Australian Consumer Law: defects, warranties and unfair contracts basil 120324

ACL: Defects, Warranties and Unfair Contracts
Steven Brown

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Australian Consumer Law: Defects, Warranties and
Unfair Contracts
Paper written by Steven Brown, Etienne Lawyers, B.Ec, LL.B, (Sydney), M.
App. Fin (Macquarie), FAICD, Accredited Business Law Specialist, AIMM,
FPIAA.
BASIL CLE Conference on Saturday 24 March 2012 at the Sebel Hotel,
Parramatta

Introduction
This paper is about recent changes to Trade Practices Act 1974 (Cth) (“TPA”), by the
Competition and Consumer Act 2010 (Cth) and the introduction of the Australian
Consumer Law (the “ACL”) and my comments on the likely impact they will have on
consumer transactions in Australia.

Recent Changes
The changes we will look at are the amendments to Act made by the Trade Practices
Amendment (Australian Consumer Law) Act 2010 (“ACL.

Defects and Warranty Changes under the Competition and Consumer
Act 2010
The New Consumer Laws:

1. What are the differences between Then and Now?
2. contractual warranties cf statutory guarantee

3. Who is a consumer? Has the Law changed?
4. Guarantees and Auctions.
One of the highest profile changes introduced by the ACL is the new system of
statutory guarantees which replace the conditions and warranties previously implied
into consumer contracts by the Trade Practices Act 1974 (Cth) (TPA) and various
state laws.

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Rational for the change

In July 2009, the Commonwealth Consumer Affairs Advisory Council (CCAAC) noted
that the crucial failing of the system of implied terms in the TPA had long been
identified:
It is clear from studies over the past two decades that the key problem with
the current statutory implied terms regime is a lack of awareness by
consumers, retailers and, to a lesser extent, manufacturers of their legislated
rights and responsibilities. [Consumer rights: Statutory implied conditions and
warranties Issues paper, Commonwealth Consumer Affairs Advisory Council,
July 2009, Page 7]

The TPA and the corresponding state legislation operated by implying conditions and
warranties into the contract for purchase of goods or services by a consumer. These
implied conditions used terms, such as “merchantable quality” and “fitness for
purpose”, drawn from 19th-century English mercantile law. Terms familiar and known
to lawyer but complex and confronting so the legislature thought for consumers.
[Example to show complexity of these things.] Carpet Call v Chan
The TPA regime did not provide express remedies for consumers. Consumers, who
wanted to enforce their rights, had to do so under the law of contract. Section 75A of
the TPA effectively gave consumers the right to return some products for a refund but
did not use the word “refund”, referring instead to “purported rescission” and the right
to “recover from the corporation, as a debt, the amount or value of any
consideration”. This was not language that was easily comprehended by most
consumers.
The legislature concluded that it is not surprising that consumers did not understand
their rights.
The Regulation Impact Statement prepared for the Ministerial Council on Consumer
Affairs (MCCA) [Regulation Impact Statement: The Australian Consumer Law – A
national consumer guarantees law, December 2009, also considered the report

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dated 30 October 2009 prepared by the Commonwealth Consumer Affairs Advisory
Council (CCAAC) for the Minister for Competition Policy and Consumer Affairs,
Consumer rights: Reforming statutory implied conditions and warranties (CCACC
Report) and concluded that there were so many deficiencies in the previous system
that better consumer education would not fix the problems. So, while the previous
TPA provisions formed the base of the majority of the ACL [This was the
recommendation of the Productivity Commission. See Productivity Commission
(2008) Vol. II, p.62.], the MCCA recommended that the system of implied contractual
warranties and conditions be replaced with a system of clearly expressed statutory
guarantees,

coupled

with

express

remedies.

The

MCCA

accepted

this

recommendation in December 2009 and consumer guarantees were born [see: Joint
Communiqué, MCCA Meeting, 4 December 2009].

Lessons from New Zealand
The consumer guarantee regime in the ACL is largely modelled on the provisions in
New Zealand’s Consumer Guarantees Act 1993 (NZ) [See: A new approach to
Consumer Policy Strategy 2010-2012, MCCA, 4 December 2009]. Useful insights as
to how the ACL provisions are likely to be applied can therefore be gained from New
Zealand case law.

When do the statutory guarantees apply?
The new consumer guarantees in the ACL apply to ‘consumer’ transactions. The
definition of a consumer transaction is largely unchanged from the TPA. Section 3 of
the ACL defines a consumer to be:
“A person (which can include a corporation) is taken to acquire goods or services as
a consumer if:
(a)

the amount payable does not exceed $40,000;

(b)

the goods or services are of a kind ordinarily acquired for personal, domestic
or household use or consumption; or

(c)

in the case of goods, those goods consisted of a vehicle or trailer acquired for
use principally in the transport of goods on public roads,[Section 3(1), ACL]

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and, in the case of goods, the goods are not acquired for re-supply or to be used up
or transformed in a manufacturing process.[Section 3(2), ACL]

What are the guarantees?
The ACL sets out nine guarantees that apply to supplies of goods, and three that
apply to services. Most of these closely follow the language of the warranties that
were previously implied by the TPA.
Sections 51 to 53 of the ACL provide guarantees that the supplier of goods has the
right to sell the goods, that the purchaser will receive undisturbed possession, and
that the goods are free from undisclosed securities.
Sections 54 to 57 contain guarantees as to the quality of the goods supplied. These
are that the goods must be of acceptable quality, fit for any disclosed purpose, and
match descriptions and/or samples previously provided. There is also a guarantee of
availability of repairs and spare parts (s 58). Finally, s 59 provides that any express
warranty given by a manufacturer will also have effect as a statutory consumer
guarantee.

The guarantees applying in respect of consumer supplies of services are that the
services will be supplied with due care and skill (s 60), that the services will be fit for
any disclosed purpose (s 61) and that, if no specific time for provision of the services
is agreed, they will be supplied within a reasonable time (s 62).

Guarantee of acceptable quality
The guarantee of acceptable quality replaces the previous implied condition that
goods would be of merchantable quality.[ Sections 71 and 74D, Trade Practices
Act] As this is the guarantee likely to be most often relied upon by consumers when
they have a faulty product, it merits particular consideration.

Section 54(2) of the ACL provides that:

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Goods are of acceptable quality if they are as:
(a) fit for all the purposes for which goods of that kind are commonly supplied; and
(b) acceptable in appearance and finish; and
(c) free from defects; and
(d) safe; and
(e) durable;
as a reasonable consumer fully acquainted with the state and condition of
the goods (including any hidden defects of the goods) would regard as acceptable
having regards to the matters in subsection (3).

Subsection (3) then lists five matters to be taken into account in determining what is
“acceptable”:
1. the nature of the goods;
2. the price of the goods;
3. any statements made on packaging;
4. representations made about the goods by the supplier or manufacturer; and
5. any other relevant circumstances.
Reasonable expectations of an inexpensive product might be quite different from
what would be reasonable to expect of an expensive product of the same kind.

The inclusion of an express requirement that goods be ‘durable’ is new. Previously,
if goods failed early, it was necessary to show that this failure was due to a defect
present at the time of supply that rendered the goods of unmerchantable
quality. Now, a failure to comply with the consumer guarantee of acceptable quality
can be established simply by showing that the product has failed to last as long as a
consumer would reasonably expect.

In New Zealand, where the definition of acceptable quality is substantially identical to
that in the ACL, the New Zealand Court of Appeal has stated that ‘acceptable quality’
sets a higher bar than ‘merchantable quality’: Nesbit v Porter [2000] NZLR 465 at
[52]. Nevertheless, the guarantee of acceptable quality is not a guarantee of

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perfection. Rather, it is a guarantee that a product will reach standards that a
reasonable consumer would regard as ‘good enough’.

