In November 2021, the ACCC accepted court enforceable undertakings from Compass Matin Pty Ltd (Compass), EduCollect Pty Ltd (EduCollect) and the companies’ common director, Mr Stephen Eric Palframan, after both online-tutoring companies admitted to enforcing unfair contract terms. The conduct contravened section 23 of the Australian Consumer Law (ACL) which is in Schedule 2 of the Competition and Consumer Act 2010 (Cth). Compass further admitted to making false and misleading representations to consumers about its provision of free tutoring lessons which was in breach of sections 18 and 29(1)(g) of the ACL. The case serves as a timely reminder of the ACCC’s intolerance towards businesses that leverage their superior bargaining power to unjustifiably penalise consumers for early termination of contracts.
Relevant Provisions
Section 23 of the ACL renders terms of consumer or small business contracts void if the term is unfair and the contract, in which the term is contained, is a standard form contract. Pursuant to section s23(3) of the ACL, a consumer contract is a contract for the supply of goods or services to an individual who purchases the good or services ‘wholly or predominantly’ for ‘personal, domestic or household consumption’.
While there is no legal definition, a standard form contract is one whose terms have been set by one party with little to no scope for input or negotiation from the other party. They are typically created by businesses who offer consumers same or similar contracts and thus seek to standardise the contracts to improve contracting efficiency. Section 27 of the ACL considers it sufficient that a party merely alleges, in proceedings, that a contract is a ‘standard form contract’ for it to be presumed to be a ‘standard form contract’. The onus falls on the other party to prove that the contract is not a ‘standard form contract’.
Section 24 of the ACL establishes a cumulative criterion, which if satisfied constitutes a term as ‘unfair’ within the meaning of section 23. A term is unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it is not reasonably necessary in order to protect the legitimate interests of the party who would have been advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
In the scenario that a term is found to be unfair, if the term is severable from the contract, that is the contract is ‘capable of operating without the unfair term’, the contract remains binding on the parties pursuant to section 23(2) of the ACL.
With respect to misleading and deceptive conduct, a summary of the applicable sections of the ACL are as follows:
- Section 18 of the ACL prohibits misleading and deceptive conduct in the course of trade and commerce.
- Section 29 of the ACL is a specific prohibition against false or misleading representations, in trade or commerce, in connection with the supply or possible supply of goods or services.
- Section 29(1)(g) of the ACL specifically prohibits the making of false or misleading representations that goods or services ‘have sponsorship, approval, performance characteristics, accessories, uses or benefits’.
Section 87B, located under Part 6A of the Competition and Consumer Act 2010 (Cth), gives the ACCC powers to accept ‘a written undertaking given by a person….in connection with a matter in relation to which the Commission has a power or function under this Act’. The ACCC has powers in relation to contraventions of the ACL.
Compass Matin and EduCollect’s conduct – unfair contract terms
Compass and EduCollect’s standard form consumer contracts were typically 12-48 month subscription agreements that were valued at several thousands of dollars. The impugned conduct related to the enforcement of two separate clauses that featured in both Compass and EduCollect’s contracts over different periods:
- In the period spanning January 2014 to July 2018, EduCollect enforced a contractual term that required consumers to pay an amount equivalent to 6 months of subscription fees if the consumer terminated the contract early.
- In the period spanning July 2018 to November 2019, Compass enforced a contractual term that required consumers to pay an amount equivalent to the full amount of the contract if the consumer terminated the contract early.
Prior to any commencement of action, Compass and EduCollect admitted to the enforcement of unfair contract terms. The companies’ right to enforce such a high financial penalty was significantly imbalanced against the consumers’ right to exercise early termination and was highly unlikely to have been ‘reasonably necessary to protect any legitimate interest’, even financial, that Compass and Edu Collect had in preventing the early termination of the contract. Further, the term caused financial detriment, with some consumers having paid several thousands of dollars in terminating the contract early.
Both companies agreed to a section 87B court-enforceable undertaking which outlines the redress to be provided to consumers who were affected by the unfair contract terms and those currently in contracts containing the unfair term. Both companies have also undertaken to implement compliance programs.
Compass has also agreed to include a term in all future contracts that exceed 12 months in duration which gives the consumers a right to terminate the long-term contract at no cost ‘by the later of 20 business days from the contract date or 10 business days from the date the consumer is given access to the service’.
Compass Matin’s conduct – false and misleading representations
Compass advertised its services through telemarketing and promotional flyers. The impugned conduct occurred over the period spanning July 2018 to November 2019, when Compass’s telemarketers represented to consumers that they had ‘won’ a ‘free tutoring session or assessment’ or a ‘free face-to-face one hour lesson’ and that a ‘tutor’ would visit their home to provide the lesson. Similar representations were made in the promotional flyers handed out to prospective consumers.
In fact, Compass would send sales agents to the consumers’ homes with the main purpose to induce consumers to sign up to long-term contracts. The conduct was alleged to have breached sections 18 and 29(1)(g) of the ACL, with the representations made during advertising being false and misleading as to the purpose or ‘benefit’ of the visit being the provision of a free tutoring service, as opposed to a sales pitch.
Prior to any commencement of court action, Compass admitted to making false or misleading representations to consumers and further undertook to provide redress to consumers who were misled and subject to home visits by the sales agents.
What this means for your business?
Businesses are responsible for terms that they incorporate in their standard form contracts and as such should endeavour to construct fair and transparent terms. Further, the imposition of any cost on the consumer for early termination must be reasonably necessary to protect a legitimate interest, for example, the actual loss to be suffered by the business if the consumer were to breach the contract. For more detail on this, refer to our article Ashley & Martin – Unfair contract terms in consumer contracts.
Businesses must not, in their attempts to market and push sales, make false or misleading representations to consumers about the goods or services they provide. To engage in such conduct represents a serious contravention of the ACL and is liable to attract substantial penalties.
At Bryks Lawyers, we are experienced in advising on Australian Consumer Law matters. Contact us today to see how we can assist you!
