• 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

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.

It’s a bit like a subpoena and even a search warrant and requires the CSP to provide detailed documents, records and other information that may show it is in breach.

Now the Federal Government has agreed to give the regulator an even more effective power that will change the way CSPs need to approach advertising.

Substantiation Notices

The new weapon is called a ‘Substantiation Notice’.

Basically, it lets the regulator issue a notice that says (for instance):  ‘In an ad on 12 March you claimed that your service offered the best P2P speeds in Australia.  Please prove it.’

States can already do it

Several State consumer affairs regulators have had power to issue them for some time, and the ACCC has been keen to get in on the action.

For instance, Victoria’s Fair Trading Act says:

Substantiation of claims

The Director may, by notice in writing, require a person who publishes or causes to be published a statement promoting, or apparently intending to promote, the supply of goods or services, to provide to the Director, within the period specified in the notice, proof of any claim or representation made in the statement.

A person on whom a notice under this section is served, who -

• fails to provide proof sufficient to support the claim or representation; or
• fails, without reasonable excuse, to provide that proof by the time specified in the notice; or
• provides information which is false or misleading -

is guilty of an offence and liable to a penalty not exceeding -

• 600 penalty units, in the case of a natural person; or
• 1200 penalty units, in the case of a body corporate.

Pretty powerful stuff.  Discussions so far have assumed that the ACCC’s new power will me modeled pretty closely on the existing State laws.  For the sake of this article, we’ll make the same assumption.  But bear in mind that Canberra could vary things if it wished.

The States haven’t used the power much

The States haven’t made much use of Substantiation Notices so far.  For instance, Consumer Affairs Victoria served nine Substantiation Notices in 2004-05 and six notices in 2005-06.

But the ACCC was keen to get the power

There are two key problems with section 155 notices, from the ACCC’s perspective.

Evidentiary threshold

First, it can only issue a notice if it is already satisfied that there is a matter that may constitute a contravention of the Trade Practices Act.

That’s not a very high test.  But it means that a section 155 notice certainly can’t be issued if the ACCC is simply wondering whether an advertising claim is fair and true.  There’s no such ‘evidentiary threshold’ for Substantiation Notices.  If the ACCC wants to be satisfied of a claim’s truth, it will be able to issue a notice.

Workload

A section 155 notice might elicit hundreds or thousands of pages of material from the target.  Fine, but the ACCC then needs to read and analyse it to understand whether it discloses and / or proves any legal breaches.  That can involve a lot of time and effort.

In many cases, what the ACCC really wants to know is the one thing it cannot do in a section 155 notice:  Ask the pointed question ‘You said ABC.   Prove it.’

This means that the target has to precisely make, or fail to make, the case for the truth of its claim.  The material the ACCC then needs to judge is far more focused.

What’s it mean for advertisers ?

It means that every claim in every advertisement will need to be written with the question in mind:  ‘Could we precisely and comprehensively substantiate this claim ?’

Of course, that’s how advertising should always have been written.  But once the ACCC has power to demand substantiation, there’s much greater danger in advertising ‘fast and loose’.

When ?

The recommendation that the ACCC be granted this new power arises from the Productivity Commission’s Consumer Framework Report we reported earlier.

The whole package from the Report is proposed to be implemented by 2011, but we gather that Substantiation Notices for the ACCC will be dealt with sooner rather than later.  Don’t be surprised if they’re part of the legal landscape in 2009.

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.

The Council is made up of Federal and State Ministers responsible for consumer affairs and describes the changes – expected to be fully in place by 2011 – as ‘far-reaching consumer policy reform’.

Highlights of the announcement

Consistency

• Designed to provide greater national consistency in Australia’s consumer laws.
• Will overcome existing inconsistencies, gaps and duplication in Australia’s consumer legislation and its enforcement.

Objectives

• Will adopt Productivity Commission’s proposed objective:

To improve consumer wellbeing through consumer empowerment and protection, fostering effective competition and enabling the confident participation of consumers in markets in which both consumers and suppliers trade fairly.

• 6 key targets:
  • to ensure that consumers are sufficiently well-informed to benefit from and stimulate effective competition;
  • to ensure that goods and services are safe and fit for the purposes for which they were sold;
  • to prevent practices that are unfair;
  • to meet the needs of those consumers who are most vulnerable or are at the greatest disadvantage;
  • to provide accessible and timely redress where consumer detriment has occurred; and
  • to promote proportionate, risk-based enforcement.

Reducing the costs to business

• Reduce burdens on business and facilitate well-functioning markets.

Basis of laws

• Law should be based on the current consumer protection provisions of the Trade Practices Act 1974 and also incorporate appropriate amendments reflecting best practice in state and territory legislation.
• Developed by the agreement of all Australian governments and made law through an application legislation scheme, with the Commonwealth as the lead legislator.
• Amendments to be agreed by governments according to an Inter-Governmental Agreement, which will provide for the amendments to be agreed by the Commonwealth plus four state and territory governments, of which three must be states.

Unfair contract terms

• Will include a provision that addresses unfair contract terms with the following features:
  • Term is unfair when it causes a significant imbalance in the parties’ rights and obligations arising under the contract and it is not reasonably necessary to protect the legitimate interests of the supplier.
  • Remedy could only be applied where the claimant shows financial or other detriment, or a substantial likelihood of detriment, to the consumer (individually or as a class).
  • Would relate only to standard form (ie non-negotiated) contracts.
  • Would exclude the upfront price of the good or service.
  • Would require all of the circumstances of the contract to be considered, taking into account the broader interests of consumers, as well as the particular consumers affected.
• Provision for class actions against suppliers.
• Provision for certain (types of) terms to be outlawed.
• Business to be allowed a grace period to comply.

Our take on it

The present mish-mash of State and Federal consumer laws is a disgrace, and a move for consistency is to be applauded.

That doesn’t mean that consistency will always yield a fair or balanced law.  Business is on notice that the rules of the game will be significantly revamped over the next three years, and needs to be ready to present its perspective in the national discussion.