Consumer remedies – an overview

Part 5-4 of the ACL sets out the remedies to which a consumer is entitled when a
guarantee has been breached. In many cases, a consumer will have a choice of
enforcing remedies against either the manufacturer of the goods (which includes the
importer) or the retailer. The only guarantees that cannot be enforced against a
retailer are the guarantee relating to the availability of a repair network and spare
parts, and the guarantee that the manufacturer will comply with its own express
warranty. As under the TPA, retailers have a right of indemnification against
manufacturers where the retailer has incurred loss honouring a consumer guarantee
that could have been directly enforced against the manufacturer: Section 274, ACL.

Section 271 of the ACL allows consumers to enforce the guarantees of acceptable
quality, compliance with sample, availability of spare parts and a repair network and
compliance with any express warranty directly against the manufacturer.

A

consumer only has a right to damages against a manufacturer, not to return the
goods. In practice, a faulty good may be found to have no value and so damages will
be equal to the purchase price of the good. This is effectively the same remedy as a
return of the goods for a refund.

If a consumer guarantee is not complied with and:
(a) the failure to comply with is ‘major’; and
(b) the ‘rejection period’ has not expired.

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then a consumer will generally be entitled to their choice of a refund, repair or
replacement product.
If the failure to comply with the consumer guarantee is not ‘major’, the supplier can
choose what remedy is provided: Section 259(2)(a), ACL. The remedy the supplier
may choose depends on the type of failure, but for a defective product the supplier
can choose to repair, replace or refund the product: Section 261, ACL.

The right to a refund or replacement – what is a ‘major’ failure?
Where a consumer wants to return a product for a refund or replacement, they must
first show that there has been a ‘major’ failure to comply with a consumer
guarantee. Section 260 of the ACL defines a major failure as follows:
A failure to comply with a guarantee referred to in section 259(1)(b) that applies to a
supply of goods is a major failure if:
(a)

the goods would not have been acquired by a reasonable consumer fully
acquainted with the nature and extent of the failure; or

(b)

the goods depart in one or more significant respects:
(i)

if they were supplied by description - from that description; or

(ii)

if they were supplied by reference to a sample or demonstration model
- from that sample or demonstration model; or

(c)

the goods are substantially unfit for a purpose for which goods of the same
kind are commonly supplied and they cannot, easily and within a reasonable
time, be remedied to make them fit for such a purpose; or

(d)

the goods are unfit for a disclosed purpose that was made known to:
(i)

the supplier of the goods; or

(ii)

a person by whom any prior negotiations or arrangements in relation
to the acquisition of the goods were conducted or made;

and they cannot, easily and within a reasonable time, be remedied to make
them fit for such a purpose; or
(e)

the goods are not of acceptable quality because they are unsafe.

Although there are five alternate grounds for categorising a failure as “major”, the
“reasonable consumer” test (subs (a)), the “unfit for purpose” test (subs (c)) and the

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“unsafe goods” test (subs (e)) can be expected to be the grounds most commonly
relied on to establish a major failure.

The ‘reasonable consumer’ test - s260(a)
Experience in New Zealand suggests that the determination of whether a failure is
‘major’ will most often turn on the ‘reasonable consumer test’. This provides that a
failure will be major if a reasonable consumer who knew of the failure in advance
would not have acquired the goods. The fact that an individual consumer, whose
sensitivities may differ from those of the reasonable consumer, may not have
purchased a product, does not necessarily mean that a defect is ‘major’. [Somewhat
worryingly, at page 23 of the ACCC Consumer Guide, the ACCC appears to
misapply this test, stating that: “There is a major failure to comply with a consumer
guarantee where you would not have purchased the product had you known about
the problem.” (Emphasis added)

Consumers reading this guide are likely to

understand that the relevant test is a subjective test based on whether the individual
consumer would have purchased a product if they had known of a particular defect,
rather than the objective test of what a reasonable consumer would have done.]

The New Zealand case of Norton v Hervey Motors Ltd [1996] DCR 427, provides a
useful example. In that case, the consumer was unhappy with defects in the
paintwork on a vehicle she had purchased and she wished to have the vehicle
replaced. The expert evidence was that the defect was easy to remedy and covered
by the express warranty that came with the vehicle. In those circumstances, the
court held that a reasonable consumer, having regard to the existence of the express
warranty, would still have purchased the vehicle. Therefore the failure was not ‘of
substantial character’ (or, in ACL terms, ‘major’) and the consumer did not have the
right to return the vehicle.

Although this test does not expressly include any assessment of whether the fault is
easily repairable, New Zealand courts have found that whether a failure is ‘major’ is a
matter of degree:

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On a monetary level, being required to spend $1000 on repairs in respect of a vehicle
purchased for $5000 might indicate a failure of a “substantial character” but that
would not necessarily hold true for the same repairs on a vehicle of significantly
greater value [Stephens v Chevron Motor Court Ltd [1996] DCR 1 at [16]].
New Zealand courts have also held that a reasonable consumer ‘must be taken to
expect that there may well be some matters which will require remedy’: Norton v
Hervey Motors Ltd [1996] DCR 427 at [10]. This will clearly be the case when a
consumer is purchasing certain types of products, such as a motor vehicle. In recent
years, cars have become increasingly reliable. Nevertheless, a car is such a
complex combination of systems that most reasonable consumers would still be likely
to expect that any vehicle they purchase will suffer minor faults from time to time. It
follows that, provided they will be remedied under the manufacturer’s warranty, such
faults would be unlikely to cause a reasonable consumer not to purchase. Similar
logic may apply to appliances such as washing machines that most reasonable
consumers are likely to expect will require service calls from time to time.
The reasonable consumer test may give different results, however, when applied to
products that consumers don’t expect to suffer frequent faults. For example, most
reputable brands of television are highly reliable. Unlike a consumer purchasing a
car, a consumer purchasing such a television may reasonably expect their purchase
to operate without fault for several years. However, if their television does develop a
fault, fixing it will require the consumer to disconnect the television, work out how to
get it to a service agent, and then, in most cases, live without television for a number
of weeks. Once the television is repaired, the consumer must arrange to collect it
again and then work out how to reconnect it properly.
Most televisions can be expected to operate without fault for years. Therefore, it is
likely that a reasonable consumer who knew ahead of time that a television would
experience any fault in the first few years requiring it to be taken to a service agent
would choose to purchase another brand instead. This means that even a fault that
can be quite easily fixed may constitute a “major” failure and give rise to a right of
refund if it nevertheless causes a consumer considerable inconvenience.

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Unfit for purpose – s260(c) and (d)
Sections 260(c) and (d) provide that failure of a product to be fit for purpose (eg,
because it is defective) will constitute a “major” failure if it cannot be remedied “easily
and within a reasonable time”. The corollary, of course, is that if a product can be
repaired or modified easily within a reasonable time, the initial failure to be fit for
purpose will not be deemed under s 260(c) or (d) to be “major”.
It appears that many suppliers understand this to mean that if a product can easily be
repaired, a consumer has no right to require a refund or replacement. The Australian
Competition and Consumer Commission (ACCC) appears to encourage this view by
placing greater emphasis in its guidance on the “unfit for purpose” test than the
“reasonable consumer” test. For example, the ACCC’s Consumer Guarantees — A
Guide for Consumers (ACCC Consumer Guide) states:
Minor failures to comply with a consumer guarantee can normally be fixed or
resolved in a reasonable amount of time.
Major problems cannot be fixed or are too difficult to fix [ACCC Consumer Guide, at
page13].
This ignores the fact that, as described above, even a fault that can easily be fixed
may cause sufficient inconvenience that a reasonable consumer would not have
purchased the product had they known about the failure in advance. If so, the fact
that the product can be repaired for the purposes of s 260(c) or (d) will not prevent
the failure being “major” under the test in s 260(a).
If Australian courts and tribunals follow the New Zealand interpretation of the
“reasonable consumer” test, suppliers that insist upon repairing products rather than
accepting returns may risk substantial penalties for misrepresenting consumers’
rights under the statutory guarantee regime.

