From 12 November, 2016 the Australian Consumer Law will provide that a term of a small business contract is void if:
- the term is unfair; and
- the contract is a standard form contract.
The Recruiters Casebook has been exploring each of these key expressions as we prepare for the 12 November reform commencement date.
So far, we’ve looked at the definition of small business contract. A contract is a small business contract if it meets both a headcount requirement and an upfront price requirement.
We have already considered the headcount requirement (fewer than 20 employee) and the upfront price requirement (not more than $300,000 or $1 million if the duration of the contract is more than 12 months).
In our last article, we identified some recruitment, on-hire and contracting agency contracts that you might regularly use, which might be standard form contracts and took a closer look at how a court would decide if they actually are standard form contracts.
Standard form contracts that are often used by recruitment, on-hire and contacting agencies could be:
- terms of business under which you supply services to clients;
- terms of business under which you acquire goods, services or property interests (e.g. a commercial lease) from third parties;
- terms of business with your independent contractors – because they’re contracts for services;
- candidate or work seeker registration agreements – because you are supplying agency or representation services – even though the candidates or work seekers might not actually be engaged or might be between assignments.
In this article you will learn how to recognise terms of standard form contracts that might be unfair and how a court would decide if they actually were unfair.
14 examples of unfair terms
Section 25 of the Australian Consumer Law gives 14 examples of terms that might be unfair.
We say might be unfair, because they are only examples. A lot will depend on some essential tests that we will discuss shortly. But for the moment, have a look at the 14 examples and think about whether your standard form contracts contain any of the following:
- a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
- a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
- a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
- a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
- a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
- a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
- a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
- a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
- a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
- a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
- a term that limits, or has the effect of limiting, one party’s right to sue another party;
- a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
- a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract;
- a term of a kind, or a term that has an effect of a kind, prescribed by the regulations. (You won’t find any of these because at the moment none are prescribed).
Most traditionally (or competitively) drafted terms of business are likely to have one or more of those terms. They are designed to tilt the balance in favour of one party over another as though contracting were a sort of contest or the other party was a potential crook. You might consider that to be a good thing.
Then again, if you are looking to develop a more collaborative business relationship, you might rethink some of these terms because what you put into your terms of business says a lot about the type of relationship you will get out of them.
So, assuming that your standard for contracts might have a few of these terms, how would a court decide if they were actually unfair and therefore void?
3 essential conditions
The 14 examples we just looked at are not a complete list of every type of unfair term. There are likely to be many others. But for any term to be an unfair term, three conditions must be met.
- the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract; AND
- the term is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term. Note: You have the reverse onus of proof here – i.e. it will be presumed that the term is not reasonably necessary unless you prove otherwise; AND
- the term would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The UK House of Lords has held in relation to similar provisions that
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.
Australian Courts have taken a less intuitive approach. For the moment, we only have consumer cases to go by – i.e. no small business contracts yet. But some trends are starting to emerge.
In one case, the Federal Court had to consider a term in standard form airline contract that required ticket purchasers, who wished to substitute a new passenger, to pay an administrative fee and to pay the difference between the fare originally purchased and the fare available on the date of change. VCAT thought this was unfair. However, the Federal Court was not so sure and sent the matter back to VCAT for reconsideration saying:
…a term in a consumer contract is to be regarded as unfair if it causes a significant imbalance in the parties’ rights and obligations arising under the contract. It is apparent that the significant imbalance must be to the detriment of the consumer. And it is apparent that in determining whether a term causes a significant imbalance in the parties’ rights and obligations one must have regard to all the circumstances.
So Australian Courts are likely to adopt an objective approach, looking at all the circumstances of the case when deciding if suspect terms in standard form small business contracts are unfair.
The Federal Court got to have another look at the requirement last year in a case where it was alleged that doctors had been prescribing medications and treatment for male sexual dysfunction over the telephone. Understandably, perhaps, they had a NO REFUND term and a question arose about whether it was unfair.
Several other features of the case were important.
- Patients were bound to pay for the treatments for a set period of time, regardless of whether they wished to continue with them, with payment either made upfront or by way of instalments;
- If the treatments did not successfully treat the patient’s condition, or the patient experienced adverse side effects, then pursuant to the terms of its SATISFACTION GUARANTEE, the doctors refused to give a refund or to cancel the contract unless the patient tried at least one option from each of the available delivery mechanisms for which the patient was not contraindicated (including injections into the base of the penis). After that, the doctors would deduct the cost of the medication supplied and a 15% administration fee from any refund given; and
- Patients who had telephone consultations were only provided with a copy of the terms of the SATISFACTION GUARANTEE after they had already agreed to purchase the treatments.
In holding that the term was unfair, North J said:
When regard is had to the contract as a whole, the unfairness of the term becomes incontrovertible. The contract provided for the supply of medications which were not regarded by the medical profession as the usual forms of treatment and there was no cogent evidence that they were effective to treat ED or PE. In those circumstances it was unfair to hold the patient to the agreement on penalty of payment of fees, the method of calculation of which was unknown, imposed in order to cancel the treatment.
In Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited (2015) the Federal Court had to consider a term that required a consumer (unless the consumer opted-out) to pay money to a supplier by installments for goods that might never be ordered without the supplier offering any financial benefit, such as a discount on the goods or any interest, if the money was refunded.
