As s. 23 was a new introduction to the CCA, it is worth spending some time discussing how this law came to arrive in the Act. The unfair contract provisions have an interesting history and have found their way into Australian law in a somewhat unorthodox manner.

In recognition of the importance of cross-border consumer trade, and the diversity in the approaches taken by individual Member States of the European Union towards consumer protection, a Council Directive on unfair terms in consumer contracts came into force on the 11th of May 1993^[1] (“the Directive”).   The Directive required the Member States to implement relevant legislation before the end of 1994. The purpose of the Directive was outlined in Article 1(1) of the Directive, as follows: “The purpose of this Directive is to approximate the laws, regulations and administrative provisions of the Member States relating to unfair terms in contracts concluded between a seller or supplier and a consumer.”

Drawing upon the Unfair Terms in Consumer Contracts Regulations 1999 (UK), which represents the UK’s implementation of the Directive,^[2] the Fair Trading Act 1999 (Vic) (referred to throughout as the “Victorian Legislation”) was amended in 2003 to include Part 2B regulating unfair terms in consumer contracts. The success of the Victorian Legislation has, in turn, been a catalyst for a nationwide adoption of unfair contract provisions.

As a result, Victorian cases are likely to have a significant bearing on the interpretation of the unfair contract terms provisions of the ACL. In addition to drawing on the Victorian Legislation, further guidance may also be drawn from the application of the Contracts Review Act 1980 (NSW) (referred to throughout as the “Contracts Review Act”).^[3]

The Contracts Review Act allows New South Wales Courts power to award remedies to consumers that have been affected by procedural or substantive unfairness. The Contracts Review Act allows a Court to find a contract to be “unjust” and rule that the contract is void or make an order to vary the contract. Thus, it overlaps with the ACL’s unfair contract provisions as both the ACL and the Contracts Review Act provide remedies to a consumer, where the consumer has not had a reasonable opportunity to negotiate the terms of the contract.

In addition, a Court applying the Contracts Review Act may take into consideration the bargaining powers of the parties in making the contract, whether the terms were able to be negotiated and whether it was practical for the party seeking relief to negotiate the alteration of or reject any of the provisions of the contract, and what the educational or economic circumstances of the parties were when making the contract, in order to determine whether a matter is unjust.^[4]

3.1.1 Scope of s. 23

To properly understand the scope of s. 23 of the ACL, it is vital that we grasp several fundamental terms, or concepts, that are used in the section. These terms are discussed in turn.

3.1.1.1 Consumer Contract

The first term that is introduced in this context is the term ‘consumer contract’. In discussing the introduction of the ACL, Victorian Consumer Affairs stated that a ‘consumer contract’ is a ‘standard-form contract’ for the supply of goods or services that is wholly or predominantly for personal, domestic or household use or consumption.^[5] It is therefore necessary to examine the meaning of a ‘standard form contract’ (see 3.1.2.3) to understand this section.

3.1.1.2 Small Business Contract

The term ‘small business contract’ was recently introduced, as noted above (at 3.1). Section 23(4)(b) requires at least one of the parties to a contract to be a business employing fewer than 20 persons (i.e., 19 persons or less) at the time of entering the contract to qualify as a ‘small business contract’. In addition, the upfront price payable under such a contract must not exceed $300,000, or if the contract duration is longer than 12 months, the upfront price payable must not exceed $1,000,000. To be captured by this provision, a small business contract must be entered into or renewed on or after 12 November 2016 and must satisfy the meaning of a ‘standard form contract’.

3.1.1.3 Standard Form Contract

The term “standard form contract” is explained in s. 27 of the ACL as follows:

As seen above, the ACL does not specifically define the term ‘standard form contract’, but rather lists a number of criteria that a court may take into consideration to determine whether a contract is a ‘standard form contract’. In general terms, it is understood that a standard form contract is a contract that is prepared by one party to the contract (usually the business), containing a generic set of terms and conditions where the other party (the consumer) has not had an opportunity to negotiate the terms and is usually offered to the consumer on a ‘take it or leave it’ basis.^[6]

3.1.1.4 Unfair

Another fundamental term that needs to be addressed is the meaning of the term ‘unfair’. As with the definition of ‘standard form contract’, the definition of ‘unfair’ has been provided in the ACL.

Section 24 of the ACL outlines the meaning of unfair as follows:

Section 24(1)(b) uses the term “legitimate interest” in reference to the inclusion of the term in the contract, in the event the business can prove the legitimate interest in including the term, it is unlikely to be found to be unfair. The interpretation of “legitimate interest” is the duty of the court to determine on a case by case basis. While courts have discussed the matter of whether a term is reasonably necessary to protect a ‘legitimate interest’, Justice Banks-Smith stated that ‘[i]t is not appropriate to attempt to define ‘legitimate interest’. It will depend upon the nature of the particular business of the relevant supplier and the context of the contract as a whole.’^[7] It should be noted, however, that businesses will be required to produce evidence to prove that the particular term is reasonably necessary for the efficacy of the business.^[8] Commentators have suggested this may be done through the production of material relating to the business’ costs and structure, the need for the mitigation of risks or particular industry practices to the extent that such material is relevant.^[9]

Further to the above, s. 24(2)(a) requires the Court to consider the extent to which the term is transparent and s. 24(2)(b) requires the consideration of the contract as a whole in determining whether the term is unfair. Commentators in the field have speculated that the transparency requirement of s. 24(2)(a) will not operate to automatically find a term unfair if it does not meet the transparency requirement. In the same vein, a term that is transparent will not, in itself, disprove the unfairness of the term.^[10]