Unsafe products – s260(e)
Section 260(e) of the ACL provides that goods have a major failure if they are “not of
acceptable quality because they are unsafe”. This means that any failure of the

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guarantee of acceptable quality that arises as a result of a safety defect is
automatically a major failure. This raises the spectre that almost any safety defect in
a product may give rise to a right for consumers to claim refunds.
Of course, before a safety defect can be deemed to be a ‘major’ failure, it must be
serious enough to breach the guarantee of acceptable quality in the first place. In
practice, this means that the defect must result in the product not being as free from
defects or as safe as a reasonable consumer would regard as acceptable. The High
Court of New Zealand had reason to examine the level of safety expected by a
reasonable consumer in Contact Energy Ltd v Jones [2009] 2 NZLR 830. In that
case, which concerned the supply of electricity, the court found that a reasonable
consumer may be willing to accept a degree of risk - particularly with products that
have an inherent degree of risk.
Nevertheless, it seems clear that a motor vehicle that has a defect that results in an
increased risk of brake failure, or an electrical appliance with a fault that creates a
risk of electrocution, will breach the guarantee of acceptable quality on the basis that
these products would not be as safe as a reasonable consumer would regard as
being acceptable. Section 260(e) will then deem the relevant failure to be ‘major’,
giving affected consumers a right to claim a refund.
This has serious implications for manufacturers conducting safety recalls. Where
products have a potential safety issue, the normal approach is for the manufacturer
to issue a recall for a specified range (such as a serial number range), have each
product inspected and take the necessary action (such as a repair or replacement)
for products that are found to be affected by the fault. Under the new law, however, if
a product is found to be affected by a defect, manufacturers may not have the right to
insist that consumers accept a repair of their product. Instead, a safety recall may
well give affected consumers the right to insist on their choice of a refund or
replacement.
The government’s Consumer Guarantees — A Guide for Businesses and Legal
Practitioners states that a potential safety issue does not automatically amount to a
major failure. Instead, it says that “[e]ach of the goods subject to the recall would
need to be considered individually”.[Commonwealth of Australia, Consumer

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Guarantees — A Guide for Businesses and Legal Practitioners, 2010 (ACL Business
Guide), p 21.] The inference is that if a product is recalled because it may have a
safety defect, then where an individual product is inspected and found not to be
affected by the defect, there would be no right of refund. It seems difficult to avoid the
conclusion, however, that once an inspection shows that a product is affected by a
safety defect, the consumer is entitled to insist upon a refund or replacement. This
means that future safety recalls may be very expensive indeed for manufacturers.

The right to a refund or replacement – the rejection period
Section 262 of the ACL provides that, in certain circumstances, a consumer is not
entitled to return goods for a refund or replacement even though they have suffered a
‘major’ failure. This will occur where the goods are lost or destroyed, have been
attached to other property in a way such that they cannot be removed without
damage, or the ‘rejection period’ has ended.
The most important of these limitations is the rejection period. Section 262(2)
defines the rejection period as follows:
The rejection period for goods is the period from the time of the supply of goods to
the consumer within which it would be reasonable to expect the relevant failure to
comply with a guarantee referred to in section 259(1)(b) to become apparent having
regard to:
(a) the type of goods; and
(b) the use to which a consumer is likely to put them; and
(c) the length of time for which it is reasonable for them to be used; and
(d) the amount of use to which it is reasonable for them to be put before such a
failure has become apparent.
This important limitation would seem to have the following consequences:
1. If consumers do not act reasonably promptly once they discover a fault, they
may lose their right to return the goods to claim a refund or replacement, and
will instead have to accept a repair.[In Nesbit v Porter the Court accepted that

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this period must also include some allowance for the consumer to ‘become
properly informed about the nature of the defect´ and to ‘consider an
appropriate decision, whether or not to return the goods’ (at [40])]
2. However, where a product is affected by a latent defect, a consumer may be
able to claim a refund once the defect becomes manifest, even if that is a
considerable time after the goods were purchased. For example, if an
expensive consumer durable has a design fault that is likely to cause it to fail
at some point within its first two years of life, then it is likely that this will be a
major failure to comply with the guarantee of acceptable quality. Section 262
provides that the rejection period for that product will be the ‘period… within
which it would be reasonable to expect the relevant failure to comply with [the
guarantee of acceptable quality] to become apparent’. In this case, since the
defect normally takes up to two years to become apparent, the rejection
period will be up to two years, and consumers may be entitled to claim a full
refund for their product for up to this long.
3. If a fault takes longer than could reasonably be expected to manifest, such as
where the consumer only rarely uses the product, the right to return the
product may be lost.
In Nesbit v Porter [2000] NZLR 465 the New Zealand Court of Appeal considered
the equivalent section in the Consumer Guarantees Act. In that case, a second hand
Nissan Navara vehicle was found to have rust and problems with the steering and
shock absorbers. The court found that it was reasonable to expect those defects to
become apparent soon after supply. As the vehicle was subject to six monthly
roadworthy tests, the court found at [48] that:
…the motor vehicle dealer should be generally freed from the burden of having to
accept rejection of a vehicle of this age and pedigree after the time for the next
mandatory six monthly Warrant of Fitness check had passed. If, at the latest, a
defect of the kind found in the Navara has not manifested itself on such an
inspection, it would be an unfair burden upon the supplier if a buyer of such a vehicle,
which must be assumed to have been in daily use, sometimes in rough conditions,
should thereafter be able to reject it.

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The court went on to find that since the rejection period had expired before the
consumer attempted to return the vehicle, the right to reject the vehicle was lost.
On the other hand, in a matter before the Motor Vehicle Disputes Tribunal of New
Zealand [Reference No. MVD 211/09 (Auckland) [2010] NZMVDT 8 (5 February
2010)], a purchaser wished to return a car some six years after purchase because
the vehicle’s transmission had started to malfunction. Although the vehicle was six
years old, it had only travelled 34,000 kilometres. The tribunal accepted expert
evidence that a failure of transmission after so few kilometres could not be
considered as anything other than premature failure and found that the vehicle had
suffered a major failure of the guarantee of acceptable quality. The Tribunal found
that the consumer was entitled to return the vehicle, even though it was six years old.

Original Packaging Restriction – No Longer s 259(7) ACL
Consumers were in the past often thwarted in relying upon TPA remedies by being
contractually required to produce the original packaging for a consumer good sought
to be returned. Section 259(7) no expressly prohibits a retailer or manufacturer from
honouring the statutory warranties just because goods are not returned in their
original packaging.

Special case – lemons
The reviews of the consumer protection laws that preceded the ACL considered
whether a specific ‘lemon law’ was required; either for motor vehicles specifically, or
for consumer products in general.[See Consumer rights: Statutory implied conditions
and warranties Issues paper, CCAAC, July 2009, chapter 6] While there are varying
definitions of a “lemon”, the CCAAC defined lemons as products that “simply will not
function as intended, for reasons that are beyond the expertise of a reasonable
repairer to remedy”.[See CCAAC Report, page 92] In simple terms, it is a product
that, despite repeated repairs, continues to break down.
The CCAAC acknowledged that lemons can cause consumers considerable
inconvenience. However, it also found that the incidence of lemons, either in motor
vehicles or in consumer products generally, was not high enough to warrant specific
legislation. The CCAAC also thought the new consumer guarantees may address
some of the difficulties facing consumers in obtaining a remedy under the

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TPA. Consequently, the CCAAC recommended against a specific lemon law.[See
CCACC Report, page 99]
Whether the new consumer guarantees do in fact address issues relating to ‘lemon’
products remains to be seen. It is interesting to note that the ACCC does not appear
to address the question at all in its guides.
It seems clear that a product that breaks down repeatedly will breach the guarantees
of acceptable quality and, possibly, fitness for purpose.

