Welcome to the third article in our new series ‘UCT 101’, designed to assist businesses in preparing for new reforms to the unfair contract terms regime under the Australian Consumer Law (ACL)1 introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Act). The reforms to the UCT regime under the Act will take effect from 9 November 2023.
In our first two articles of the series (which can be found here and here), we discussed some of the preliminary foundational questions associated with the application of the unfair contract term (UCT) regime, namely – what constitutes a ‘standard form contract’ and a ‘small business contract’ for the purposes of UCT regime.
In this article, we arrive at the core principle of the UCT regime – what makes a contract term unfair? For ease of reference throughout this article, the term ‘advantaged party’ will be used to refer to the party who seeks to include, apply or rely on the UCT, and the term ‘disadvantaged party’ will be used to refer to the party that is subject to, or disadvantaged by, the purported UCT.
When is a term unfair for the purposes of the UCT regime?
A term of a consumer contract or small business contract is unfair if the following three conditions are satisfied (UCT Test):2
- The term creates a significant imbalance in the parties’ rights and obligations under the contract;
- The term is not reasonably necessary to protect the legitimate interests of the advantaged party; and
- The term would cause detriment (whether financial or otherwise) to the disadvantaged party if it were applied or relied on.
In applying the UCT Test, a court may take into account such matters as it thinks relevant, but must take into account:3
- The extent to which the term is transparent; and
- The contract as a whole.
Let’s look more closely at each of these conditions…
|The term creates a significant imbalance in the parties’ rights and obligations under the contract.
|The first limb of the UCT Test looks at whether the term creates a significant imbalance between the rights and obligations of the parties under the contract. One important consideration in applying this limb of the test is whether the contract gives the advantaged party a right without imposing a corresponding duty on the advantaged party, or without giving any substantial corresponding right to the disadvantaged party.
In ACCC v Servcorp  FCA 1044, a clause in a customer contract permitted Servcorp to terminate the contract by giving one month’s written notice to the customer at any time without cause, and without the requirement to pay compensation to the customer. In contrast, the customer had limited termination rights and did not have any specific corresponding right to terminate for convenience. In considering these differing rights, the court determined that they gave rise to a significant imbalance in the parties’ rights and obligations.
|The term is not reasonably necessary to protect the legitimate interests of the advantaged party.
|The second limb of the UCT Test considers whether the term in question may be reasonably necessary in order to protect the legitimate interests of the advantaged party. This ‘legitimate interest’ need not be purely monetary, and may be of a business or financial nature.4 This limb acts a rebuttable presumption, meaning it is up to the advantaged party to show why the term is necessary to protect its legitimate interests.
In Carnival Princess Cruise Lines Ltd v Karpik (The Ruby Princess)  FCAFC 149, the Court held that the applicant had a ‘legitimate interest’ in including exclusive jurisdiction clauses and class action waivers in its customer contracts, given that it was an international corporation engaged in business across multiple jurisdictions, and had an interest in dealing with claims “in the one forum of which it was familiar, with its regularly engaged legal representatives and on an individual basis”.5
|The term would cause detriment (whether financial or otherwise) to the disadvantaged party if it were applied or relied on.
|The third limb of the UCT Test requires there to be detriment (financial or otherwise) to the disadvantaged party. The requirement is that it “would cause” detriment – meaning more than a mere possibility of detriment is required.6
In late 2021, the ACCC investigated certain terms of the standard form consumer contracts of Please Hold (UK) Limited (Please Hold). The contracts in question contained an automatic renewal clause which caused the contracts to automatically renew for a further term upon the expiry of the initial term. The initial term of these contracts generally ran for a period of between 24 to 36 months, and would automatically renew for another full contract term if the customer did not terminate the contract in writing at least 42 days before the end of the initial term. If a customer did not terminate in time, the contract would be extended for the further term without notice and the customer could only terminate by paying termination charges equivalent to the price payable for the further term less 3%.
The ACCC considered that the automatic renewal clause was unfair, as it had the potential to cause significant financial detriment to customers who, in effect, had to pay for a service they may no longer have needed, under a contract that they may have thought had expired or that they had tried to cancel. While Please Hold did not accept that its contract terms were unfair or constituted a breach of the ACL, it cooperated with the ACCC’s investigation and agreed to amend its contract terms to address the ACCC’s concerns.
|The court may take into account such matters as it thinks relevant.
|In determining whether a term is unfair according to the UCT Test, the Court must take into account such matters as it thinks relevant. This has not proven to be a simple throwaway line, and in previous Australian cases has allowed Courts to take into account pre-contractual conduct and consumer choice when presented with alternative options.
