The Senate Standing Committee on Economics has received, and noted, strong submissions that part of the proposed new unfair contracts law can’t be right. 

But so what ?  The Committee majority finds no fault with the reasoning of law Professor Frank Zumbo, or the Consumer Action Law Centre … but it has still rubber stamped the Bill, virtually guaranteeing its passage into law.

And yes, the problem wording is the part we described as the Bill’s ‘bonkers bit’ back in June 2009.  It’s disappointing that the Senate Committee system hasn’t been able to deliver a sensible outcome.

The problem

We described it at length in an earlier post.  But in a nutshell, it’s this:

The new law will say that a contract term is unfair if it creates imbalanced rights or obligations without good reason.  And it goes on to say that in assessing that, the court must consider how ‘transparent’ (i.e. clear and obvious) the term is.

So the exact same imbalanced term, effectively forced by the exact same dominant supplier on the exact same customer with the exact same minimal bargaining power might be (a) unfair, if it is on page 21 of the contract in ordinary print but (b) fair, if it is on page 1 in bold type.

How does the page, or font size, affect whether a term creates imbalanced rights ?  How do they affect whether there’s a good reason for including an imbalanced right ?  It is, as they say in the classics, a non sequitur.  Transparency forms no part of the definition of ‘unfairness’ offered by the Bill.  So how can it be a factor in deciding if a certain case falls within the definition ?

The Zumbo view

Associate Professor Frank Zumbo submitted to the Committee:

… That the bill’s reference to whether or not a contract term is transparent in section 3(3) should be deleted. As with the ‘detriment’ provision, he argued that the test for transparency should be distinct from whether or not the contract term is unfair. Indeed, he argued that a contract term may be transparent but drafted by the larger party in a way that represents a significant imbalance in contractual rights of that party and which goes beyond what is reasonably necessary to protect its legitimate interests.

Consumer Action Law Centre view

Consumer Action Law Centre submitted:

… That the transparency clause is ‘the only part of the Bill’s definition of ‘unfair’ that was not in the MCCA-agreed model for UCT provisions and was not foreshadowed in the consultation information paper of February 2009′. The two other matters in subsection 3(2) of the bill – detriment and the contract as a whole – are both ‘reasonable and in accord with the MCCA model’.

The Centre explained that the unfair contract laws are a negotiation problem (a substantive issue), not a disclosure problem (a procedural issue). In this context, the availability, legibility and presentation of contract terms is irrelevant: the key obstacle is the inability of consumers to negotiate the terms of standard form contracts proposed by suppliers.

The Centre feared that despite the government’s good intentions in introducing the ‘transparency’ test, the test may substantially undermine the operation of the provisions. It could mean that the courts will regard a term as:

…’less unfair’, and thus possibly not unfair at all, if it has been clearly typed out in the contract, regardless of whether it is realistic to expect the consumer to have read, understood or negotiated over that contract term, and regardless of the extent of the unfairness of the content and effect of that term. Despite the EM’s statements, the provision is not drafted in terms of a court being required to take into account the extent to which a term is not transparent but the extent to which it is.

The majority Committee position

Professor Zumbo and Consumer Action Law Centre are plainly correct on the transparency question.  The Committee majority didn’t find otherwise.

But some Senate Committees have a real brief to critique, while others seem to consider themselves a rubber stamp.  In this case, the majority simply approved the Bill, including this obvious mistake.

The minority Committee position

Senators Alan Eggleston and Barnaby Joyce made some separate comments of a rather confused kind:

In relation to … whether a term is ‘transparent’ in the context of matters to which a court must have regard in deciding whether a term is unfair, Coalition senators are attracted to the arguments of the Consumer Action Law Centre and Professor Frank Zumbo that the “transparent” element is superfluous in this clause and should be removed.

Coalition senators recognise that difficulty and unease these concepts have caused from the evidence of a number of witnesses. We are however satisfied, based on the UK and Victorian experience and Treasury and other evidence, that these elements, in their context of “matters to which a court must have regard,” are not impassable.

Coalition senators note with satisfaction that the experience in the UK is that the key role in enforcement of the UK Regulations has been with the regulator and not the courts.

As far as we can tell, they ended up in support of the majority position, although if the final paragraph means what it seems to (that Parliament needn’t worry so much about how an Act directs courts if it considers that there won’t be many court cases, because a regulator will sort most things out), the Senators need their mouths washed out.

