The Australian unfair contract terms law: the rise of substantive unfairness as a ground for review of standard form consumer contracts.

• Jurisdiction: Australia
• Author: Paterson, Jeannie Marie
• Date: 01 December 2009

[In 2010, the Commonwealth Parliament passed legislation implementing a national consumer law, the Australian Consumer Law ('ACL'). These reforms include a regime regulating unfair terms in standard form consumer contracts, the unfair contract terms law ('UCTL'). This piece outlines the important aspects of the UCTL, including the test for determining whether a term is unfair, the examples provided in the legislation of the kind of terms that may be urfair, and the matters which the court must take into account in determining whether a term is unfair. The UCTL, along with similar provisions in the United Kingdom and Victoria, is then examined in light of both classical contract theory and behavioural economics, with attention given to how these regimes deal with both substantive and procedural fairness. Drawing on behavioural economics, this piece argues that, as consumers' ability to make rational decisions when presented with complex problems is significantly limited, measures designed to ensure procedural fairness, for example through requirements of transparency and clarity in contract terms, are not sufficient to protect consumers entering into standard form contracts. It is argued that regulation of the substantive fairness of contract terms, as envisaged under the UCTL, is necessary for an effective consumer protection regime in Australia.]

CONTENTS I Introduction II Classical Contract Law and Procedural and Substantive Fairness III The Scope of the UCTL A Standard Form Consumer Contracts B Excluded Terms C Determining whether a Term in a Standard Form Contract Is Unfair 1 Does the Term Cause a Significant Imbalance in the Parties' Rights and Obligations under the Contract? 2 Is the Term Reasonably Necessary in Order to Protect the Legitimate Interests of the Party Who Would Be Advantaged by the Term? 3 Would the Term Cause Detriment (whether Financial or Otherwise) to a Party if It Were to Be Applied or Relied on D Examples of Unfair Terms in Standard Form Contracts E Matters the Court Must Take into Account in Determining whether a Term Is Unfair 1 The Contract as a Whole 2 Transparency 3 Such Matters as the Court May Consider Relevant IV The Relationship between Substantive Unfairness, Transparency and Notice V Conclusion I INTRODUCTION

In the first part of 2010, the Commonwealth Parliament passed a package of reforms implementing a comprehensive national consumer law, the Australian Consumer Law ('ACL'). (1) The ACL will be contained in sch 2 of the Trade Practices Act 1974 (Cth) ('TPA'), itself to be renamed the Competition and Consumer Act 2010 (Cth) ('CCA'). (2) The states and territories have agreed to introduce and enact mirror legislation applying the ACL as part of their respective laws. (3) Part 2-3 of the ACL regulates unfair terms in standard form consumer contracts. (4) The unfair contract terms law ('UCTL') is based on recommendations of the Productivity Commission in its 2007 Review of Australia's Consumer Policy Framework. (5) The Productivity Commission recognised that some prices for contracting parties could rise in the short term as a result of regulating unfair contract terms but considered that the benefits of a fairer market outweighed these costs. (6) Similar regimes have already been in force in the United Kingdom and in Victoria. In the United Kingdom, the Unfair Terms in Consumer Contracts Regulations 1999 (UK) ('UTCCR') implemented the European Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts (7) to regulate the use of unfair terms in consumer contracts. (8) in Victoria, unfair terms in consumer contracts were regulated under part 2B of the Fair Trading Act 1999 (Vic) ('FTA'), now amended to mirror the UCTL. (9)

Under the UCTL, a term in a standard form consumer contract will be void if the term is unfair. (10) A term of a consumer contract will be unfair if 'it would cause a significant imbalance in the parties' rights and obligations arising under the contract', 'it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term', and 'it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.' (11) In determining whether a term of a consumer contract is unfair, a court 'may take into account such matters as it thinks relevant' and must take into account 'the extent to which the term is transparent' and 'the contract as a whole.' (12) The UCTL provisions regulating unfair contract terms do not affect terms that define 'the main subject matter of the contract', set 'the upfront price payable under the contract' or are 'required, or expressly permitted, by a law of the Commonwealth, a State or a Territory'. (13) Although the ACL unfair contract term regime does not apply to contracts that are financial products or contracts for the supply or possible supply of services that are financial services, (14) equivalent provisions regulating unfair terms in these contracts have been introduced into the Australian Securities and Investments Commission Act 2001 (Cth). (15)