The remedy most

consumers will then seek will be a refund or a new product, not more repairs. To
require this, the relevant failure must be ‘major’.
Under s 260(a), a failure is major if the reasonable consumer, fully acquainted with
the nature of “the failure”, would not have purchased the product. It is not clear that
this language is well adapted to allow a series of failures to be taken into account.
The alternative argument is that a product that continually fails is not “fit for purpose”
under s 260(c) or (d). If several previous repairs have failed to make a product
reliable, a consumer may then be able to argue that it has been shown that the
problem cannot easily, and within a reasonable time, be remedied and that the
definition of major failure in s 260(c) or (d) has become satisfied, entitling them to
require a refund or replacement. Again, however, this right seems less than clear.
Summary

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Manufacturers Warranties
The Trade Practices Act did not regulate the content or form of manufacturers’
warranties. The ACL, however, sets out a range of requirements for such warranties,
including a requirement to include a statement informing consumers of their rights
under statutory consumer guarantees.
These requirements come into effect on 1 January 2012. From this date, failure to
comply with the new laws may result in penalties ranging from $10,000 per offence
for individuals to $50,000 per offence for corporations. Every product a manufacturer
sells without a compliant warranty statement will be a separate offence (that is, there
is a separate offence for every single item sold).
To comply with the ACL, from 1 January, 2012 all manufacturers’ warranty
statements must:
The law relating to Warranties against defects in the ACL at Section 102. This
relevantly provides that a person must not give a document to a consumer that
evidences a warranty against defects unless it complies with the requirements
prescribed in the Regulations.

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These requirements are contained in the Competition and Consumer (Australian
Consumer Law) Amendment Regulations 2010, and while these are not yet in force,
they are due to come into force on 1 January 2012. Regulation 90 of this provides
that a Warranty against defects must:

1. Be transparent
2. It must concisely state;
- What the person who gives the Warranty must do so that the Warranty
may be honoured, and.
- What the Consumer must do to entitle the Consumer to claim the
Warranty
3. It must contain the comment “Our goods come with guarantees that cannot
be excluded under the Australian Consumer Law. You are entitled to a
replacement or refund for a major failure and for compensation for any other
loss or damage. You are also entitled to have the goods repaired or replaced
if the goods fail to be of acceptable quality and the failure does not amount to
a major failure.”
4. Prominently state the following information about the person who gives the
warranty:
- the person’s name
- Business address
- Telephone number
- Email address (if any)
5. State the period or periods within which a defect in the goods or services to
which the Warranty relates must appear if the Consumer is to be allowed to
claim the Warranty.
6. Set out the procedure for claiming the Warranty.
7. State who will bear the expense of claiming on the Warranty, and if by the
person who gives the Warranty – how the consumer can claim expenses
incurred in making the claim.
8. State that the benefits to the consumer given by the Warranty are in addition
to other rights and remedies of the consumer under a law in relation to the
goods or services to which the Warranty relates.

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In the case of the first of these requirements, the term “Transparent” is defined in
Section 2 of the ACL to mean “expressed in plain language, legible and presented
clearly.”; in summary it must be in language that can be easily understood.
In the case of the third requirement, the term “major failure” is defined in Sections
260 and 268 of the ACL and this specifies a series of scenarios where goods are a
“major failure” and these are:
•
•
•
•

If the goods would not have been acquired by a reasonable consumer who
knew the extent of the failure fully;
If the goods are different from their description of a sample of them;
If the goods are unfit for the purpose for which they were bought and cannot
be remedied to make them fit for such a purpose; or
If the goods are unsafe.

Businesses should consider all places where statements regarding a warranty
against defects are made, such as warranty cards, product packaging, instruction
manuals, point of sale materials and websites. Businesses that import products to
Australia or sell products with a significant lead time for manufacture or packaging
may need to act soon to correct statements included in product packaging to ensure
compliance.
Under the guarantee regime of the ACL, suppliers need to tread very carefully when
dealing with product faults, particularly if they wish to attempt a repair before offering
a refund. Misleading consumers as to their statutory rights is a ‘hot button’ issue for
the ACCC and with the introduction of civil penalties for contraventions of the ACL,
the ACCC has potent weapons to clamp down on suppliers who contravene the law.
The ACCC has recently taken a number of enforcement actions in this area,
including issuing an infringement notice to a major fashion retailer for representing
that there were ‘no returns’ on sale items and prosecution of a major computer store
chain for misleading in-store signage about warranty rights that ultimately led to
penalties of $203,500 being imposed.
All suppliers of consumer products should be reviewing their refund policies to
ensure that they take into account consumers’ rights under the ACL. In particular,
refund policies must not:

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1. make blanket ‘no returns’ or ‘no refunds’ statements, even on sale items;
2. require a customer to take an exchange or credit note rather than a cash refund;
and
3. require customers to keep their receipt (although satisfactory proof of purchase
can be required) or return products in their original packaging.
Of course businesses do not have to accept ‘change of mind’ returns and, if they do,
they are entitled to set conditions on those returns such as a length of time or the
requirement for all labels and tags to still be attached. Often the difference between
compliant returns policies and those that breach the law are relatively minor (e.g., ‘no
returns on sale items’ is illegal whereas ‘no change of mind returns on sale items’ is
perfectly legal). It is therefore important to ensure that suppliers’ policies are
reviewed.
Businesses should also consider all places in which their policies are represented,
such as in-store signage, printed on receipts, websites and the statement staff make
to customers. Store staff also need to have adequate knowledge of consumer’s
rights and all businesses should have an appropriate complaints handling system to
ensure that all customer complaints are handled promptly and professionally.
Businesses may also wish to consider displaying the recently released national pointof-sale sign that informs customers of their rights to a repair, refund or exchange of
faulty goods. This sign replaces other government approved signs that were
applicable to the previous state and federal legislation. Although the sign is not
mandatory, retailers are encouraged to display the sign at their point-of-sale such as
a cash register.
Consumer guarantees under the ACL are unlimited as they were under the Trade
Practices Act. A guarantee that cannot be excluded allows the consumer to recover
their loss not just the cost of replacing the defective good.

Steven Brown

Schematic of (new) Australian Consumer Guarantee

Types of Guarantees Given to Consumers

New
Required by Law

Australia Consumer Law (ACL)

Subtopic

Guarantees

Contractual warranty

Offered though not required by law

Representation that is actionable under s 18 of ACL misleading and deceptive conduct

personal use

Who is a Consumer

Defined by s3 ACL

Goods ordinarily acquired for

domestic use
household use

Note what are consumer goods can be
surprising: Carpet Call v Chan (1987) ATPR
46-025 - Carpet in a night club a consumer
good

Page 20

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Unfair Contract Changes
Laws attempting to deal with unfair contract terms in consumer contracts are not a
new phenomenon. Indeed when Senator Murphy (latter His Honour Justice Murphy)
introduced the Act into the Senate in 1973 he said about Part V of the then bill (which
became the TPA): “The age of caveat emptor is now dead. It is now the age of let the
seller beware.” This sentiment is current. The second reading speech for the ACL
noted that in regards unfair contract laws: “…. similar laws … have been in place in
Victoria since 2003. And laws tackling unfair contract terms exist in the United
Kingdom, in the rest of the European Union, in Japan and in South Africa. Laws
which allow for the examination of the fairness of contracts and contract terms also
exist in jurisdictions in Canada and the United States.”

