The ACCC has been successful in its Federal Court action against hair loss treatment business Ashley & Martin Pty Ltd (Ashley & Martin). Ashley & Martin supplies its customers with hair regrowth medical treatment programs (Medical Treatment Program).
The proceedings were instituted by the ACCC in November 2017 and almost two years later, the Federal Court found that terms in three of Ashley & Martin’s standard form contracts (Contracts) were unfair. These Contracts had been used with over 25,000 customers between June 2014 and at least June 2017.
In recent years, the general trend has been for businesses facing ACCC proceedings in respect of the Unfair Contract Terms regime to concede that terms in their standard form contracts are unfair. When this occurs, the business and the ACCC agree on the declarations and injunctions sought and submit a statement of agreed facts and admissions to the Court.
In this case, while the parties filed a statement of agreed facts, Ashley & Martin did not admit that the challenged terms were unfair. Rather, Ashley & Martin raised a number of arguments in defence of the proceedings.
Overview of the Unfair Contract Terms regime
The consumer unfair contract terms regime is set out in the Australian Consumer Lawi (ACL) and in the Australian Securities and Investments Commission Act 2001 (with respect to contracts for financial products and services). From 12 November 2016, the consumer unfair contract terms regime was extended to cover standard form “small business contracts”.
A consumer contract is defined as a contract for a 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 consumptionii. Examples of standard form consumer contracts include agreements for personal mobile phone plans, travel bookings and retail terms and conditions.
A small business contract is:
- a contract for a supply of goods or services, or a sale or grant of an interest in land;
- where at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
- either of the following applies:
- the upfront price payable under the contract does not exceed $300,000; or
- the contract has a term of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000iii.
It is currently not unlawful to include unfair contract terms in a standard form consumer contract or small business contract, however a Court or relevant Tribunal can declare terms in such contracts to be unfair and therefore unenforceable. A party to the contract, the ACCC or ASIC has standing to seek a declaration that a term is unfair.
As at the date of this article, the Government has completed initial consultation on changes to the unfair contract terms regime and a consultation Regulation Impact Statement is expected to be issued by the Department of Treasury.
The ACCC’s arguments regarding the Ashley & Martin contracts
The ACCC’s arguments in respect of the Contracts are summarised by Banks-Smith J at paragraph 5 of the reasons for judgment as follows:
“The overarching theme of the ACCC’s contention is that the terms operate together in a manner that commits patients to undertake and pay for a Medical Treatment Program that includes prescription only medicines before patients have had an opportunity to obtain and consider medical advice as to risk and suitability, and in circumstances where patients remain liable to make payments regardless of the nature of the advice. It is only after an appointment with a doctor that a patient is able to give informed consent. By that time, the patient has already committed to a contract from which they cannot withdraw without cost.”
Most customers would sign the Contract to undertake a Medical Treatment Program at their initial consultation with an Ashley & Martin hair loss consultant, who is not a medical doctor nor a healthcare professional. At this initial consultation, the customer would usually be provided with enough non-prescription products to last the length of their Medical Treatment Program, which was typically 8 or 12 months.
After the initial consultation, an appointment would be made for the customer to see a medical doctor engaged by Ashley & Martin as an independent contractor. Ashley & Martin would provide a protocol letter to the doctor setting out its requirements and procedures, including that the doctor must discuss the risks associated with undertaking the Medical Treatment Program. These risks, depending on the type of hair loss treatment products prescribed, included weight gain, high blood pressure and headaches for women and impotence, palpitations and allergic reactions for men.
The effect of the challenged terms in the Contracts were that:
- Customers were obliged to pay for all or part of the Medical Treatment Program on signing the relevant Contract;
- Customers could only obtain a refund for certain hair loss treatment products where one of Ashley & Martin’s medical practitioners deemed the products unsuitable due to an adverse medical side effect and a substitute hair loss treatment product was not available. Customers could not obtain a refund where they were simply concerned about the risks and side effects and no longer wished to continue the Medical Treatment Program;
- If a medical condition or allergic reaction precluded a customer from undertaking a particular Medical Treatment Program, Ashley & Martin would endeavour to transfer the customer to another program or to another hair loss treatment product however the customer was not permitted to terminate the Medical Treatment Program without detriment;
- If a customer terminated the Medical Treatment Program before consulting a medical doctor engaged by Ashley & Martin, the customer would need to pay a percentage of the total price of the Medical Treatment Program or the price of the hair loss treatment products and services provided, depending on which version of the Contracts was used;
- If a customer terminated the Medical Treatment Program within two days after consulting a medical doctor engaged by Ashley & Martin, the customer was required to pay a percentage of the total price of the Medical Treatment Program or the price of the hair loss treatment products and services provided, depending on which version of the Contracts was used; and
- If a customer terminated the Medical Treatment Program more than two days after consulting a medical doctor engaged by Ashley & Martin, the customer was required to pay the total price of the Medical Treatment Program.
In instituting the proceedings, the ACCC stated “Consumers considering contracts for medical treatments are often in a vulnerable position. It is vital that these contracts allow a fair opportunity for people to fully consider the treatment program and medical advice, particularly where there is a risk of side effects”iv.
