Regulations 1994 (UK) Lord Bingham considered are not identical to the unfair contract provisions of the ACL.