How does the unfair contract terms law differ from unconscionable
conduct?
The ACL introduces new consumer protection provisions to the TPA and the
Australian Securities and Investment Commission Act (“ASIC Act”) in the form of the
unfair contract terms provisions. Consumer protection provisions prohibiting
unconscionable conduct have existed in the both pieces of legislation for some time,
but there are differences between the two regimes that will ensure their concurrent
operation.
The unconscionable conduct provisions deal with the conduct of a party entering into
a contract or other transaction, and/or its conduct once the contract has been entered
into, rather than an assessment of terms of the particular contract. Part IVA of the
TPA contains a range of factors that the court may consider when determining
whether conduct has been unconscionable. These factors may include any
contractual terms (for example, whether the consumer was required to comply with
conditions not reasonably necessary to protect the interests of the supplier, or
whether the consumer understood documentation relating to the supply), but extend
to broader concepts such as the use of unfair tactics, undue influence or pressure by
the supplier. The list is broad and non-exclusive.
Some factors contained in the unconscionable conduct provisions are similar to those
in the list of considerations that the court must take into account when determining

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whether a contract term is unfair under the unfair contract terms provisions of the
ACL. For example, both the unconscionable conduct provisions and the unfair
contract terms provisions provide for consideration by the court of the extent of each
party’s bargaining power in relation to the contract. However, the relative strengths of
the parties’ bargaining positions in the unconscionable conduct provisions is only one
factor that the court may (and is not required to) take into account. Conversely, under
the unfair contract terms provisions, the court is required to determine as the first
limb of the test for unfairness whether a term in a consumer contract would cause a
‘significant imbalance’ in the parties’ rights and obligations arising under the contract.
In determining whether a term of a consumer contract is unfair, the court may take
into account any matters it considers relevant but must take into account the extent
to which the term is transparent and the contract as a whole.
The ACL is a schedule to the TPA, so that it can easily be applied by the States and
Territories into their respective legislation. It is important to note that the definition of
a consumer under section 4B of the TPA is broader than the definition of a consumer
for purposes of a consumer contract under the ACL.
Under section 4B of the TPA, a person (including a corporation) is deemed to be a
consumer, where the goods or services acquired by the consumer were ‘of a kind
ordinarily acquired for personal, domestic, or household use or consumption’ (subject
to certain exceptions and provided the price of the goods or services exceeds the
prescribed amount). The definition of a consumer in section 4B is focused on the
nature of the goods or services purchased. Such goods or services may satisfy the
test as being of a kind ordinarily acquired for personal, domestic, or household use
even though they may also be of a kind acquired for business use. For example see
the case of Carpet Call Pty Ltd v Chan (1987) ASC 55-553; where commercial
grade carpet used in a night club was held to be a good acquired for personal,
domestic or household use.
Under the unfair contract term provisions of the ACL, a consumer contract is defined
as a contract for the 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.’ The

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definition is narrower because it focuses on the purposes of the contract under which
purchaser acquires the goods or services and not on the nature of the goods or
services purchased. There is no monetary limit specified.
On 17 March 2010 the ACL introduced laws regulating unfair contract terms.
The unfair contract terms have now commenced.
The unfair contract terms provisions will apply only to standard form consumer
contracts—for example, contracts for the supply of goods or services to an individual
whose acquisition is wholly or predominantly for personal, domestic or household
use or consumption.
To assist businesses, legal practitioners, consumers and industry organisations
understand the new unfair contract terms laws, national guidance has been
developed. The draft publication Australian Consumer Law: A guide to unfair contract
terms (the “Draft”) provides information on the types of contracts and contract terms
which may be affected by these new laws. Remember, that even when the Guide is
no longer a draft it is nevertheless only the ACCC’s views of what courts might do
not what they will or must do when they come to interpret the amendments.
The unfair contract terms provisions apply to ‘consumer contracts’ as defined by both
the ACL and the ASIC Act.
Under the ACL, a ‘consumer contract’ is a contract for:
• the supply of goods or services, or
• sale or grant of an interest in land;
to an individual whose acquisition of the goods, services or interest in land is wholly
or predominantly for personal, domestic or household use or consumption (ACL, s.3).
Under the ASIC Act, a similar definition of a consumer contract applies in relation
financial products and services (ASIC Act, s.12BF).
An “interest” in relation to the land means:

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(a)

a legal or equitable estate or interest in the land; or

(b)

a right of occupancy of the land or of a building or part of the building
erected on the land arising by virtue of the holding of shares, or by
virtue of a contract to purchase shares in an incorporated company that
owns the land or building; or

(c)

a right, power or privilege over, or in connection with, the land. (ACL
Part 1, Clause 1).

Four points to note in relation to the meaning of a “consumer contract” are:
1.

The definition does not limit the operation of the unfair contract term
provisions to things of a personal, domestic or household nature.

The

definition will include the supply of any good, service or interest in land to a
consumer provided the acquisition of what is supplied under the contract is
wholly or predominantly for personal, domestic or household use or
consumption. For instance, is a loan taken over a directors home where the
director uses the money received to invest in his or her business a consumer
contract or not?
2.

The definition of “interest” goes beyond the usual notions of legal or equitable
estates. The definition extends the meaning to include a right of occupancy of
land arising by virtue of holding shares in a company, or a contract to
purchase shares in a company that owns the land or the building.

The

definition extends the normal concept of an interest in land. It also includes a
right, power or privilege over or connection with the land. This too may go far
beyond normal concepts of equitable interests in land.
3.

The definition of “interest” could cause an interesting conflict in how courts
deal with what is a consumer contract. As the extended definition allows
courts to treat a “contract to purchase shares in an incorporated company that
owns land or building, as a “consumer contract”. Yet that same contract could
be the constitution of the incorporated company which is an expressly
excluded contract for the purposes of the ACL. How the courts will address
this issue when the time comes will be interesting.

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4.

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The definition of consumer is not the same as the definition of consumer for
the purposes of the statutory warranties. The definition is more restrictive. It is
restricted to predominantly for consumer purposes not ordinarily acquired. If
this definition was used for the Carpet Call v Chan case a different result
would most likely arise.

What is a standard form contract?
The ACL does not define the term “standard form contract”. The Draft at page 5
states: "..in broad terms a standard form consumer contract will typically be one that
has been prepared by one party to the contract and is not subject to negotiation
between the parties – that is, it is offered on a ‘take it or leave it’ basis."
Section 7(2) of the ACL provides guidance to a court in determining whether there is
a standard form contract by considering the following:
(a) Whether one of the parties has all or most of the bargaining power relating to the
transaction;
(b) Whether the contract was prepared by one party before any discussion relating to
the transaction occurred between the parties;
(c) Whether another party was, in effect, required either to accept or reject the terms
of the contract in the form in which it was presented;
(d) Whether another party was given an effective opportunity to negotiate the terms
of the contract;
(e) Whether the terms of the contract take into account the specific characteristics of
another party or the particular transaction; and
(f) Any other matter prescribed by regulation (The ACL provides for the Minister to
augment the list by Regulation to allow the list of considerations to be expanded

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in response to changes in markets and the way in which standard form contracts
are construed and used (s7(2)(f) ACL).
The onus of proving that a contract is not a standard form contract is reversed. The
business operator has the onus of establishing that there were free and frank
negotiations before the contract was entered into. The Draft at page 6, states that
the onus of proof is reversed as a businesses will be better placed to bring evidence
in respect of the nature of the contract it uses and the way in which it deals with its
counterparties. Whereas the individual will only have evidence that is particular to
their transaction along and not have the evidence about how the business operates.
This takes up the comments in the Explanatory Memorandum at paragraph 108,
which read:
“If a party wishes to argue that the contract has been negotiated and is
not in a standard form, then the rebuttable presumption requires the
party that presents the contract to show that the contract is not a
standard form contract. This reflects that:
(a)

the claimant will usually only have evidence of the existence of
one contract - their own; and

(b)

the respondent is best placed to bring evidence regarding the
nature of the contracts it uses and the way in which it deals with
other parties to such contracts, including whether negotiations
have been entered into.”

