Unfair Consumer Contracts Law Reform in Australia (at last), Japan and Europe

Compared to Australian and New Zealand legislation, Japan’s Consumer Contracts Act 2000 has quite narrow restrictions on the bargaining process leading up to the conclusion of contracts between consumers and commercial suppliers (Luke Nottage ‘Nihon-Nyujirando Shohishakeiyakuho [Consumer Contract Law in Japan and New Zealand]’ 1620 Toki no Horei 4-5, June 2000). But it adds a ‘general clause’ regulating unfair contract terms, voiding those that ‘impair the interests of consumers unilaterally against the fundamental principle’ of good faith under Civil Code Art 1(2), as well as targeting some specific types of terms. The Consumer Contracts Act also extends to all types of contracts (except employment contracts: Art 48), and defines ‘consumer’ broadly as any individual not contracting for a business purpose (Art 2).

This definition is similar to that of the 1993 EC Directive on unfair terms (93/13/EEC), which provided a major impetus to enactment in Japan (as did the 1985 Directive for Japan’s Product Liability Act 1994). However, Art 4(2) of the 1993 Directive excludes terms relating to ‘the definition of the main subject matter of the contract’ or ‘the adequacy of the price and remuneration … in so far as these terms are in plain intelligible language’, with the Preamble specifically mentioning insurance contract premiums. The annexed indicative ‘grey list’ of clauses that may prove unfair also suggests that certain terms found in financial services contracts are likely to be acceptable. Art 3(1) voids ‘any contractual term which has not been individually negotiated … as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’.
Article 7 adds an important obligation on European member states to provide ‘adequate and effective means’ to prevent usage of unfair terms, including injunctions. Consumers were unable to obtain such provisions in Japan’s original Act, but they were added in 2006 and are already having some impact. By contrast, the EU was slower than Japan in harmonising controls focusing solely on the contract negotiation process. These came only in the 2005 Unfair Commercial Practices Directive (2005/29/EC). But that now includes quite general clauses prohibiting misleading conduct vis-à-vis consumers (Arts 6 and 7).
What about Australia? The Trade Practices Act 1974 (Cth) included a very broad prohibition on misleading and deceptive conduct in trade (s52), which competitor firms as well as individual consumers and regulators could invoke. Part V Div 2 also voids attempts by corporations to limit specific statutory warranties (merchantable quality, fitness for purpose notified before supply, etc) when supplying goods and services to ‘consumers’ as defined (eg for goods) in s4B(1):
(a) a person shall be taken to have acquired particular goods as a consumer if, and only if:
(i) the price of the goods did not exceed [$40,000]; or
(ii) where that price exceeded[$40,000] the goods were of a kind ordinarily acquired for personal, domestic or household use or consumption or the goods consisted of a commercial road vehicle;
and the person did not acquire the goods, or hold himself or herself out as acquiring the goods, for the purpose of re supply or for the purpose of using them up or transforming them, in trade or commerce, in the course of a process of production or manufacture or of repairing or treating other goods or fixtures on land.’
In addition, for transactions under $40,000 suppliers can limit (but not exclude totally) liability if this is ‘fair and reasonable’ and the goods are not ordinarily for personal use (s68A). Further, the obligation to take due care when providing services (s74(1)) always excludes ‘(a) a contract for or in relation to the transportation or storage of goods for the purposes of a business, trade, profession or occupation carried on or engaged in by the person for whom the goods are transported or stored; or (b) a contract of insurance’ (s74(3)). And the fitness for purpose obligation is excluded for ‘services of a professional nature provided by a qualified architect or engineer’ (s74(2)).
The scope of application for these consumer protection provisions is therefore very convoluted and seemingly quite arbitrary, partly reflecting the lobbying power of certain professional groups in obtaining exclusions from TPA obligations. And the mandatory statutory warranties have been displaced in practice by retailers increasingly selling ‘extended warranties’, even though the mandatory warranties often would or should provide similar coverage anyway. Retailers and consumers also tend now to believe that the only really important thing is express warranties provided by manufacturers, even though the latter also owe statutory warranties similar to those of retailers (see Part V Div 2A, added in 1986). This confusion is not helped by the fact that there is no statutory requirement that such express voluntary warranties be in plain intelligible language, as under the 1999 EC Consumer Guarantees Directive (1999/44/EC). Such problems are highlighted in a Review of Statutory Implied Terms and Warranties initiated in late July 2009 by the Commonwealth Consumer Affairs Advisory Council. This is another part of the Australian government’s review of consumer law and policy overall since February 2009, following a detailed Report of the Productivity Commission released in April 2008.