One logical and strong position

It was up to independent Senator Nick Xenophon to stand up for logic in legislation:

Courts’ consideration of … ‘transparency’

As it stands, courts have the discretion to consider all aspects of cases before them, and should not be constrained to focus on ‘transparency’ and ‘detriment’ specifically when it comes to determining whether or not a contract is unfair. The mandatory requirement for the Court to focus on transparency and detriment will require the court to address these specific questions and will effectively turn these mandatory requirements into tests in themselves and in a manner that negatively impacts on the consumer.

National Legal Aid argues that the concept of ‘transparency’ implies that consumers are able to make informed choices about contract terms, however it stated in its submission that their case work would suggest the opposite.

… because most consumers do not read contracts – most rely on a notion that traders will act in a fair and reasonable way when it comes to enforcing their rights. Even when they read contracts, consumers do not often understand how a particular clause will operate in practice. And, even when a contract is read and understood, standard clause contracts are nonnegotiable – it is a falsity to think that consumers can somehow bargain their way through amending or deleting a clause in a contract that is unfair but transparent.

Associate Professor Frank Zumbo also argued in his submission that a term can be considered ‘transparent’ but may still be ‘unfair’.

…on the simple, but objective basis that the larger party’s bargaining power allows the larger party to draft and impose a contract term in such a way as to (i) represent a significant imbalance in the contractual rights and obligations in the larger party’s favour; and (ii) in a manner that goes beyond what is reasonably necessary in order to protect the legitimate interest of the larger party.

Our take on it

It seems to us that this was an extreme case of law making gone wrong. 

• The transparency ‘test’ forms no logical part of the definition it is supposed to test for.
• That problem was clearly pointed out to the Committee.
• So were its practical consequences.

But somehow, it was all OK by everyone except Senator Xenophon.

Last December Optus incurred customer wrath, effectively torpedoing mobile access to cheap international VoIP services by charging them at international rates. 

At the time, Optus insisted that:

International calls within the meaning of your Optus Mobile Standard Form of Agreement for all Timeless and Cap plans includes calls that re-route or divert to international numbers.

CSP Central asked Optus to tell us where the SFoA said that.  We couldn’t be sure – because the document is a confused mish-mash – but as far as we could tell it said no such thing.

Apparently Optus didn’t feel too sure of its grounds, either.  So it has bolted on a powerful, unbalanced  new contract term that is sure to attract the interest of consumer regulators who have unfair contract terms legislation in their armory.  Today, that’s only Victoria.  On 1 January 2010, it will be every Australian State and Territory, and the ACCC.

The new Optus contract term

The following little gem has been added to Optus’ standard terms:

5.2A  Blocking Calls
Effective 12 August 2009, we may block access to a number (other than an emergency service number) if we reasonably require this to be done for technical, operational or commercial reasons.

Seems pretty rude, to us

It’s the ‘commercial reasons’ that trouble us most. 

It’s a ‘commercial reason’ to block a particular number that it relates to a service that competes with Optus. 

It’s a ‘commercial reason’ to block access because the number represents a call type that is unprofitable for Optus.

For many purposes, the word ‘commercial’ can reasonably be translated as ‘money making’.  That’s not a cheap shot.  ‘Commercial real estate’ is real estate used for money making purposes.  ‘Commercial loans’ are financial arrangements made to facilitate money making activities.

So substitute that for ‘commercial’ in Optus’ new term and you get:

5.2A  Blocking Calls
Effective 12 August 2009, we may block access to a number … if we reasonably require this to be done for … money making reasons.

It’s a pretty unbalanced and unreasonable power to have, unless Optus can explain what legitimate interest it is necessary to protect.

Unbalanced and unreasonable equals illegal

Under the new national unfair contracts law, due to take effect on 1 January 2010, a term in a standard form contract that is (a) seriously unbalanced and (b) not reasonably necessary to protect a legitimate interest is void.  And the onus of showing the legitimate interest will lie on the party that benefits from it.

Back in January, we were asking Dear Optus, please show us where the supposed definition of international calls could be found.  Now, we’re asking What legitimate interest of Optus justifies a power to block access to numbers for unspecified ‘commercial’ reasons ?

Delivered in our trademark style … plain english guaranteed … the seminar offered practical and expert insights into living harmoniously with the new trade practices law.