In Jetstar Airways Pty Ltd v Free  VSC 539, the Court held that VCAT had erred in finding that certain contract terms (being terms imposing additional fees for passenger ticket transfers) caused a significant imbalance in the parties’ rights and obligations. In reaching this conclusion, the Court took into account as relevant the fact that the consumer had the choice of selecting from a range of ticketing options at the time of purchase which offered more or less flexibility depending on the price (e.g. Jetstar offered fares that were less restrictive (particularly being refundable) that were correspondingly more expensive), ultimately upholding Jetstar’s ground of appeal. This analysis was interlinked with the Court’s consideration of the ‘contract as a whole’, and is thus repeated with a slightly different consideration below under ‘the court must take into account the contract as a whole’.
|The court must take into account the extent to which the term is transparent.
|In determining whether a term is unfair according to the UCT Test, the Court must take into account the extent to which the term is transparent. However, it must be noted that a non-transparent term does not necessarily equal an unfair term, and a transparent term does not necessarily equal a fair term.7 Section 24(3) of the ACL states that a term will be transparent if it is expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term.
In ACCC v JJ Richards & Sons Pty Ltd  FCA 1224, the Court found that terms which were drafted in legal language, rather than plain English, that had been presented in a very small font size and not in a way that drew them to the customer’s attention were not transparent. The Court said that the terms could fairly be described as a “densely packed page of small print terms and conditions”.8
|The court must take into account the contract as a whole.
|In determining whether a term is unfair according to the UCT Test, the Court must take into account the contract as a whole. It has been well established in Australian case law that a term “cannot be assessed in a vacuum” in such a way which ignores the practical considerations of the contractual obligation,9 and that the evaluation of the term must “include the whole bargain and, necessarily, its commercial context”.10
In Jetstar Airways Pty Ltd v Free  VSC 539, the Court held that VCAT had erred in finding that certain contract terms (being terms imposing additional fees for passenger ticket transfers) caused a significant imbalance in the parties’ rights and obligations. The Court said that VCAT had merely assessed the benefits and detriments to the parties of the term as a single term of the contract, and had failed to assess the rights and obligations of the parties as a whole. According to the Court, VCAT should have considered other provisions of the contract to see if they ‘counterbalanced’ the term which imposed additional fees on the customer for transferring their ticket. The Court was satisfied that VCAT had not considered the contract as a whole, because it failed to take into account "a special term as to price, that tended to counterbalance the term in question."11
Can you give me some examples of an unfair contract term?
Section 25 of the ACL sets out examples of the kinds of terms that may be unfair. These include:
- A term permitting one party (but not another party) to avoid or limit performance of the contract;
- A term permitting one party (but not another party) to terminate the contract;
- A term penalising one party (but not another party) for a breach or termination of the contract;
- A term permitting one party (but not another party) to vary the terms of the contract;
- A term permitting one party (but not another party) to renew or not renew the contract;
- A term permitting one party to vary the upfront price payable under the contract, without the right of another party to terminate the contract;
- A term permitting one party to unilaterally vary the characteristics of the goods or services to be supplied under the contract;
- A term permitting one party to unilaterally determine whether the contract has been breached or to interpret its meaning; and
- A term permitting one party to assign the contract to the detriment of another party without that other party’s consent.
However, as these are examples only, the existence of a term of a kind listed above will not necessarily be unfair in certain circumstances. Whether or not a term is unfair will depend entirely on the application of the UCT Test as described above.
In our next instalment of ‘UCT 101’, which will kick off in early-2023, we will examine some of the “key offenders” under the UCT regime, looking at those contractual terms which are most likely to give rise to UCT concerns. Until then look out for our regular articles on ACL related matters, which we will be publishing over the next couple of weeks.
How can we help?
We have a dedicated contracting and consumer law team that can assist you with contract preparation and review and can provide you with advice on your rights and obligations under the ACL, particularly in light of recent reforms. We also routinely present to businesses on the Australian Consumer Law and the unfair contract terms regime. Please contact us if you would like more information about the services we provide.
This article was written by Teresa Torcasio, Partner and Zoe Vise, Associate.
1Competition and Consumer Act 2001 (Cth), Schedule 2 (‘Australian Consumer Law’ or ‘ACL’).
4Paciocco v Australia and New Zealand Banking Group Ltd  HCA 28; (2016) 258 CLR 525; 333 ALR 569; 90 ALJR 835.
5Carnival Princess Cruise Lines Ltd v Karpik (The Ruby Princess)  FCAFC 149 at .
6ACCC v Ashley & Martin Pty Ltd  FCA 1436 (Banks-Smith J).
7Explanatory Memorandum to the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 (Cth).
8ACCC v JJ Richards & Sons Pty Ltd  FCA 1224 at .
9ACCC v Ashley & Martin Pty Ltd  FCA 1436 at .
10Carnival Princess Cruise Lines Ltd v Karpik (The Ruby Princess)  FCAFC 149.
11Jetstar Airways Pty Ltd v Free  VSC 539 at .