Do I need to check my customer contracts before July 1?

Standard-form consumer contracts have been around for as long as I can remember. Clients like them because they only have to have a contract drafted once instead of every time they enter into a transaction with a consumer. They save time and money. And nobody reads them anyway – until there’s a problem. 

But when was the last time you read your business’s consumer contract? Do you ever review them to keep them current?

Over time, some businesses have developed clauses that consumer advocates would consider unfair. Take this one for example:

You waive, release, discharge and relinquish any and all claims that you now have or may have against us, our affiliates, subsidiaries, parents, shareholders, directors, officers, employees, agents and representatives which are connected with, arise out of, relate to or are incidental to the use of the Service.

Or this one:

We may terminate this Agreement immediately by notice to you if…you change your address or billing contact details without notifying us in accordance with clause …

These clauses are unfair to consumers because they shift the entire risk onto consumers; risks that should either be borne by the business or equally between business and customer. They are examples of how easy it can be to slip one-sided, unfair terms into contracts that are presented on a “take-it or leave-it” basis. 

The ACCC and ASIC, as well as State/Territory consumer affairs agencies, are now taking a larger stick to standard-form consumer contracts.  From 1 July 2010, there is a new national Unfair Contract Terms law that makes a clause in a standard-form consumer contract unfair if:

• it represents a significant imbalance in the parties’ rights and obligations arising under the contract, and
• is not reasonably necessary to protect the seller’s legitimate interests, and
• would cause detriment (whether financial or otherwise) to a consumer if it were to be applied.

In deciding whether a clause is unfair, the court must take into account the contract as a whole and how “transparent” the clause is.

In other words, does the contract provide some additional benefit in exchange for the unfair clause? Is the clause easily understood? Was it made clear to the consumer up front? These things won’t necessarily make a seriously unfair clause fair, but it might help with borderline issues.

Key areas to watch out for with your consumer contracts are:

• One-sided variation clauses. Contracts that allow the seller to change important aspects of the contract at its own discretion without the consumer having any right to end the contract without penalty. 
• Limitation of liability. Some liabilities can be limited, for example where there are unforeseen circumstances outside the seller’s control preventing completion of the contract. But other liabilities are implied into consumer contracts by law and cannot be excluded or modified.  Attempting to do so not only renders the term unfair, it can be downright false and misleading.
• Penalty clauses. It’s not unreasonable for a business to seek damages if a consumer breaks a contract. But it can’t be a “penalty” that leaves the business with more compensation than its loss – only courts can impose penalties for a breach of contract. Genuine compensation (say a commercial rate of interest on outstanding debts) would be acceptable but imposing a 25% interest rate or huge fees to deter or penalise will be unfair.

So now is the time to review those contracts. Just keep it simple, make it clear, no nasties and no hidden surprises. 

Now there’s a challenge for lawyers!

Piquet Kruzas is a lawyer and experienced management trainer.  He has operated his own e-commerce retail and distribution business and brings skills from 15 years in competition and consumer law, telecommunications regulation and compliance at the ACCC and Consumer Affairs Victoria.  He is currently on secondment to Browne & Co. Solicitors and Consultants