Application of the Unfair Contracts Regime to School Enrolment Contracts

by Andrew Lind on 3 July, 19

There have been recent substantial amendments to the Trade Practices Act 1974 which commenced on 1 July 2010.  These amendments  substantially change the ground rules for consumer contracts by making unfair terms in standard form contracts void. The amendments have the potential to apply to School Enrolment Contracts, and it would be wise for schools to now review their enrolment contracts.

Does the Act Apply to the Enrolment Contract

The amendments apply to “consumer contracts”.

What is a consumer contract?

A consumer contract is a contract for:

(a) the supply of goods or services; or

(b) a sale or grant of an interest in land [eg. a lease],

to an individual whose acquisition … is wholly or predominately for personal, domestic or household use or consumption.” (s2 the Act)

The supply must be to an individual. As the Enrolment Contract is usually with the parents of the student, this requirement would be satisfied.

The acquisition must also be for the whole or predominant purpose of personal, domestic or household use or consumption. The legislative intent is to regulate “consumer law” not “business to business” supplies.

In our view, the supply of tuition services to parents is an acquisition for personal use.  As a result, enrolment contracts are a “consumer contract”.

Implications of the Act Applying to the Enrolment Contract

If you supply to a customer under a consumer contract it is then necessary to consider whether:

(a) The term is unfair [to that extent the contract will be void]; and

(b) The contract is a standard form contract [which for schools it almost certainly will be].

Unfair Terms

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 [the burden of proof is on the supplier to show it is reasonably necessary]; and

(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.” (s3(1) the Act – emphasis added)

The Act provides a non-exhaustive list of specific examples of unfair terms, in section 4(1) (a)-(n) set out below:

(a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;

(b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;

(c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;

(d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;

(e) a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;

(f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;

(g) “a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract”;

(h) a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;

(i) a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;

(j) a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;

(k) a term that limits, or has the effect of limiting, one party’s right to sue another party;

(l) a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;

(m) a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract;

(n) a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.

Transparency (clear expression) reduces the risk of unfairness

In the process of determining if a term is unfair, a court can take into account any matter that it thinks relevant, but it must take into account the extent to which the term is transparent.

A term, is transparent  (s 3(3) the Act) if it is:

(a) Expressed in reasonably plain language;

(b) Legible;

(c) Presented clearly; and

(d) Readily available by any party affected by the term.

School enrolment contracts should be reviewed with this in mind.

Standard Form Contracts

To be void, not only must the term be unfair, but it must also be in a standard form contract. (s2(1) the Act)

If a party (consumer) alleges that a contract is a standard form contract then it is presumed to be unless proven otherwise. (s 7(1) the Act)

Generally, a school’s enrolment contract will be a standard form contract.

Exempt terms

Some bed-rock terms of a consumer contract even if they are unfair and in a standard form contract, are exempt under s5 of the Act from being void under this regime.

The intention of this legalisation is not to provide a de-facto cooling off period. If the customer has agreed to buy something for an upfront price they should be bound to that and not be able to say that the upfront price was too high later or that they wanted to buy less than they clearly agreed to buy at point of contract.

Exemptions are:

(a) Terms that define the main subject matter of a consumer contract; or

(b) Terms that set the “up front” price payable under the contract [eg. I commit to pay $[a certain dollar amount]]; or

(c) Terms that are required, or expressly permitted, by a law of the Commonwealth or State or Territory.

What about existing contracts?

This regime will apply to all standard form consumer contacts entered into or renewed after the date of commencement of the ACL (1 July 2010).

It will also apply to any variation after the date of commencement.

Review of your Enrolment Contract

Given the implications of the Unfair Contracts regime, we recommend that schools review their enrolment contracts now, and seek legal advice if they have any concerns regarding possible unfair terms.  We can provide this advice if required.  We can also assist with a more general review of enrolment contracts.

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