We’ll offer a repeat session soon … keep watching.

• isn’t in the Productivity Commission report that recommended the new law
• isn’t in the Victorian law that is already in force in Victoria
• isn’t in the United Kingdom law that served as the model for Victoria’s law, and
• is bonkers.

It makes no sense.  It’s bananas.  And the Explanatory Memorandum that accompanies the Bill admits as much.

The definition of ‘unfair term’

Since the proposed law voids ‘unfair terms’, it needs to say what that expression means.  Here’s how it does that.

Meaning of unfair

(1) A term of a consumer contract is unfair if:

(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.

OK, that’s cool as far as it goes.  There are two conditions that define an unfair term:

• My rights are significantly greater than yours, or my obligations are significantly less.
• That disparity isn’t reasonably necessary to protect my legitimate interests.

We can understand that.  Fine.

An example

Before we get to the bonkers bit, let’s dream up an example of how that definition might work.  Let’s say that there was a court decision that ISPs could be liable to massive damages if they receive a copyright infringement allegation and don’t suspend the alleged account within 5 minutes. 

Well, every ISP would add a contract term that allowed it to immediately suspend a customer in those circumstances.

That term would clearly be ‘fair’.  The powerful and unbalanced right to suspend is necessary for the ISP to protect itself against big damages awards.  End of story ?  Would a court have to think about it a moment longer ?  Hasn’t the definition of ‘unfair’ been applied and resolved in this case ?

Well, not quite.  Thanks to the bonkers bit.

The other thing the court would have to do

The draft law directs the judge:

In determining whether a term of a consumer contract is unfair under subsection (1), a court must take into account the extent to which the term is

(a) expressed in reasonably plain language; and

(b) legible; and

(c) presented clearly; and

(d) readily available to any party affected by the term.

Think about that.  We have a term that, according to the definition in the proposed law, is not unfair.  But the poor judge can’t just say that.  She also has to consider its ‘transparency’. 

Well, what if it’s totally ‘non-transparent’ ? 

What does she do ?  What can she do ?  She has already concluded that the term ‘is reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.’  If she also decides it was ‘non-transparent’ is she obliged to reverse the result ?  Does lack of transparency have the effect that it is ‘not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term’ ?

‘I am satisfied that that the term is reasonably necessary to protect your legitimate interests’ she says.  ‘But it isn’t presented clearly.  So now I rule it is not reasonably necessary to protect your legitimate interests.’ 

Get it ?  A factor that is not part of the definition, but (for bonkers reasons) is described as a mandatory consideration, changes the outcome.  If it can do that, why is it not part of the definition of unfairness ?  If it can’t, why is it mentioned at all ?

Why is it so ?

Bonkers logic lead to bonkers results.  Imagine this … We introduce a law that says:

• You must not say rude things to tram drivers.
• In determining whether person has been rude, the court must have regard to the direction of travel of the tram.

You see, the direction of the tram isn’t an element of rudeness.  It’s like saying ‘to decide if a person is tall, the court must have regard to whether it is Tuesday.’  There’s just no logical connection.

And here’s the punch line:  the Explanatory Memorandum admits the nonsense

Transparency, on its own account, cannot overcome underlying unfairness in a contract term. Furthermore, the extent to which a term is not transparent is not, of itself, determinative of the unfairness of a term in a consumer contract and the nature and effect of the term will continue to be relevant.

Translation:

• The clearest, most readable, most transparent wording cannot make an unfair term fair.
• Obscurity, complexity and non-transparency don’t make a fair term unfair.

So here’s the question …

What the hell is the transparency ‘factor’ doing in the Bill ?   If the legislators want to say that obscure terms can be unfair – purely because of their obscurity and no other factor – fine.  But don’t say that the only test is reasonable necessity for the term to exist, but then direct judges to consider ‘transparency’.

From 1 January 2010, the Government intends that we’ll have a national unfair contract terms law.  ACCC will have power to demand that advertisers positively substantiate any claims they make.  And there’ll be new penalties, enforcement powers and options for compensating consumers.

Stay tuned to CSP Central for plenty of news and expert commentary about the new law.  We already have some detailed comments on one misconceived part of the drafting.