In holding that the term was unfair, it seems that the Court developed a sort of “unilateral benefit” test as an indicator of the presence of unfair terms. It said:
The term gave a right to Chrisco to withdraw money from the consumer’s account, after the conclusion of the consumer’s order, without any substantial corresponding right to the consumer. A right is the correlative of a duty. But what duty is imposed upon Chrisco which corresponds to the consumer’s duty to permit Chrisco to withdraw money from his or her account? (My emphasis).
But that test might now be under some doubt after two High Court judges considered the significant imbalance issue in the course of their reasons in the recent decision of Paciocco v Australia and New Zealand Banking Group Limited (The ANZ Bank Fees Case).
In the ANZ Bank Fees Case, late payment fees charged by the bank were held not to be unfair even although there was some question about the proportionality of their amount.
Justice Gageler said:
 …the customers argue that the contractual stipulation for charging the late payment fee caused a significant imbalance in the rights and obligations of ANZ and of Mr Paciocco under the credit card contracts, to the detriment of Mr Paciocco as the consumer. That was because ANZ was put “in a situation where it [could] profit from breaches of contract by the consumer without any quid pro quo”. The significance of that imbalance, they argue, was “demonstrated by the lack of any meaningful relationship between the amount of the late payment fee and the reasonably foreseeable loss which would result to [ANZ] from late payment”.
 One answer to the argument is that its minor premise has not been established: there was a meaningful relationship between the amount of the late payment fee and the accrual of costs to ANZ from the occurrence of late payment events and that those costs were reasonably foreseeable at the time of contracting. The evidence of Mr Inglis showed that relationship. The more complete answer to the argument is that its major premise is flawed. To demonstrate that the stipulation for payment put ANZ in a situation where it might profit from breaches of contract by a credit card customer without the customer in breach acquiring something in return would not alone be sufficient to allow it to be concluded that the stipulation caused a significant imbalance in the parties’ rights and obligations arising under the contract. Even if the stipulation could be characterised as a matter of ordinary language as “penalising the consumer but not the supplier for a breach or termination of the contract”, that was only one factor amongst many to be taken into account. (My emphasis).
We might draw from this that a “meaningful relationship” between the charge imposed and the Bank’s interest sought to be protected did not necessarily have to be “proportional” if it was reasonably foreseeable – i.e. it was an expense that the Bank might have incurred regardless of whether it did so or not.
Justice Keane said:
 The Full Court held that the late payment fees were neither “unjust” nor “unfair”. Having already considered all of the circumstances at the time of Mr Paciocco’s entry into the credit card contracts, and the effects of the terms of those contracts, the reasons of the Full Court in this respect were unsurprisingly brief. Allsop CJ said:
“Considering the terms of [the equivalent provision] of the [Fair Trading Act], at the time of entry into the arrangements, did the provisions in question cause an imbalance in the parties’ rights and obligations to the detriment of the consumer? It is difficult to see why this would be so by reference to the matters in [the Act] or otherwise. The provisions were clearly disclosed. In most instances, the fees could be avoided. No trickery took place. Although set by the bank in contracts of adhesion, the contracts were terminable at the will of the customer; and the fee could be avoided by the conduct of the customer that was not unreasonable – keeping to her or his contractual limits.”
His Honour thereafter approached the matter, not so much as a matter of business or legal intuition, as one of characterisation of the suspect term and of its operation:
 …The requirement of [the Act] that the term be “to the detriment of the consumer” was not satisfied because the late payment fee was not a detriment to Mr Paciocco. As has been seen, it was an expense which he chose to risk as more convenient to him than paying his account on time.
What these cases are demonstrating is that Australian courts are unlikely to treat the question of unfairness as a matter of idiosyncratic justice, adopting a sort of “gut feel” or “fair go all round” approach. The approach will be more technical and involve the application of more sophisticated legal tests.That seems so even though there may be some room for the application of business intuition or normative standards as described by Alsopp CJ when the Bank Fees Case was before the Full Court of the Federal Court.
Trickery and sharp practice impede commerce by decreasing trust and increasing risk. Good faith and fair dealing promote commerce by supporting the central conception and basal foundation of commerce: a requisite degree of trust. Business people understand these things.
Given the current state of the law (and standard small business contracts or terms of business for that matter), it looks like there are going to be a lot of claims after 12 November 2016 that terms in small business contracts are unfair. Those claims will consume considerable time, productivity and money. Some of them will be successful. Many of them will not. But they will delay payments, impede contractual performance, and damage important business relationships.
It will be the mere presence of suspect terms in your standard form contracts (terms of business), rather than any actual unfairness, that will attract these claims.
Up until now, you might have got away with unfair terms on the basis that “at least they gave you something to argue about if push ever came to shove”. From 12 November 2016 those arguments will become much weaker. The reforms will tip the balance against you; and you may find that you will be involved in arguments that you would rather not have – arguments that you will be less likely to win and which may result in costs orders being made against you.
The obvious measure to take, therefore, is to have your standard form contracts (terms of business) reviewed by your lawyers and remove suspect terms that may be unfair; that may be unnecessary and may not really describe the sort of relationship that you want. The ACCC has been saying something like this for months.
There is still time … if you act now!
Andrew C. Wood
 Director General of Fair Trading v First National Bank plc  1 AC 481 at 494;  UKHL 52.
 Jetstar Airways Pty Ltd v Free  VSC 539.
 At para .
 Australian Competition and Consumer Commission v ACN 117 372 915 Pty Limited (in liq) (formerly Advanced Medical Institute Pty Limited)  FCA 368.
 At para .
  FCA 1204.
 At para .
  HCA 28.
 Paciocco v Australia and New Zealand Banking Group Limited  FCAFC 50.