The unfair contract provisions in the United Kingdom use the phrase ‘plain and intelligible language’ rather than ‘transparent’. Notwithstanding, the practical effect of these two phrases is likely to be the same. The United Kingdom case of Office of Fair Trading v Abbey National plc^[11] per Smith J may provide some guidance regarding how the term ‘transparent’ may be interpreted:

[Transparency] 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.^[12]

The requirement for transparency was addressed in the Victorian Civil and Administrative Tribunal (“VCAT”) case of Director of Consumer Affairs Victoria v AAPT Ltd (Civil Claims)^[13] (“the AAPT case”). In this case, the Tribunal made it clear that even where a contract contains terms that favour the consumer, the favourable term may not counterbalance the unfair term if the consumer is unaware of the unfair term. A consumer may be unaware of the unfair term where it is implied in the contract, hidden in the terms and conditions, in a schedule or another document or where the term is written in legalese.^[14] The rationale behind the decision in the AAPT is that there may be in an information imbalance in the favour of the business where a consumer is unaware of the unfair term.

The AAPT case, in interpreting what constitutes an ‘unfair term’, found there are two distinct types of unfair terms:

1. Terms that cause such an imbalance that they are unfair even if they were individually negotiated or brought to the consumer’s attention; and
2. Other terms that cause less (but still significant) imbalance. These terms are only fair if they have been individually negotiated or brought to the consumer’s attention.^[15]

Furthermore, when reading of section 24(2)(b), it could be understood that the requirement of the Court to consider the contract as a whole may require the Court to weigh up the benefit or detriment to the consumer under the contract. A term that is alleged to be unfair may be seen in a better context when the detriment to the consumer is viewed in conjunction with the counterbalancing terms. For example, a potentially unfair term may be included in a consumer contract but may be counterbalanced by additional benefits, such as a lower price, being offered to the other party.^[16] It is also worth noting that where a particular term is decided to be unfair in one case, it will not necessarily be unfair in every contract.^[17]

A case that dealt significantly with unfair contract provisions, and more specifically the requirement to view the contract as a whole, was the case of Jetstar Airways Pty Ltd v Elizabeth Winifred Free (“Jetstar v Free”). Jetstar v Free was the first decision of the Victorian Supreme Court to consider the effect of the equivalent Victorian unfair contract provisions. As judgments such as this provide a valuable insight into how the ACL provisions are likely to be interpreted by the courts, it is worth devoting some time to this case.

At first instance, Jetstar v Free was heard in VCAT.^[18] Ms Free purchased two return plane tickets for herself and her sister. The tickets were purchased online from the respondent airline company, Jetstar, as part of a special introductory offer and Ms Free paid $437.39 per person for return tickets. In purchasing the tickets, Ms Free indicated she agreed to Jetstar’s “Fare Rules” by clicking an ‘I Agree’ button. At the time of purchase, there were more expensive tickets available that permitted ticketholders to change the name of the passenger, among other particulars.

Subsequently, Ms Free sought to change the name of the passenger on the second ticket. In accordance with the “Fare Rules”, Jetstar charged Ms Free a “change fee” of $75 in addition to a $600.90 fare difference between the original and the current ticket prices. Ms Free sought a refund of the fare difference on the basis that it had been imposed under an unfair contract term. Senior Member Vassie found in favour of Ms Free. In interpreting the unfair contract provisions of the Victorian Legislation, Senior Member Vassie found that the charges cause a significant imbalance in the rights and obligations of the parties, and further that Jetstar received a windfall for providing a service for which the passenger had already paid. In the light of this, it was found the term was unfair within the meaning of the Victorian Legislation.

Jetstar appealed against the VCAT decision in the Supreme Court of Victoria^[19] and succeeded on the following grounds:

1. VCAT erred in finding that the imposition of the charge caused a significant imbalance in the parties’ rights and obligations, by failing to take into account the benefit to Ms Free from the right to transfer the ticket to another person; and
2. VCAT erred in assessing the effect of the imposition of charges on the parties’ rights and obligations independently, rather than in the context of the contract as a whole.^[20]

In the appeal, Cavanough J discussed at length when a ‘significant imbalance in the parties’ rights and obligations’ would occur.

Jetstar submitted that VCAT failed to take into consideration that the right to transfer the ticket to another person counterbalanced the additional fees. Further Jetstar argued that there were other, more expensive, fares available at the time of Ms Free’s purchase which would have allowed Ms Free to cancel (with a refund), and make name and address changes without charge. Jetstar submitted that VCAT concentrated solely on the additional payment that Ms Free was required to make.

Justice Cavanough noted that the Victorian Legislation required the examination of both the rights and obligations of the parties. He found this required a consideration of the balance of the parties’ rights and obligations both under the alleged implied term and under the contract as a whole. Accordingly, the Court considered that any detriment to a consumer from a particular term must be weighed against any countervailing benefits rather than consider it in isolation. In this regard, the position taken by Cavanough J in Jetstar v Free has been affirmed in the provisions under the ACL, where it has been made explicit that the contract as a whole must be taken into consideration in determining whether a term of that contract is unfair.

Justice Cavanough also found that VCAT had not given proper consideration to the rights that had accrued to Ms Free under both the alleged implied term (the ability to substitute a passenger name) and the contract (a very low ticket price), each of which acted as a counterbalance to the burden of the fare difference she had to pay.

The Jetstar decision, at both the first instance and appeal, dealt significantly with the term “contrary to the requirements of good faith”, as required under the Victorian Legislation. The Court’s findings regarding this requirement have not been discussed here, as this requirement has not been replicated in the ACL provisions.^[21]