Australia’s legislation is likely to become even more complicated if the federal Parliament enacts the Trade Practices Amendment (Australian Consumer Law) Bill, introduced on 26 June 2009. This laudably adds a long-overdue missing link in Australia’s consumer protection regime: broader restrictions on all unfair terms. These follow the lead of amendments to Victoria’s Fair Trading Act in 2002, in turn based on the 1993 EC Directive. The Bill likewise applies to a ‘consumer contract’ defined as supply ‘to an individual whose acquisition …. is wholly or predominantly for personal, domestic or household use or consumption’ (ie a non-business purpose). This is a partial throwback to a more subjective test than in the current TPA. But the latter’s original definition (in 1974, before an amendment in 1977 generating s4B above) had asked whether goods or services were ordinarily used for ‘private use’. Even under the present s4B(4), ‘commercial road vehicle’ is defined more subjectively to the user: ‘vehicle or trailer acquired for use principally in the transport of goods on public roads’. The Contracts Review Act 1980 (NSW) also does not provide for relief from an ‘unjust’ contract ‘in so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person, other than a farming undertaking’ (s6). Australian courts and others interpreting the Bill’s unfair terms provisions may also be able to draw on similar wording delimiting the applicability of consumer credit legislation (itself under review since 20009 ). The Bill’s definition of ‘consumer’ may also yet displace at least some definitions within the existing TPA, such as Part V Div 2.
In addition, the Bill includes financial services but specifically excludes charterparties and contracts for marine salvage, towage, carriage of goods by sea, and the constitution of a company, managed investment scheme or other kind of body. It also excludes a consumer contract term that ‘defines the main subject matter of the contract, or sets the upfront price payable’. So this is likely to exclude insurance contract premiums, as under the 1993 EC Directive. The Bill is also similar in applying only to standard-form contract terms. This restriction reflects a strong outcry from business interests when the Treasury released a Consultation Paper in May 2009 containing an Exposure Draft providing for coverage not limited to standard form contracts (as still in Japan, following an older German law approach).
Thus, like the 1993 Directive, the Bill reflects partly still a ‘procedural justice’ model of consumer law, focused on transparency and the need to safeguard some consent, particularly with standard-form contracts. But also partly a ‘commutative justice’ model, focused on substantive balance or fairness (T Wilhelmsson & C Willett ‘Unfair Terms and Standard Form Contracts’ in G Howells et al eds, Research Handbook on International Consumer Law (forthcoming, Elgar, 2009).
The biggest difference with the Directive, and Japan’s Consumer Contract Act, lies in the definition of an ‘unfair’ term – 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 to protect the legitimate interests of the party who would otherwise be advantaged by the term’. The Victorian Act likewise has been amended this year to remove any reference to ‘good faith’. This follows a 2005 report of the English and Scottish Law Commissions, and also is related to current confusion in Australian (commercial) contract law about the content (and applicability) of a generalised duty of good faith. Yet TPA provisions on broader ‘unconscionable conduct’ still list good faith as a factor (Part IVA). And its excision from the Bill means that Australia will miss out on an opportunity to learn from how civil law tradition countries in Europe and Japan have developed this principle to balance the various social interests involved when providing the (scarce) resources of the state to enforce contracts, especially now those involving consumers.
However, the Bill does give more bite back to enforcement proceedings. Where a term is declared unfair by a court, or proscribed by the Minister (by Regulation – but none were proposed along with the Bill), the regulator (the ACCC) can bring injunction proceedings that also seek further orders against corporations using such terms, in favour of those not party to the original proceedings. These orders can include refunds for them, for example, but not full damages. This is a welcome amendment to the narrow scope of TPA s87 (limiting orders to parties alone), as interpreted in Medibank Private v Cassidy [2002] FCAFC 290. But the ACCC had been pushing for it for the last 7 years, pointing out for example that the securities regulator (ASIC) has long had such broader powers.
So that particular reform of the TPA’s enforcement regime confirms my impression about Australia’s ‘lethargic’ attitude to consumer law reform since the 1990s. So does the fact that the unfair terms rules will only come into effect at the federal level from 1 January 2010, and be applied by states in their legislation from 1 January 2011. Part of the backdrop is Australia’s complex constitutional system, but this timeframe also reflects a lack of political will – compared for example to Europe nowadays, and arguably also Japan.
To keep up momentum and make sure Australia maintains global standards, it will be important to fund better comparative and empirical research centred around consumer law specialists in Australian universities. To that end, Sydney Law School will host the 4th Consumer Law Roundtable on 4 December 2009. And in another Treasury consultation recently about consumer policy research and advocacy, Roundtable members have also proposed the establishment of the ‘Australian Consumer Research Network (ACReN), partly inspired by the flexible cross-institutional Australian Network for Japanese Law (www.law.usyd.edu.au/anjel).

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.