New consumer law will punch holes in ISP / telco contracts

Last August, we explained that the Ministerial Council on Consumer Affairs had generally accepted a Federal Productivity Commission recommendation for a national ‘unfair contracts’ law.

Canberra now says it will fast track the new law.  Expect a bill in Parliament by June 2009, and a new law in force from 1 January 2010.  As part of the process, an important discussion paper is now available.

Make no mistake.  The new law will force a re-think of most ISP and telco standard contracts in Australia.  Many everyday, standard terms will be at risk, or even completely banned.

It will also require Consumer Affairs Victoria to review its approach to unfair contracts.

About the proposed new law

The new consumer law arising from the Productivity Commission’s report will have three main elements:

• a national consumer law based on current consumer protection provisions in the Trade Practices Act 1974, adding a national unfair contract terms regime and more flexible enforcement powers
• a new national product safety regime
• better cooperation and information sharing between national and state regulators.

At this stage, we’re particularly interested in the new national unfair contracts law.

New national unfair contracts law

Key points:

• It will apply only to ‘take it or leave it’ standard contracts.
• Telco / ISP standard agreements are particularly identified as targets.
• If a telco / ISP says ‘It isn’t a take it or leave it standard contract, they must prove it.’
• A term is ‘unfair’ if it causes a significant imbalance in the parties’ rights and obligations under the contract and is not reasonably necessary to protect the legitimate interests of the telco / ISP.
• The person who attacks a term as ‘unfair’ must prove that some one has actually suffered financial or other detriment or is substantially likely to do so.
• There will be representative actions for damages by a class of consumers detrimentally affected by unfair contract terms i.e. customers can gang up on a telco / ISP’
• Regulators can lead representative actions, or consumers can do it themselves.
• Upfront price is excluded from unfairness test.  The law can’t be used to simply say that a price is unfair.
• Some kinds of terms can be banned completely.
• There will be a transition period allowed.

What kinds of terms are in the ‘unfairness’ gun ?

The discussion paper gives these examples of terms that could offend the new law:

• terms that permit the ISP / telco to unilaterally vary the terms of the contract
• terms that prevent the consumer from cancelling a contract
• terms that require the payment of fees when the service is not provided
• terms that exclude liability for harm resulting from the ISP / telco’s or its agents’ actions
• terms that let the ISP / telco supply goods or services that are not those contracted and paid for by the consumer
• terms that let only the ISP / telco decide whether to renew or not to renew the contract
• terms that penalise only the consumer for breaches of the terms of the contract
• terms that permit the ISP / telco to change the price of the goods or services contracted for without allowing the consumer to terminate the contract
• terms that permit the ISP / telco to unilaterally determine whether a breach of the contract has occurred or to interpret the contract’s meaning
• terms that allow the ISP / telco to assign the contract to the consumer’s detriment, without the consumer’s consent
• terms purporting to limit the consumer’s right to take legal action against the ISP / telco
• terms limiting the evidence that the consumer is permitted to use in legal proceedings based on the contract
• terms imposing the evidential burden on the consumer in legal proceedings
• terms that do not permit refunds to consumers when the goods or service are not provided, or which apply conditions to the way in which consumers are refunded
• terms that require consumers who breach a contract term or terminate early to pay penalties, in the form of specific additional payments, additional interest or indemnity legal costs, which do not reflect the ISP / telcos’ reasonable costs
• terms that deem something as a fact or that something will be a fact, such as an acknowledgment that certain information has been provided to the consumer prior to the agreement being made, regardless of whether or not it was.

And what kinds of terms might be banned completely ?

These are the kinds of terms that may be affected:

• terms retaining title for suppliers in goods that cannot be removed from consumers’ premises without damage
• terms allowing suppliers to repossess such goods
• terms denying the existence or validity of pre  or post contractual representations made to consumers
• ‘entire agreement’ terms
• terms deeming something a fact
• terms that deny the existence or effect of oral representations
• terms under which consumers acknowledge that they have read or understood the contract
• conclusive evidence terms
• terms that are void under laws that imply certain terms into contracts
• terms that otherwise limit suppliers’ liability for their negligence
• flat / fixed early termination fees
• terms requiring the paying out of the balance of a contract
• terms requiring consumers to pay more than suppliers’ reasonable enforcement costs reasonably incurred
• terms allowing suppliers to retain, debit or set off disputed amounts
• terms mandating arbitration of disputes or otherwise inhibiting access to courts or tribunals.

For most States, it’s a win for consumers

Victoria is the only State or Territory that currently has an unfair contracts law.  So consumers in all other States and Territories will be getting access to these rights for the first time.

But Victoria gets it wings clipped in one way

Under Victoria’s current unfair contracts law, there is no requirement that the regulator Consumer Affairs Victoria ‘be real’.  If it considers that a term is unfair, and it can persuade a tribunal to consider the same thing, the ISP / telco loses – even though not a single actual disadvantaged customer has been produced as ‘evidence’.

This highly academic approach to the problem invites the Victorian regulator and courts to approach the law in an intellectual, theoretical way.  You might have thought this runs a risk that they would go too far.  So did the Productivity Commission, whose report emphasised the risks of this approach:

• 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.

Canberra’s discussion paper basically agrees with this assessment and sets the bar higher than the current Victorian law:

Remedies will be available only where the claimant (an individual or a class) shows detriment to the consumer (individually or as a class), or a substantial likelihood of detriment, not limited to financial detriment.

This element of the model reflects the PC’s recommendation , although it makes it clear that action may also be undertaken on the basis of a ‘substantial likelihood of detriment’. This recognises concerns about the limitations that a requirement limiting enforcement action to actual detriment would place on the effectiveness of enforcing the provision in practice.

However, by requiring a proof of a ‘substantial likelihood of detriment’ in the particular case, the provision would require more than a theoretical case of potential detriment to be made out, but would require proof of either actual detriment or a substantial likelihood of detriment. This recognises concerns about the potential for regulatory overreach, should no such limitation be applied.

It isn’t quite as strict a solution as the Productivity Commission wanted, but it supports the general view that the regulator needs to ask ‘Is this real ?’ before waving the law at a company.

Our take on it

History shows that CSPs generally adopt a ‘wait and see’ approach to these kinds of new laws.  Then a few players get seriously punched up and many panic. 

Copyright infringement and the safe harbour are a great example.  Three years ago, you couldn’t give away advice on safe harbour.  Now, management are in a rush to sail in, since iiNet was sued.

We think a more measured approach to standard CSP contracts would be wise.  The law is coming, ready or not.  But better to be ready.  That doesn’t mean changing contracts prematurely, but it could involve some measured thinking about which protections you really need, and which are over the top.