Chrisco is a well-known provider of Christmas hampers, supplying to customers across Australia. Its business model allows customers to pay for hampers through instalments during the year - this was referred to as the 'HeadStart Plan'. However, its standard form contracts recently caught the attention of the ACCC, which brought proceedings against Chrisco in the Federal Court in November.

This blog focuses on the Court's finding that the 2014 HeadStart Plan contained an 'unfair term' within the meaning of s24 of the Australian Consumer Law (ACL)1 with the effect that the term was declared void. As this case concerned liability only, the penalty will be determined at a hearing next year. The ACCC is seeking pecuniary penalties, declarations, injunctions, non-party consumer redress and costs.

The unfair term

The relevant term of the HeadStart Plan (the "HeadStart term") allowed Chrisco to continue to withdraw funds through direct debit after a customer had paid in full for the hamper. The HeadStart term continued to apply unless the customer chose to 'opt out'. Chrisco contended that this system enabled customers to 'keep saving for next year's order'. Customers were able to request a refund of any money deposited – but without interest.

The meaning of unfair under the legislation

Section 24(1) of the ACL provides that a contractual term will be deemed unfair if:

  1. it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
  2. it is not reasonably necessary in order to protect the legitimate interest of the party who would be advantaged by the term; and
  3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

In considering the imbalance caused by this arrangement, Justice Edelman noted that whilst the HeadStart Plan gave Chrisco the right to withdraw money from the customer's account, the customer did not have any corresponding right under the contract. Chrisco submitted that the HeadStart Plan meant that payments made were less than they would have been without the term. This was rejected by his Honour who found that the time value of money meant that customers on the HeadStart Plan would end up paying more as they would be paying the same overall amount but starting their payments at an earlier point in time.

The legislation also provides that in assessing whether a term is unfair, the Court should consider the contract as a whole, and also the extent to which the term is transparent.

The transparency requirement

A term is transparent if it is:

  1. expressed in reasonably plain language; and
  2. legible; and
  3. presented clearly; and
  4. readily available to any party affected by the term.

His Honour noted that the font size of the HeadStart term was printed in a small font - it was less than half the size of the main heading in the contract. Another issue concerning legibility, clarity and availability was that the HeadStart term and the opt-out provision were at opposite ends of the four pages of the catalogue. They also failed to refer to one another. It was held that it would, therefore, not have been clear to customers that there was the possibility of opting-out of the HeadStart Plan. Moreover, the HeadStart term did not clearly identify the amount of money that would be debited from the customer's bank account, or how the amounts would be determined.

The contract as a whole

In considering the contract as a whole, his Honour noted that the contract was designed to be convenient for the consumer. However, this did not militate against his finding that the term was unfair.

Significance of the decision

The Court's decision sends a strong message to traders that they must strictly comply with all of their obligations under the ACL, including the unfair contract terms.

This case is also timely in light of the fact that earlier this year, Federal Parliament passed legislation extending the unfair contract term protections to small businesses. Under the amended legislation (which will take effect on 13 November 2016 and will apply to contracts entered into after this date), the unfair contract provisions will apply to standard form contracts entered into by businesses that:

  • employ less than 20 employees; and
  • the upfront price payable does not exceed $300,000; or
  • if the contract has a duration of more than 12 months and the upfront price payable does not exceed $1,000,000.

This change is unlikely to have a great impact on businesses that already deal with consumers. However, it will require attention from businesses that operate solely in the business to business environment and have, up to now, not had to concern themselves with unfair terms legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.