The unfair contract terms provisions do not apply to the following terms of a standard
form consumer contract that are excluded by section 5(1) of the ACL or 12BI(1) of
the ASIC Act:
Ø terms that define the main subject matter of a consumer contract;
Ø terms that set the ‘upfront price’ payable under the contract;
Ø terms that are required, or expressly permitted, by a law of the
Commonwealth or a State or a Territory; or
Ø

Contracts excluded by regulation.

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The practical result of the ACL is that it will apply to all commonly known forms of
standard consumer contracts. That is, unless the business can show a real and
genuine intention to present a draft contract for the supply of goods or services and
to engage in effective negotiations with the consumer on the terms of such supply, it
is difficult to envisage a practical situation in high volume consumer transactions that
will not be caught.

Terms that define the main subject matter of a consumer contract
The purpose for exempting these terms is said to remove from consumers the ability
to avoid their contractual obligations because of a simple change of mind. (Draft p7)

Terms that set the ‘upfront price’ payable under the contract
The rationale is that the upfront price is easily understood by consumers, and when
the price is stated in an upfront manner it is unlikely to create any imbalance in the
parties' rights and obligations.
The Draft at p8 provides examples as follows:
“The ‘upfront price’ would not include further payments under the contract that are
contingent on the occurrence or non-occurrence of a particular event. This would
exclude from the upfront price, for example, provisions that impose fees for additional
goods or services that are not identified at the time the contract was made and
default penalty fees or exit fees.
In the context of a financial product or service, for example a consumer credit
agreement, the upfront price includes the amount borrowed and the interest payable
and any fees disclosed at the time the contract is entered into but does not include
contingent fees, often referred to as default fees.”
However, I am not convinced that the views of the ACCC will necessarily be those of
the Courts. Why wouldn't a late penalty fee if clearly set out in a standard form

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contract at the time the contract was entered into be the same as the interest payable
at the time the contract was entered into.
Surely if the new provisions will be that easily circumvented they would seem not to
be of much use or benefit to consumers.

Terms that are required, or expressly permitted, by a law
The amendments are not intended to apply to terms of contracts that are required or
expressly permitted by a law of the Commonwealth, or a State or a Territory, but only
to the extent that they are required or permitted. This is self evident as it is not
appropriate for the courts to determine whether a term is unfair when it has been
mandated by a law to be included in the form of contract before it.

Contracts excluded from new amendments
Certain contracts even if standard in form are expressly excluded from being
reviewed by the ACL amendments. These contracts are:
Ø Shipping contracts;
Ø Constitutions of companies, Management investment schemes or other kinds
of bodies; and
Ø Most insurance contracts will not be reviewable by the new amendments due
to section 15 of the Insurance Contracts Act.
Note: As Private Health insurance contracts are not regulated by the Insurance
Contracts Act (see section 9 of that act) then to the extent they are standard form
consumer contracts their terms will fall for consideration under the amendments.

When will a term be "unfair"
Under the ACL amendments a term in a consumer contract is unfair if three limbs are
all satisfied:

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First - it would cause a significant imbalance in the parties’ rights and obligations
arising under the contract; and

•

Second - the term is not reasonably necessary to protect the legitimate interests
of the party who would be advantaged by the term; and

•

Third - it would cause detriment (whether financial or otherwise) to a party if it
were to be applied or relied on.

Significant imbalance
There is no statutory definition of the concept of significant imbalance, nor any
assistance in the Explanatory Memorandum which at paragraph 51 simply reads:
“This would involve a factual determination of whether any such significant imbalance
exists.”

The Explanatory Memorandum does disclose that the amendments are based upon
Victoria’s Fair Trading Act 1999. Consequently, some guidance from that case law on
the equivalent sections will be useful.
The words ‘significant imbalance’ in the context of Part 2B of the Victoria’s Fair
Trading Act 1999, were considered by Cavanough J in Jetstar Airways Pty Ltd v
Free [2008] VSC 539. In that case, Cavanough J interpreted the term ‘significant
imbalance’ in the Victorian law as follows:
[I]n the phrase "significant imbalance", the word "significant" seems to me to carry, or
to include, a quantitative sense. The word can certainly carry the meaning
"substantial". As Thomas JA said in Emaas v Mobil Oil Australia Ltd, the word
"significant" very much takes its meaning from the context in which it is used… I
recognise the perils of attempting to paraphrase statutory language, but, in my view,
the context of the word "significant" in section 32W shows that it means, principally at
least, "significant in magnitude", or "sufficiently large to be important", being a
meaning not too distant from "substantial”.
Whilst trite all that can be said now is that “significant imbalance” will be determined
by the courts as a mixed question of both fact and law. The courts will need to
determine the relevant rights and obligations of each party and then a “balancing”

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assessment to determine whether there is a significant imbalance as between the
parties’ rights and obligations.
In the area of industrial law the courts in New South Wales have been considering
what is an unfair contract for some time and continue to do so when interpreting and
applying Part 9 Division 2 of the Industrial Relations Act 1966 (NSW) and its
predecessors in section 275 of the Industrial Relations Act 1991 (NSW) and
section 88f of the Industrial Arbitration Act 1940 (NSW). Since, 2007 the Federal
Courts have been required to do similarly in regards independent contracts under the
Independent Contractors Act 2006 (Cth).
However, another commentator has said: “To me at least, this seems like an unusual
test and one which could be quite difficult to apply. From the supplier’s point of view,
it may involve giving factual evidence as to the practical consequences of its
warranty obligations for example compared to the simple obligation of the consumer
to pay the purchase price.” (See Booth, Peter, Victorian Bar, Paper 20 August, 2009
at paragraph 27.)

Not reasonably necessary
The second limb to be satisfied before a term in a contract is declared “unfair” is that
its existence was not reasonably necessary. The onus is on the respondent to
establish, on the balance of probabilities, that the term which the consumer alleges is
“unfair” was reasonably necessary to protect the legitimate interests of the party who
would be advantaged by the term: in most cases the business operator (see s3(1)(b)
ACL). The reason for this is that the terms in a consumer contract are presumed not
be reasonably necessary unless the party that seeks to reply upon them can prove
otherwise to the court (see s.3(4) ACL).
The type of evidence that might be introduced to prove that a term is necessary to
protect the legitimate interest of the business on the balance of probabilities could
include material relating to the respondent’s costs and business structure, the need
for the mitigation of risks and relevant industry practices to the extent that such
material is relevant to establishing that a term or terms are reasonably necessary to
protect the respondent’s legitimate interests. Evidence that it is common practice in

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the industry may not be all that useful unless and until court decisions in upholding
the legitimate interests of a party have been established.
The approach taken by the ACL appears to be predicated on the premise that
freedom of contract operates and should continue to operate. Whether this is indeed
correct is not known but whether it is something that should be maintained is
something which the Parliament did not consider. Consumers in reality have when
entering into contracts the choice of accepting the business standard form contract or
not. Negotiating terms is not a possibility. The notion that freedom of contract has
any scope in the contracts entered into between consumers and business is fanciful.
This limb adds an additional factual consideration that a respondent will need to
prove in each case. Any evidence that can demonstrate that the inclusion of the term
was reasonably necessary may be led. Accordingly, the factual issues are expanded.
With more facts to deal with the greater will be the cost of defending such litigation.
As Peter Booth states at paragraph 31 of his paper: “It is not hard to foresee that
evidence of that type might be quite complex and involve considerations of effect on
the market were such a term to be held to be void.”

