Unfair contract terms 03: Clauses commonly used in disputes

We've already said that 2021 will be a significant year for the unfair contract term (UCT) laws. For that reason, we're bringing you a series of articles on the UCT laws. Our first instalment was a general refresher while the second instalment addressed automatic renewal clauses. This instalment will address some clauses that are commonly relied on in disputes: clauses that address choice-of-law, jurisdiction, arbitration and adjudication. We plan to address two further examples – indemnities and limitation on liability clauses – in a future instalment.

Choice-of-law, jurisdiction and arbitration clauses in the internet age

Standard form contracts are often entered into by consumers and small businesses when acquiring goods or services online. This is often done at the click of a button with little to no consideration of the terms. The provider of the goods and services often operates in several jurisdictions if not globally. This gives rise to the potential for cross-border disputes. In those circumstances, it's not surprising that standard form contracts often contain clauses addressing choice-of-law, jurisdiction and arbitration. Since these clauses address related issues, points that arise for one under the UCT laws are likely to arise for others.

The first instalment of this series addressed the general rules of the UCT laws. It's worth recounting the fundamentals of the test for "unfairness" here. A term will only be unfair if (i) it would cause a significant imbalance in the parties' rights and obligations arising under the contract; (ii) it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and (iii) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. All three elements must be fulfilled for a term to be unfair. As we'll discover below, the second element may be particularly important for choice-of-law, jurisdiction and arbitration clauses.

When determining whether a term is unfair, a court must also consider whether it is "transparent". A term is transparent if it is expressed in reasonably plain language, legible, presented clearly and readily available.

Whether a term is unfair is determined at the time the contract is entered into and does not consider events that occurred after it was entered into. This is similar to the rule for interpreting contracts.

The UCT laws contain a list of terms which may (not must) be unfair. This list is colloquially called the "grey list". It includes a "term that limits, or has the effect of limiting, one party's right to sue another party". An arbitration clause and jurisdiction clause perhaps "limits, or has the effect of limiting, one party's right to sue another party". We'll look at this further below, but for now, it's important to note there is no presumption that any of the terms in the grey list are unfair.

Arbitration clauses

Social media is probably one of the most common online services used by consumers and small businesses. A recent decision regarding arbitration clauses and the UCT laws concerned Instagram: one of the best known social media providers.

Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846 considered an arbitration clause between Instagram and a small business that used its services (Dialogue). The arbitration clause applied the American Arbitration Association's rules and the Federal Arbitration Act (USA) to all disputes between the parties with two exceptions. First, the clause did not prevent Dialogue from bring a claim in a "local 'small claims' court". Second, Dialogue could opt-out of arbitrating a dispute by giving written notice within 30 days of the date that the arbitration clause first applied.

Two points are worth noting about the arbitration clause. First, it stated that Dialogue's filing fees and administrative costs for the arbitration were capped at US$200, and generally, Instagram was required to pay the other costs of the arbitration, including the arbitrator's fees, hearing room rental and the costs of witnesses and evidence produced at the direction of the arbitrator. Second, the arbitration clause did not specifically say where the arbitration was to occur. Another clause of the agreement said the parties submitted to the courts of Santa Clara County, California, but that clause did not address where an arbitration was to occur.

Justice Beach of the Federal Court concluded that the term was not unfair because it did not cause a significant imbalance between the parties' rights and obligations under the contract and further, it was reasonably necessary to protect Instagram's legitimate interests. His Honour did not need to consider the final element of the test for unfairness, being that the term would cause detriment if it were relied on.

Justice Beach noted the following points when concluding that the term did not cause a significant imbalance in the parties' rights and obligations under the contract.

• The term "was transparent because it was stated prominently in bold, all-capital letters at the top of the original Terms of Use" and was generally "conspicuously set out".
• There was no significant imbalance in the parties' rights and obligations because the arbitration clause "applied equally to both parties" so "there was symmetry rather than asymmetry". His Honour thought "a term does not cause a significant imbalance if there is a meaningful relationship between the term and the protection of a party, and that relationship is reasonably foreseeable at the time of contracting" which "is the case with the arbitration agreement here". With respect, this consideration seems more relevant to the second element of the test for unfairness, being whether the term was reasonably necessary to protect a legitimate interest of the party that would be advantaged by it.
• Nothing much turned on the option to opt-out of the arbitration clause upon giving 30 days' notice. Justice Beach concluding that the clause would still be fair even without the opt-out.
• Dialogue relied on one example of potentially unfair terms in the grey list, being "a term that limits, or has the effect of limiting, one party’s right to sue another party", but Justice Beach thought this was unhelpful to Dialogue's case. His Honour considered Dialogue's argument "superficial" because Dialogue could still sue and the arbitration clause was symmetric. It seems his Honour considered that the arbitration clause did not fall within the grey list because (i) Dialogue could still sue Instagram through arbitration, making a claim in a local court or opting out of the arbitration using the opt-out provision and (ii) the arbitration clause was symmetric so it did not limit "one party's right to sue", but this is not expressly stated in the judgment.
• Justice Beach suggested that remote hearings and technological developments, particularly during COVID-19, have made hearings in foreign locations easier.

  Justice Beach noted the following points when concluding that the term was reasonably necessary to protect the legitimate interests of Instagram.

