By Andrew Jankovic
3 October 2019
The Federal Court recently held that hair-replacement business Ashley & Martin’s consumer contracts were in breach of the Australian Consumer Law (ACL), due to ‘unfair’ terms that unreasonably disadvantaged consumers that breached the unfair contracts provisions of the ACL. As a result, the terms under scrutiny have been deemed void, and the ACCC has indicated that they will further pursue the matter by seeking an order for consumer redress and costs. The case is a very interesting one that highlights the importance of structuring appropriate rights and limitations in standard form consumer or small business contracts, but also the limitation in enforcement options and penalties for getting it wrong… for now.
What happened with Ashley & Martin
Between June 2014 and July 2017 approximately 26,000 customers of Ashley & Martin were made to sign agreement terms and pay as much as $6,600 upfront, for a hair loss treatment program. The program was scheduled to last between eight to twelve months. However, after signing, a customer would immediately forfeit their right to a full refund in the event the contract was terminated. A customer would also be forced to pay a certain percentage (or all) of the upfront payment, determined by which stage of the program the customer was at. Customers could get a maximum of 75% of their money back if they cancelled immediately after signing, which would drop to 50% after two days. Furthermore, a customer would have no right to a refund at all after seeing one of the company’s doctors, who would medically assess the customer’s suitability for the prescribed anti-hair loss medicine.
The ACCC considered these terms to constitute unfair contract terms in violation of the ACL and took Ashley & Martin to court. The court determined that the termination clause contained in the contract was indeed unfair and in breach of section 23 of the ACL relating to unfair terms in consumer and small business contracts. Judge Katrina Banks-Smith said Ashley & Martin required customers to sign the contract “in circumstances where they do not have the opportunity to make an informed or real choice”. Only after the contract is signed does the customer receive medical advice as to risks and suitability, which therefore puts the customer under pressure to make an uninformed decision in a short timeframe. By incorporating such terms Ashley & Martin had created an imbalance in the parties’ rights and obligations when it was not necessary or justifiable to protect the legitimate interests of Ashley & Martin. The judge commented that the unfair terms were exacerbated by the customer having to first sign the contract before knowing if the medicine used will cause any adverse side effects. Further consideration was given to the amount required to be paid by the customer in the event of a breach, which was deemed not proportional and not reasonable to reflect the loss flowing from the breach. As a result, the court deemed that all unfair terms contained in the contracts were void.
When does the unfair terms legislation apply?
As of November 2016, the unfair consumer contract terms provisions in the ACL were extended to also cover contracts to which a small business is a party. A small business is defined as a business that employs fewer than 20 people at the time the contract is signed, and where the ‘upfront price payable’ does not exceed $300,000 – or $1 million if the contract is for more than 12 months.
In order for a court to declare that any specific term in a consumer or small business contract is unfair, the term needs to form part of a ‘standard form contract’. While the ACL does not specifically provide a ‘standard form contract’ definition, it is generally interpreted as a contract which is prepared by one party before communicating to the other party, prepared by the party with the most power and not negotiated before signing. In other words, a contract on a ‘take it or leave it’ basis. Consumer contracts will be presumed to be a standard form contract, unless the business relying on the terms proves otherwise. For instance, a gym membership contract, internet service contract or a smartphone contract would be examples of standard form contracts.
In deciding whether a term in a standard form contract is unfair, the court has adopted a three–limbed test for ‘unfairness’. The meaning of an ‘unfair’ term as set out in the ACL is:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it is not reasonably necessary 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.
All three limbs of the unfairness test must be proven to exist, on the balance of probabilities, for a court to decide that a term is unfair.
Penalties and the push for change
While the ACCC has been very active and willing to ensure compliance with the unfair terms provisions of the ACL, greater powers of enforcement will be needed if it ever intends to act as an highly effective deterrent. Currently the ACCC cannot seek civil pecuniary penalties or issue an infringement notice when a term in a contract is declared unfair and voided by the court. Right now, the enforcement available involves rendering the relevant clause unenforceable. Where rendering that clause unenforceable brings the entire contract into question it would also render the contract unenforceable, but otherwise it would remain valid. By broadening the ACCC’s enforcement rights to include, for instance, fines and other such penalties, the ACCC would be able to more appropriately punish infringing companies and create stronger incentives for businesses to ensure their contracts are in line with the ACL. Earlier this year, the Morrison Government addressed the ACCC’s call for greater powers and announced their intention to introduce penalties of up to $10 million for contracts containing unfair contract terms and increase the number of small businesses eligible for protection under the ACL. While such proposals would satisfy the growing call for stronger penalties, it remains uncertain as to exactly when and how the government plans for such changes to take effect, or what types of breaches in practice would trigger the imposition of the high-end fines. This is certainly a ‘watch this space’ situation, but in the meantime it is imperative that all businesses pay close attention to their standard form contracts to ensure compliance.
If you would like further information on the above and how it impacts on your business or your client’s business, or you need advice regarding standard form contracts or compliance with the unfair contracts provisions of the ACL, please contact one of our experts below.