Detriment
Detriment is not limited to financial detriment. This is designed to allow the court to
consider situations where there may be other forms of detriment that have affected or
may affect consumers disadvantaged by the practical effect of an unfair term. Other
forms of detriment may include inconvenience, delay or distress suffered by the
consumer as a result of the unfair term.
The claimant in the proceedings will be required to prove detriment as part of their
claim that the term is unfair. This aligns the unfair contract terms provisions more
closely with the unfair contract terms provisions contained in the Victorian Fair
Trading Act.
Sections 4(1)(a)-(h) ACL, and sections 12BH(1)(a)-(h) ASIC Act, set out, without
limitation, examples of the kinds of terms of a consumer contract that may be unfair,
such as the business operator:

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(a)

avoiding or limiting their performance of the contract;

(b)

terminating the contract;

(c)

penalising the consumer for a breach of termination;

(d)

varying the terms of the contract;

(e)

renewing or not renewing the contract;

(f)

varying the upfront price payable under the contract without the
consumer being able to terminate it;

(g)

varying the characteristics of the goods or services supplied or financial
services supplied to or to be supplied under the contract;

(h)

determining whether the contract has been breached or to interpret its
meaning.

By way of expanding the examples we will consider four situations.
(1) Section 4(1)(a) ACL, section 12BH(1)(a) ASIC Act - a term that permits, or
has the effect of permitting, one party (but not another party) to avoid or limit
performance of the contract
Terms that permit a supplier to avoid or limit its performance of its obligations under
the contract, at its discretion and without liability, otherwise known as an exclusion
clause, has the potential to cause a significant imbalance in the parties’ rights and
obligations arising under the contract.
Terms may be less likely to be considered unfair if they are qualified in such a way
that consumers understand when and how they are likely to be affected, or if the
terms outline reimbursements available to the consumers when such terms are relied
upon by the supplier.

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(2) Section 4(1)(b) ACL, section 12BH(1)(b) ASIC Act - a term that permits, or
has the effect of permitting, one party (but not another party) to terminate the
contract
Terms that allow the supplier to cancel a fixed term contract at will, without having
any valid business reason or in response to an inconsequential breach of contract by
the consumer, may be considered unfair by a court.
An example of this arose in the Victorian case of Director of Consumer Affairs
Victoria v AAPT Limited [2006] VCAT 1493 at 53, where Morris J found that an
immediate termination clause in a mobile phone contract potentially had broad
application:
A customer may have breached the agreement in a manner which is inconsequential,
yet faces the prospect of having the service terminated. Further, if the customer
changes his or her address (which will not necessarily be the address for receipt of
billing information) this will also provide a ground to AAPT to terminate the
Agreement. Because these provisions are so broadly drawn, and are one sided in
their operation, they are unfair terms within the meaning of the Fair Trading Act.
Terms may also be considered unfair if they undermine the consumer’s right to
terminate the contract. Terms which state or imply that the consumer cannot cancel
the contract under any circumstances or only with the supplier’s agreement,
regardless of the supplier’s action or omission under the contract, may be considered
unfair.
(3) Section 4(1)(c) ACL, section 12BH(1)(c) ASIC Act - a term that penalises,
or has the effect of penalising, one party (but not another party) for a breach or
termination of the contract
Terms imposing penalties for trivial breaches of a contract committed inadvertently
by consumers may be unfair.

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A contract may also be considered unfair if it threatens sanctions over and above
those that can be imposed at law.
A term that imposes a penalty on a consumer for terminating a contract because the
supplier has not complied with its obligations under the contract is likely to be at risk
of being considered unfair in some circumstances. An example of this may be where
a supplier is unable to supply a product ordered by a consumer by the date specified
in the contract, but also refuses to refund any money paid by the consumer if they
attempt to terminate the contract due to the non-delivery.
(4) Section 4(1)(d) ACL, section 12BH(1)(d) ASIC Act - a term that permits, or
has the effect of permitting, one party (but not another party) to vary the terms of
the contract
A contract term that provides a right for one party to alter the terms of the contract
after it has been agreed, without the consent of the other party or without notice, may
be unfair. This may operate similarly to a term that permits one party (but not the
other party) to avoid or limit performance of the contract.
If a term could require a consumer to accept increased costs or penalties, new
requirements, or reduced benefits, for example, it may be considered unfair. A
unilateral variation clause may cause a significant imbalance in the rights of the
parties to the contract even if it was intended solely to facilitate minor adjustments.
This applies to terms giving the supplier the right to make corrections to contracts at
its discretion and without liability.
An example of an unfair unilateral variation clause was identified in the Victorian case
of Director of Consumer Affairs Victoria v Train Station Health Clubs Pty Ltd
(Civil Claims) [2008] VCAT 2092. The Victorian Civil and Administrative Tribunal
found that a clause in a consumer contract allowing the health club operator to
unilaterally change the location of the club within a 12 kilometre radius of the club’s
original location, among other things, was unfair “in that it is a term to which the
consumers’ attention is not specifically drawn, and which may operate in a way in
which the consumer may not expect and to his or her disadvantage.”

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A variation clause may be more likely to be acceptable if it can be exercised by either
party and only for legitimate reasons stated in the contract which are clear and
specific enough to ensure the power to vary cannot be used by the supplier at will to
suit its interests, or in a manner that would be detrimental to consumers. For
example, a unilateral variation clause may be acceptable where:
• the potential circumstance for its operation is clearly expressed in the contract,
• it is reasonably necessary to protect the legitimate interests of the party using the
term, and
• where the consumer has a right to cancel the contract, without penalty, if the
change is detrimental to the consumer.
In determining whether a term of a standard form consumer contract is unfair, a court
may take into consideration any matter that it thinks relevant. It must, however, take
into consideration the following:
• the extent to which the term is transparent; and
• the contract as a whole.
A 'transparent' term
A lack of transparency regarding a term in a standard form consumer contract may
cause a significant imbalance in the parties’ rights and obligations.
A term is considered to be transparent if it is:
• expressed in reasonably plain language;
• legible;
• presented clearly; and
• readily available to any party affected by the term. (see s3(3) ACL)
Examples of terms which may not be considered transparent include terms that are
hidden in fine print or schedules, or that are phrased in legalese or in complex or
technical language.
Again, it is important to note that only the court can determine what a ‘transparent
term’ is for the purposes of the unfair contract terms provisions.

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Although the court must take into account the transparency requirement, a contract
that does not meet the transparency requirement will not necessarily be unfair.
Further, transparency, on its own account, will not necessarily overcome underlying
unfairness in a contract term. The UK unfair contract terms provisions use the term
‘plain and intelligible language’ rather than ‘transparent’. Despite the difference, the
finding of Smith J in Office of Fair Trading v Abbey National PLC [2008] EWHC
875 may provide some guidance:
“Regulation 6(2)…requires not only the actual wording of individual clauses or
conditions be comprehensible to consumers, but that the typical consumer can
understand how the term affects the rights and obligations that he and the seller
or supplier have under the contract.”
The fairness or otherwise of a particular contractual term cannot be considered in
isolation, and must be assessed in light of the contract as a whole. Some terms that
might seem quite unfair in one context may not be unfair in another context.
An apparently unfair term may be regarded in a better light when seen in the context
of other counter-balancing terms. However, in Director of Consumer Affairs
Victoria v AAPT [2006] VCAT 1493, Morris J said that even if a contract contains
terms that favour the consumer, such favourable terms may not counterbalance an
unfair term if the consumer is unaware of them.
Examples include implied terms, or terms that are hidden in fine print, in a schedule
or in another document, or are written in legalese. This may result in an information
imbalance in favour of the supplier. The concept of looking at the contract as whole
in regards to where and how terms are located introduces an entirely new concept of
contractual interpretation. To date the court has been concerned solely with the
substance of a contract. It seems that the concept of “considering the contract as a
whole” is introducing a form element into how courts should interpret contracts. Not
only must they be substantively fair, the appearance of a standard form contract
could by the use of small print and complicated definitions result in the contract being
unfair due to its very form.

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In summary, the requirements of “transparency” and looking at the stand form
consumer contract as a whole, appear to have been introduced to act against the
business operator, in the sense that the more difficult the term is to comprehend, or
find, the more likely it is that it will be seen by a court as “unfair”.

