Unfair contract terms: A better balance ahead

Several legal jurisdictions worldwide have passed laws against unfair contract terms in recent years.  Victoria is among them and New South Wales looked set to adopt a similar law.

The Federal Productivity Commission has now recommended a national approach to the topic and the Ministerial Council on Consumer Affairs has decided to run with it.  Interestingly, it prefers a different model to the one now operating in Victoria.

Why the different approach ?  I think the Commission’s report accurately assesses a risk in the Victorian model.

Two broad approaches

The Commission identifies two broad approaches to an unfair contract terms law.

• In the first, you empower a regulator to assess whether a certain contract is unfair, based on certain criteria. If it considers a term unfair, it can take action.

The fact that not a single consumer has actually suffered as a result of the term doesn’t matter.  It’s the potential that counts.

• In the second, you limit the regulator’s real power to cases where a term is unfair and someone actually suffers harm as a result.

The problem with a ‘no demonstrated harm’ approach

The Productivity Commission expressed the risk these ways:

• There could be inappropriate regulatory interference with apparently one-sided contracts.
• There is only limited information on the extent of consumer detriment resulting from the use by suppliers of notionally unfair contract terms.
• There is a risk of regulatory overreach.
• The regulator might not focus on more egregious unfair contract terms.

Let’s explain the psychology of all that

You know those times when you decide to spring clean the house ?  You begin with a great tidy up / clean up, and the Big Dirt and the Big Mess are very obvious.

Then you begin to notice smudges on the TV screen, and polish those away.

Then you go crazy and toothbrush clean the controls on the microwave.  Eventually you re-wipe the kitchen bench evey time a droplet of tap water lands on it.

The point is that the cleaner things get, the more you become obsessed with tiny dirt and tiny mess.

If you invite a regulator to focus on unfair contract terms, more and more minor things may start to appear unfair as time goes by.  After a while, they may shift from dealing with the ‘more egregious’ unfair contract terms to simply expressing personal opinions about what’s ‘a bit tough’.  That’s what the Productivity Commission means by ‘regulatory overreach’.

The virtue of an actual detriment test

By requiring that there is actual detriment before a supposedly unfair term can be attacked, two benefits follow.

• First, there is a real world dimension to the law.
• Second, the regulator has to satisfy a court on a question of fact, as well as law, to win a case.

A real world example

In 1994, I drafted one of the first couple of commercial internet customer terms and conditions in Australia.  It was less than a page long.  By the current standards of the Victorian regulator, it was illegal, unfair, unacceptable and inappropriate.

But it was in use, without a single amendment, for more than five years.  And without a single customer complaint that it was illegal, unfair, unacceptable or inappropriate.

Why was it tough ?  Because running a CSP can involve having to deal with the occasional Rambo for the orderly operation of the network.  Or, as the Productivity Commission puts it, ‘Such terms may provide a means for suppliers to deal with inappropriate behaviour by some purchasers, to the benefit of consumers as a whole.’

If you divorce actual outcomes from ‘apparently one-sided contracts’ and ‘notionally unfair contract terms’ you invite academic (or just plain personally opinionated) judgments of unfairness in place of focusing ‘on more egregious unfair contract terms’.

It doesn’t have to be that way

I’m not arguing this is an inevitable outcome.  With rigorous discipline a regulator could avoid it.  And I’m not saying it’s an inevitably unacceptable outcome.  In a rogue environment, desperate measures might be justified.

But as the Productivity Commission says, there’s insufficient evidence of such an environment today, and the new law can be reviewed within five years to assess whether the ‘no proof of detriment required’ model is then appropriate.

The acid test:  Has Victoria gone astray ?

Yes, I think it has.  The Productivity Commission’s concerns have been shown to be other than theoretical.

There has been regulator assertion of unfairness applied to terms that are better described as ‘innocuous’ than ‘egregious’.

Terms whose ‘notional unfairness’ has never given rise to a single instance of actual detriment have been attacked.  If it was a precondition to regulator action that even one instance of actual detriment be produced for court inspection, many allegedly unfair terms would never be questioned again.

Victoria, for the time being you’re wrong

The language of the Productivity Commission’s report is diplomatic but the underlying message is clear.  There are two models for an unfair contract terms regime.  Only one has been seriously tried in Australia.  The Commission recommends the other.  Get where it’s coming from ?

The Commission explains why Victoria’s model hasn’t spread:  ‘attempts … to devise national legislation along the lines of the Victorian model have so far failed to meet regulatory impact assessment requirements and have stalled.’

Of course they have.  Without the real world touchstone of proven, actual detriment an unfair contracts regime runs a high risk of becoming an academic exercise.

So does Victoria trim its sails ?

It’s an interesting question.  Victoria has committed to a national approach that is at odds with its current law.

Does it take the message on board and enforce the current law with an eye to where the country is heading ?  Or does it do business as usual until the uniform national law arrives ?

As the Productivity Commission points out, there needn’t actually be a vast difference in final outcomes between the two approaches.  But that depends on a disciplined application of the ‘no demonstrated detriment’ regime.

The immediate message of the proposed national law is that Victoria needs to embrace that discipline.