Ashley & Martin’s arguments
In summary, Ashley & Martin argued that:
- Certain terms were not subject to challenge by the ACCC because they either defined the main subject matter of the Contracts or set the upfront price payable under the Contracts; and
- The challenged terms were not unfair and were reasonably necessary to protect Ashley & Martin’s interests.
Terms defining the main subject matter or setting the upfront price
Under sections 26(1)(a) and (b) of the Australian Consumer Law, a term of a consumer contract or a small business contract cannot be declared unfair to the extent, but only to the extent, that the term defines the main subject matter of the contract or sets the upfront price payable under the contract (Exclusions).
The Explanatory Memorandum accompanying the introduction of the unfair contract terms regime stated that:
- Excluding the main subject matter of a contract from the unfair contract terms regime ensures that a party cannot challenge a term concerning the basis for the existence of the contract; and
- Excluding the upfront price payable under a contract ensures that a person cannot argue that the price payable is unfair, having received disclosure of the price and having agreed to pay that price when the contract was made.
Ashley & Martin argued that variations of the following terms were not subject to challenge because they either defined the main subject matter of the Contracts or set the upfront price:
I [insert name] the undersigned acknowledge my agreement to undertake and pay for the program of treatment recommended by Ashley & Martin Pty Ltd. You must pay in full the RealGROWTH Treatment program.
The Medical Treatment Program will set out the applicable Hair Loss Goods and Hair Loss Services and the time for delivery of the Hair Loss Goods and Hair Loss Services by us to you.
Banks-Smith J found that the above terms did not define the main subject matter of the contract nor set the upfront price, but rather, directed attention to the Medical Treatment Program itself and confirmed an obligation to pay the upfront price (as distinct from setting the upfront price).
In making this finding, Banks-Smith J considered that the Exclusions were drafted to protect terms from attack “but only to the extent” that they defined the main subject matter or set the upfront price. The inclusion of the words “but only to the extent” indicated there was no general protection that happened to touch on obligations to supply goods or services. Further, the Exclusions were worded precisely so that only terms that “defined” the main subject matter and “set” the upfront price were protected from the regime, rather than terms that “relate to” or “concern” the main subject matter or the upfront price.
When is a term not reasonably necessary to protect a party’s legitimate interest?
A term of a consumer contract or small business contract is 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 onv.
While the reasons for judgment assessed all three elements which render a term unfair, this article focuses on the second limb – whether a term is or is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term. The onus is on the party seeking to rely on the term to rebut the presumption that the term is not reasonably necessary to protect their legitimate interests.
Ashley & Martin submitted that it had a legitimate interest in ensuring that:
- The customer persisted with treatment long enough to observe and achieve results;
- Customers were provided with sufficient products to persist with the treatment; and
- Where a contract was terminated early at will, that Ashley & Martin would be paid a reasonable sum for the goods and services it had provided.
In assessing whether the challenged terms were reasonably necessary to protect Ashley & Martin’s legitimate interests, Banks-Smith J referred to the following principles:
- It is not appropriate to define ‘legitimate interest’ as it will depend upon the nature of the particular business and the context of the contract as a whole;
- A legitimate interest may not be purely monetary. A party may have interests in contractual performance which are intangible and unquantifiable; and
- The question of what is ‘reasonably necessary’ will, without limiting any other relevant matters, also involve assessing:
- the particular circumstances of the business;
- the other options that might be available to the party to protect its business interests; and
- the proportionality of the term against the potential loss sufferable by the party seeking to enforce the term.
In applying the above principles, Banks-Smith J found that Ashley & Martin failed to rebut the presumption that the challenged terms were not reasonably necessary to protect its legitimate interests. For example:
- Ashley & Martin had a legitimate interest in ensuring that the customer persisted with treatment long enough to observe and achieve results, however this does not explain why customers are bound to a payment obligation before seeking medical advice, nor why under the refund and termination provisions, customers could be left with some products even when the Medical Treatment Program was not medically suitable for them;
- Ashley & Martin had a legitimate interest in recovering or avoiding indirect costs, however this could be achieved by refraining from supplying a customer with the full course of non-prescription hair loss treatment products before the customer’s medical appointment; and
- The timeframes in which early termination payments escalate is not reasonably necessary to protect Ashley & Martin’s interests. The Federal Court was not satisfied as to why within two days, the amount said to be necessary to protect legitimate interests rises from 50% of overall costs to 100% of overall costs.
This decision illustrates that when seeking to justify the inclusion of a potentially unfair term in a contract, it is not enough to only consider whether the term is protecting a legitimate interest and whether it goes no further than to protect that legitimate interest. Regard must also be given to the alternatives available to a party to protect its legitimate interests.
This article was written by Teresa Torcasio, Partner and Marian Ngo, Senior Associate.
iSchedule 2 of the Competition and Consumer Act 2010 (Cth).
iiSection 23(3) of the Australian Consumer Law.
iiiSection 23(4) of the Australian Consumer Law.
vSection 24(1) of the Australian Consumer Law.