The effect of an unfair term on the contract
A finding by a court that a term is unfair, and therefore void, means that the term is
treated as if it never existed. However the contract will continue to bind the affected
parties to the extent that the contract is capable of operating without the unfair term.
Under section 87AC of the TPA and 12GBA of the ASIC Act, the ACCC, ASIC or a
party to a standard form consumer contract may apply to the court for a declaration
that a term of the contract is an unfair term. When the States and Territories apply
the ACL in their jurisdictions, they may also allow for similar actions under their
respective legislation.
A business that is found to have included an unfair term in a consumer contract a
wide. To assist the imagination of the courts Parliament has enhanced the list of
remedies as follows:
Civil pecuniary penalties will be available for conduct that does not warrant a
criminal penalty and will now include the unconscionable conduct provisions and the
unfair contract terms provisions of the ASIC Act. These penalties vary. The maximum
penalties are consistent with those presently available for breaches of certain
consumer protection provisions of the TPA ($1.1 million for corporations and
$220,000 for individuals).
Disqualification orders are also made available for breaches of certain provisions
of the ASIC Act (including those relating to unconscionable conduct, pyramid selling,
certain product safety and product information and the use of prescribed unfair
contract terms). Disqualification orders will prohibit individuals from managing

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corporations or engaging in particular activities in connection with the management of
corporations.
Substantiation notices ASIC and ACCC have the power to issue substantiation
notices requiring a business to provide information or documents capable of
substantiating a representation made by the business in relation to the supply or
possible supply of financial services (ASIC) and goods and non-financial services
(ACCC).
Infringement Notices may be issued by ACCC and ASIC for breaches of certain
parts of the ACL and ASIC Act, including the unfair contract terms provisions, with
penalties of up to $6,600. These are designed to supplement more serious penalties
by facilitating relatively small financial penalties for minor contraventions without
requiring court proceedings.
Public warning notices may be issued by ACCC and ASIC to inform the public of
potentially harmful conduct without the need for a court order.
Redress Orders ASIC and ACCC may seek court orders requiring a business to
provide redress to consumers who are not parties to a particular enforcement
proceeding. This power is designed to be used where a large number of consumers
suffer similar identifiable damage. The redress can take a number of forms, including
refunds, the variation of a contract or orders to honour representations.
Injunctions prohibiting offending conduct of the way a contract is entered into or a
form of contract not to be used could be made (section 80 of the TPA; section 12GD
of the ASIC Act).
Orders prohibiting payment or transfer of moneys or other property can be
made by the court (section 87A of the TPA; section 12GN of the ASIC Act).
Orders to provide redress to non-party consumers (section 87AAA of the TPA
Act; section 12GNB of the ASIC Act).

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Any other orders the court thinks appropriate (section 87 of the TPA; section
12GM of the ASIC Act).

Enforcement
The amendments will be overseen by:
Ø The ACCC (and State Departments of Fair Trading) for consumer non-financial
consumer contracts which oddly enough includes interest in land.
Ø ASIC for consumer financial contracts.
As under the TPA and ASIC Act, prior to the amendments, ASIC and ACCC are not
required to take enforcement action when they become aware of a breach of the ACL
or ASIC Act. Each has the right but not the obligation to prosecute wrong doing when
in their opinion they see it.
Individual consumers can also take action to protect their interests. The approach of
the amendments is ex post in that their operations in a practical sense depends
upon litigation, of what is an unfair term and what is a term that is or is not
reasonably necessary in a standard form contract, will (unless the term is a
prohibited term) have to depend upon the outcome of case law.
The approach may be well and good but it is addressing the issues case by case and
not in a wholesale manner. The difficulty is as Tonking SC has said at paragraph 6:
“The (Contracts Review Act 1980 (NSW)) has been in place for nearly 30 years and
‘is probably still developing’. This is understandable when regard is had to the fact
that much of the enforcement of unfair terms has de minimis consequences, such
that

the party affected will be disinclined to consider the detriment sufficient to

warrant the time and effort, let alone costs and risks, associated with litigation.”
Whether consumers will be considered enough to take costly litigation is yet to be
seen.

Steven Brown

Page 40

Managing your risks or How it affects competition in the market place
The amendments are significant and far reaching. They have the potential to expose
businesses to significant risk if not managed carefully.
Having regard to the above, the term "standard form contract", is likely to capture
most non-negotiable, general "terms and conditions" agreements given to consumers
to sign before a company provides its goods or services, such as:
•

banking documents, including mortgages and credit card terms and
conditions;

•

terms and conditions attaching to airline, train, bus and taxi travel;

•

terms and conditions attaching to the transport of produce or possessions
for personal, domestic or household use;

•

contracts for utilities, including telephone, internet, electricity and gas
contracts;

•

contracts for the sale and purchase of land principally by developers;

•

residential leases; and

•

contracts for recreational services such as tickets to concerts or sporting
events.

Businesses should:
•

Review existing standard form contracts to consider:
o
o

•

whether those contracts contain any possible unfair terms; and
if so, whether the terms are ‘reasonably necessary’.

If the terms are not reasonably necessary, serious consideration should be
given to whether they should simply be removed as they may well serve no
real purpose or address any real or potential risk.

•

If the term is considered to be reasonably necessary, it is important for
businesses to document the basis for the term in the event that there is a
subsequent challenge and consider whether the term should be disclosed
in a particular way to ensure it is ‘transparent’.

•

Review existing contracts which use a standard form and where there are
provisions for variation or extension after 1 January 2010 to consider:
o

Whether they contain any unfair terms;

o

Whether the terms are reasonably necessary;

Steven Brown

o

Page 41

If the terms are reasonably necessary, consider disclosing the terms
so that they are ‘transparent’ and document a business case for why
the term is ‘reasonably necessary’;

•

Start to consider and document why terms are included into their standard
contracts. Having concurrent evidence supporting why a term is reasonable
will have greater probative value that an argument seeking to defend a term
that might appear to a court a creature of recent invention. Alternatively,
are there sound commercial/business reasons behind the existence of the
clause? Are there industry-standard terms, such as an acknowledgment
that one party has read and understood the contract? If there are, then you
need to closely monitor the development of the new unfair contracts laws.

•

Ensure there is an appropriate and well communicated procedure for
creating and entering into standard form contracts that involve some
compliance or legal review;

•

Ensure staff are properly inducted and trained on the use of standard form
contracts and potentially unfair terms.

The new law is described as consumer legislation. However, the provisions reach far
beyond consumer contracts to provide a powerful weapon by which many other
agreements will also be able to be challenged - franchisees will use the legislation to
strike down terms in franchise agreements, tenants (both commercial and residential)
will be able to use them to avoid harsh lease provisions, and independent contractors
will have a powerful new tool to challenge provisions in quasi-employment
agreements. As mentioned above the new laws have conflicts as to interests in land
being subject to the laws but constitutions are excluded. Yet what will be the situation
when a constitution deals with an interest in land such a company title matter. As a
result, the new provisions are quickly likely to become among the most litigated
provisions in the TPA vying for the title of most litigated section with section 52 of the
TPA.
A schematic has been developed by a firm. A copy appears on the next page.

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www.holleynethercote.com.au/.../Unfair%20Contract%20Terms%20Blog%20Version%2009-07-13.pdf

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Bibliography
ACCC website New unfair contract terms law—Draft guidance for consultation
26 March to 12 April <http://www.accc.gov.au/content/index.phtml/itemId/920435>
Booth, P, Unfair Contract Amendments Act ACL Seminar Paper 20 August, 2009.
www.holleynethercote.com.au/.../Unfair%20Contract%20Terms%20Blog%20Versio
n%2009-07-13.pdf

Tonking, AI Submission to Senate Standing Committee On Economics – Inquiry into
the Trade Practices Amendment (Australian Consumer Law) Bill 2009, 27 July, 2009.

Australian Consumer Law: defects, warranties and unfair contracts basil 120324

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