The test for unfairness under the UCTL focuses on the substance of the terms (substantive unfairness) rather than flaws in the process through which the contract was made (procedural unfairness). (16) However, the interaction between substantive and procedural concerns under the UCTL is not entirely clear. In particular, a question remains as to whether terms may be insulated from a claim of substantive unfairness by procedural measures aimed at ensuring that consumers have notice of the terms of standard form contracts and that those terms are transparent. An approach influenced by classical contract theory might suggest that such measures should preclude any need to inquire into the substantive fairness of the terms of a contract. This piece argues that the UCTL should be used to prompt a more nuanced understanding in consumer law in particular, and contract law in general, of the behaviour of contracting parties than that inherent in classical contract theory. Insights from behavioural economics suggest that consumers typically base their contracting decisions on a small range of salient features and are limited in their ability accurately to assess the risks inherent in a transaction. An understanding of these limitations on the decision-making processes of consumers suggests that measures focused on procedural fairness, such as requirements for transparency in and notice of the terms of standard form consumer contracts, are not sufficient to ensure that those terms are fair.

This piece has three substantive parts. Part II outlines the influence of classical contract theory on the modern law of contract and its approach to issues of substantive fairness. Part III discusses the scope of the UCTL. Part IV discusses the relationship between the test of unfair terms in the UCTL and the role of transparency, notice and other measures aimed at providing information to consumers about the terms of their contracts. In discussing the UCTL, the party against whom a term in a standard form contract is alleged to operate unfairly is referred to as the 'consumer' and the party who is advantaged by the term is referred to as the 'trader'.

II CLASSICAL CONTRACT LAW AND PROCEDURAL AND SUBSTANTIVE FAIRNESS

The threshold test for an unfair term in a standard form consumer contract under the UCTL focuses on the substantive fairness of the term. The test is concerned with the effect of the term--whether it is imbalanced, is reasonably necessary to protect the legitimate interests of the trader and would cause detriment to the consumer (17)--not the process through which the contract has been made. In addressing the substantive fairness of the terms of. standard form consumer contracts, the UCTL presents a significant departure from the approach taken by the common law of contract. Courts do not traditionally invalidate contract terms purely on the ground that they are unfair. (18) Thus, in Biotechnology Australia Pry Ltd v Pace, Kirby P explained that:

the law of contract which underpins the economy, does not, even today, operate uniformly upon a principle of fairness. It is the essence of entrepreneurship that parties will sometimes act with selfishness. That motivation may or may not produce fairness to the other party. The law may legitimately insist upon honesty of dealings. However, I doubt that, statute or special cases apart, it does or should enforce a regime of fairness upon the multitude of economic transactions governed by the law of contract. (19) This refusal by the common law courts to acknowledge substantive unfairness as a ground for intervention in otherwise validly formed contracts reflects the influence on modern contract law of the classical theory of contract of the 19th century. Classical contract theory emphasises the importance of the principle of 'freedom of contract'. (20) Under this approach, freedom of contract promotes individual autonomy by allowing contracting parties to make their own choices about the types of contract they will enter into and the terms on which they will contract. This freedom is fundamental to the individualistic ideals of liberal political theory (21) and free-market economic theory (22) that influenced classical contract theory.

The emphasis placed on the principle of freedom of contract by classical contract theory requires that contractual obligations be voluntarily assumed by contracting parties. (23) The concept of voluntariness, in turn, requires certain preconditions be met before parties can consent to the obligations they assume in entering into a contract. For a party's decision to enter into a contract to be voluntary, the party must not have made his or her decision under conditions of pressure and must have been informed about the consequences of the decision. (24) As Michael Trebilcock has shown, a pure...