Links

• CSP Central backgrounders
• Parliament home page for the Bill
• Treasury’s information site

Victor says that the seminar will explain the law as it applies to ISPs, telcos and other industries.  ‘This law applies over almost all retailing in Australia,’ says Victor.  ‘So every business needs to be across it.’  Victor and Peter both specialise in plain english explanations, so this will be an ideal chance for business people to learn these important new rules.

Bookings are free but places are limited.  There are only so many people who can fit into the Logie-Smith Lanyon board room

Here’s the seminar flyer.

Under the new component pricing law that kicked in on 25 May, the single buy price of a plan like that must be ‘specified in a prominent way’.  If 3′s catalogue goes anywhere near passing that test, the new law is dead. 

ACCC really needs to kick off some enforcement action against retailers it considers aren’t complying with section 53C of the Trade Practices Act.  It’s hard to expect CSPs to follow the spirit of the component pricing law when their competitors seem to be getting away with feint micro-print.

Businesses that contract with Telstra and Optus need to understand why the coming law could give the telco giants such grief.

The beefs

Optus says:

• It is ‘highly concerned’.
• The planned law ‘suggests a lack of understanding of the nature of business-to-business transactions, which would impose enormous additional (and entirely unjustifiable) compliance costs on companies such as Optus, and would fundamentally undermine the effectiveness and efficiency of how business-to-business transactions are conducted.’

And Telstra reckons:

• ‘Significant uncertainty, unnecessary disruption and immense costs will result for small and large businesses alike.’

The planned law

The proposed law certainly will shake up contracts in Australia, as we explained back in February.

It will apply to ‘standard form contracts’ of the ‘not negotiable – take it or leave it’ variety.  Seriously unbalanced terms in such contracts will be void unless they are reasonably necessary to protect a party’s legitimate interests.

But it isn’t just a ‘consumer’ law

Here’s a serious problem for mega-wholesalers like Telstra and Optus.  The law will apply to B2B contracts as well as B2C. 

In other words, a standard Telstra wholesale agreement could fall within the protection of the law if it wasn’t genuinely negotiable.

‘Draft – for discussion purposes only’

We’ve all seen those massive Telstra contracts with ”Draft – for discussion purposes only’ in the header of every page.  And a lot of us have realised that it’s Telstra-speak for ‘Not negotiable – don’t even ask.’

Under the new ‘consumer’ law, these and other B2B contracts, and the processes around them, will come under pressure.  Sham negotiations may not be sufficient to carve them out of the ‘standard form contract’ regimes.

No wonder the major B2B suppliers are concerned.

In a brilliant moment, Chad was being shouted at by FunnyTel CEO Steve that the company didn’t have to employ him, and every day at his desk was a favour.  Steve’s a motivational speaker in his spare time.

But then Chad realised … Steve doesn’t need me, and the customers don’t need us !  Everything they buy is optional, and options don’t need to be included in the total product price, do they ???  So FunnyTel’s famous ‘Zero Heroes’ campaign was born and ACCC was smashed again by Australia’s fastest thinking telco.

‘And it’s interesting to note’, says Chad, ‘that we didn’t need to waste a single dollar on external advice.  The ‘$Nuffin to pay’ campaign is proof you don’t need Bourke Street tossers to create a totally legal campaign.’

Sure, its math doesn’t make sense.  $20 SIM plus $20 deposit does not equal $52.99.  But we know what they mean … it’s the $20 SIM plus the $20 deposit plus the $12.99 for a non-contracted month that adds up to $52.99. 

And the total price isn’t super-prominent, but it’s not in micro-print, and it is in a clear area of its own, and it is immediately below the headline pricing, and it’s not a big or cluttered ad, and it is in capitals.  ACCC might debate whether it passes the ‘prominence’ test but by TPG’s standards, it’s a good effort. 

And you know two crazy things ?

Suddenly TPG’s $12.99 headline price becomes $52.99.  And suddenly, we’d be a whole lot more likely to buy it.  Like a lot of potential customers, we are actually prepared to pay for truth in advertising.

Heck, we’re even prepared to go in to bat for this ad, and argue that the component pricing law might not require the $20 deposit to be included in the stated total price.  Possibly, it doesn’t count as ‘part of the consideration for the supply of the’ service within the meaning of section 53C of the Trade Practices Act, where the component pricing law is to be found.

TPG still has a way to go before it’s a compliance model, but as Granny said, ‘Well begun is half done.’