How online contracts may contravene the Australian Consumer Law

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Introduction

Consumers, businesses and the wider community are given certain protections under the Australian Consumer Law (“ACL”). In this day and age, online contracts are becoming the norm for consumers and small business owners alike. If you are a consumer or a small business owner, you may be interested to know how online contracts may contravene the ACL.

Small Businesses – Definition of a small business contract

Under the ACL a small business contract is one which is:

  • For the supply of goods and services;
  • At least one of the parties needs to be a small business. A small business is one that employs fewer than 20 employees, including casual employees employed on a regular and systemic basis;
  • The upfront price payable under the contract is no more than $300,000 or $1 million is the contract is for more than 12 months.

Broad applicable ACL categories (and how contravention may occur)

There are a number of broad categories under the ACL which online contracts may be in breach of, depending on the terms of the contract and other factors.

Unfair contract terms

A term is considered “unfair” where it:

  • Causes a significant imbalance in the parties’ rights and obligations; and
  • Is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
  • Would cause financial or non-financial detriment if it were relied on by the small business.

In determining whether a term is unfair, the transparency of the term must be considered as well as the overall rights and obligations of each party under the contract. A potentially unfair term may be counterbalanced by additional benefits offered to the other party.

Examples of terms that may be unfair, include terms that: allow one party to unilaterally vary the terms of the contract; enable one party to protect themselves against loss or damage at the expense of the other party by imposing broad indemnities or excessive limitations of liability; or allow one party but not the other to terminate the contract.

Only a court or tribunal can determine whether a term is unfair. If a court or tribunal finds that a term is ‘unfair’, the term will be void. That is, it will no longer be binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

While the unfair contract term laws cover most standard form contracts and terms, there are a number of exceptions which can exclude certain contracts and terms.

For more information visit the Australian Competition and Consumer Commission’s website.

Unconscionable conduct (sections 21 and 22 of the ACL)

There are a number of factors that the court may consider in relation to whether the conduct in question is considered to be unconscionable. They include (but are not limited to):

  1. The relative strengths of bargaining positions of the supplier and the customer;
  2. Whether due to the conduct of the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier
  3. Whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services
  4. Whether there was undue influence, pressure or tactics used against the customer
  5. The amount and circumstances where by the customer could have obtained identical goods or services from a person other than the supplier
  6. Consistency of the supplier’s conduct in relation to the customer versus the supplier’s conduct in relation to other customers
  7. Requirements of applicable industry codes
  8. Whether the customer acted on the reasonable belief that the supplier would comply with the code
  9. The extent to which the supplier unreasonably did not disclose to the customer
    1. Any intended conduct of the supplier which could potentially affect the interests of the customer; and
    2. Foreseeable risks to the customer arising from the supplier’s intended conduct
  10. For contracts between a supplier and customer for the supply of good or services:
    1. The extent to which the supplier was willing to negotiate the contract;
    2. The terms and conditions of the contract;
    3. Conduct of supplier and customer in complying with terms and conditions;
    4. Conduct of supplier and customer relating to their commercial relationship after entering into the contract
    5. Whether the supplier has a contractual right to vary terms unilaterally
    6. The extent that the supplier and customer acted in good faith.

These factors need to be considered when entering into or preparing an online contract, as engaging in unconscionable conduct is a breach of ACL provisions and can give rise to rights or liabilities under the ACL.

A good example of when an online contract may contravene the ACL in this regard is when a fixed form online contract (which does not allow the customer to negotiate terms and conditions) imposes terms that force the customer to make large upfront payments which do not conform to applicable industry codes of conduct.

Questions may also arise in relation to contracts which are only offered in one language and where people with a limited grasp of the language enter into contracts that contain complex terms.

Misleading or Deceptive conduct

Section 18 of the ACL states “A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”.

The test (as outlined in Google v ACCC) is whether ordinary or reasonable members of the class of people affected by the conduct would be deceived or mislead.

In the area of online contracts, ambiguous terms and phrasing of clauses would likely be considered misleading or deceptive and care should be taken to ensure that contractual terms are not misleading or deceptive.

False or misleading claims (section 29 of the ACL)

False or misleading representations relating to goods or services are not allowed under the ACL. These include (but are not limited to) false or misleading representations that:

  1. Goods are of a particular standard, quality value, grade, composition, style or model or have had a particular history or particular previous use; or
  2. Goods are new; or
  3. There is a testimonial by a person in relation to goods or services; or
  4. Goods have sponsorship approval, performance characteristics, accessories, uses or benefits; or
  5. Goods are of a particular price or place or origin.

It is important to note that online contracts need to be drafted with care so as to avoid contravening the ACL provisions in relation to false or misleading claims. Likewise, as a consumer, you should be aware that you have rights and remedies under the ACL if you have suffered harm as a result of false or misleading claims.

Referral Selling (section 49 of the ACL)

A person must not, in trade or commerce, induce a consumer to acquire goods or services by representing that the consumer will, after the contract for the acquisition of the goods or services is made, receive a rebate, commission or other benefit in return for:

(a)  giving the person the names of prospective customers; or

(b)  otherwise assisting the person to supply goods or services to other consumers;

if receipt of the rebate, commission or other benefit is contingent on an event occurring after that contract is made.

An online contract is at risk of contravening this section in certain scenarios.

For example, Company A has an online contract on their website that gives customers who sign up to their service an incentive to refer their friends to them by offering them a one-time 10% rebate on their monthly fees if they refer someone to them.

Another example is where Company B has an online contract on their website that gives customers who sign up to their service a lucky draw “chance card” per prospective customers they send to the company and a bonus of a $10 voucher per prospective customer who signs up with Company B after being referred.

Remedies

Under the ACL there are a number of remedies to breaches of ACL provisions, including:

  1. Pecuniary penalties penalising the company or individual that breaches the ACL provisions (under section 224);
  2. An Injunction preventing the company or person from continuing to do something which breaches the ACL provisions (under section 232); and
  3. A claim for damages to recover the amount of loss or damage within 6 years from the time the loss or damage was suffered (under section 236).

Conclusion

With the prevalence of Online contracts in today’s technologically advanced society, it is crucial to understand the interactions between online contracts and the ACL provisions to avoid the risk of ending up in a difficult situation.