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New Unfair Contract Prohibition warnings for SMEs

Law StuffConsumer law nationally has been radically changed with the passing of new laws that prohibit standard form consumer contracts which contain unfair terms. These changes are likely to have a significant impact on SMEs and how they interact with their customers.

The new prohibition will be inserted into the Trade Practices Act 1974 and is expected to start operation on 1 July 2010. This articles aims to explain the changes and what they mean for SMEs.

What is a consumer contract?

The prohibition on unfair terms will only apply to a “consumer contract”. A consumer contract is defined as a contract between a supplier and a person who is acquiring the product wholly or predominantly for personal, domestic or household use or consumption. This means that in deciding whether a particular person is a “consumer” it is necessary to know the reason for which the individual person is acquiring the product.

This is different to the current prohibition on unfair terms in consumer contracts under the Victorian Fair Trading Act 1999 (Vic), which defines a consumer contract as an agreement for goods or services of the kind ordinarily acquired for personal, domestic or household use or consumption and is acquired for one of those purposes. Under this definition both the nature of the product and the purpose of the individual person must be for personal, domestic or household use or consumption.

This means that the definition of consumer contract under the new provisions will be broader and may capture more contracts than those that fall within the Victorian legislation. This highlights the need for companies who operate in Victoria and currently comply with the unfair contracts provisions of the Fair Trading Act to review their standard form contracts for products that might not ordinarily be acquired by consumers but there is a possibility that the product would be acquired by a person who intends to use it for personal, domestic or household use or consumption.

Some examples of products which are likely to fall within the definition of a “consumer contract” include airline tickets, gym memberships, non-business telecommunications contracts, “off the plan” domestic property contracts, home delivery terms and conditions and computer licensing terms for individuals.

What is a “standard form” consumer contract?

There is no specific definition of “standard form” in the new legislation. However, the legislation does say that a court in deciding whether a particular contract is a standard form contract should take into account the following:

  • whether the supplier has all or most of the bargaining power;
  • whether the contract was prepared by the supplier before any discussion between the two parties;
  • whether the supplier adopts a “take it or leave it” approach;
  • whether the consumer has any opportunity to negotiate or influence the terms of the contract; and
  • whether the contract takes into account any specific circumstances relating to the individual consumer.

One area where there is a higher risk of a contract being found to be a “standard form” contract is the sale of products over the internet. In a case which occurred under the Victorian Fair Trading Act against Jetstar (Free v Jetstar Airways Pty Ltd [2007] VCAT 1405) the Victorian Civil and Administrative Tribunal found that a booking over the internet clearly involved a standard form contract as there was no opportunity for consumers to negotiate and the only choice that the consumer had was either to book the flight or not book the flight.