• His Honour said the "avoidance of litigation in multiple jurisdictions is a legitimate business interest worthy of protection" and so is a process "enabling a more efficient way to manage disputes".
• His Honour noted that Instagram had offices in several jurisdictions and had the resources to participate in litigation in Australia, but that did not alter his conclusions.
• Further, his Honour adopted the reasoning from a NSW Supreme Court, which we'll address further below, that 'there was nothing "unfair about an international corporation seeking to protect itself from claims being litigated in the courts of countless countries applying countless different substantive and procedural laws"'. Justice Beach noted that Instagram operated globally with approximately 200 million active users of which only 2% were in Australia.
• In reaching this conclusion, his Honour was careful to note that the "meaning of 'legitimate interest' will depend on the particular business of the supplier, including the circumstances of the business and the context of the contract as a whole" and "what is 'reasonably necessary' involves an analysis of the proportionality of the term against the potential loss sufferable, and other options that might be available to the respondent in terms of protecting its business and which are less restrictive to the other party to the contract."

Matters might have been different if the costs of the arbitration were not shifted to Instagram. Without this, arbitration may have been prohibitively expensive for a consumer or small business. Perhaps the opt-out provision, which Justice Beach said had little significance, or the carve-out allowing claims to be brought in a local court may have been more important. That said, his Honour did note that "inconvenience and cost alone are not likely to be sufficient to establish that submitting to a foreign jurisdiction would be unfair", so it may not have made any difference.

Overall, the decision in Dialogue v Instagram is encouraging to those who wish to enforce arbitration clauses in standard form contracts. Still, it would be wise to take steps to increase the probability of the clause being upheld, such as capping the costs of the consumer or small business conducting the arbitration to the amount they would incur if their claim were brought in a local court of tribunal. This may assist in establishing that the term is reasonably necessary to protect a legitimate interest. This provision could be limited to low-value claims so that a well-resourced small business bringing a large claim would still need to pay the costs of the arbitration. Also, the clause should be prominently and clearly stated to increase the prospects of it being transparent.

Jurisdiction clauses

The decision of Gonzalez v Agoda Company Pte Ltd [2017] NSWSC 1133 addressed whether a jurisdiction clause may be unfair. While in Sydney, Ms Gonzalez used Agoda’s website to book a hotel in Paris, where she later slipped and fell. Agoda was incorporated in Singapore and all its employees were located there. Its business was providing hotel accommodation around the world by online bookings. Agoda's standard terms included an exclusive jurisdiction clause selecting Singapore courts as the forum.

Justice Button concluded there was nothing unfair "about an international corporation seeking to protect itself from claims being litigated in the courts of countless countries applying countless different substantive and procedural laws". His Honour's brief reasoning appears to have focused on the second element of the test for unfairness, being whether the term was reasonably necessary to protect the legitimate interests of a party that was advantaged by it. His Honour did not deal with a significant imbalance in the parties' rights and obligations under the contract. It perhaps does cause a significant imbalance to force a consumer or small business to litigate a small claim in a foreign country, particularly when the other party is located there and is familiar with the legal system. Even if that argument is accepted, the clause will still be fair provided it is reasonably necessary to protect a legitimate interest.

Choice-of-law clauses

A choice-of-law clause raises two questions for the UCT laws. First, will the clause be enforceable if it seeks to impose the laws of a jurisdiction that does not have the UCT laws and therefore seeks to oust the UCT laws? Second, if the UCT laws do apply, will a choice-of-law clause be unfair?

There is no clear answer for the first question. The UCT laws do not specifically address the point. This is in contrast to the laws for the consumer guarantees which are also contained in the Australian Consumer Law. Section 67 of the Australian Consumer Law addresses clauses that purport to exclude the consumer guarantees. It states that if the "proper law" of the contract would be the law of Australia, but for a term of the contract that provides otherwise, the consumer guarantees will apply despite that term. At the time of writing, no case had addressed whether a choice-of-law clause can oust the UCT laws. There are cases which address whether a choice-of-law clause can oust provisions of the Trade Practices Act 1974 (Cth). As we all know, the Trade Practices Act was the predecessor of the Competition and Consumer Act 2010 (Cth), which contains the Australian Consumer Law and the UCT laws. These cases suggest that a choice-of-law clause cannot oust the UCT laws.^[1]

There is very limited authority on the second question: whether a choice-of-law clause is unfair under the UCT laws. Director of Consumer Affairs Victoria v Backloads.com Pty Ltd (Civil Claims) [2009] VCAT 754 concerned a company conducting a removals business. It used standard form contracts containing a term stating that the "agreement shall be governed and interpreted and enforced in accordance with the laws applicable in the Australian Capital Territory." At the time, the UCT laws did not exist in the ACL, but there were similar provisions addressing unfair terms in the now-repealed Fair Trading Act 1999 (Vic). Several terms of the contract were alleged to be unfair under the Fair Trading Act, including the choice-of-law clause. At the time, there was no legislation in the ACT addressing unfair terms. The respondent company argued that the Fair Trading Act did not apply to the contract since it is not part of the law of the ACT. This argument was not addressed by the Victorian Civil and Administrative Tribunal. Instead, the Tribunal appears to have proceeded on the assumption that the Fair Trading Act applied. The Tribunal concluded that the choice-of-law clause was unfair because "it artificially imposes the law of the Australian Capital Territory onto every contract whether or not the contract could by law be characterised as being made in the Australian Capital Territory"; had "the object or effect of depriving the relevant consumer of the protections afforded by the [Fair Trading Act]"; and there were "no circumstances which have been the subject of evidence which justify the inclusion of this clause".

It is questionable how authoritative Backloads now is in light of Dialogue v Instagram and Gonzalez v Agoda, particularly when they are decisions of superior courts and Backloads is a decision of a tribunal. Both Dialogue v Instagram and Gonzalez v Agoda found jurisdiction clauses and arbitration clauses to be valid because they were reasonably necessary to protect the legitimate interest of avoiding disputes in numerous locations. Similar reasoning could apply to choice-of-law clauses because they protect a business from litigating disputes under various different laws. However, a choice-of-law clause may not be reasonably necessary to protect that legitimate interest if it deliberately chooses the laws of a jurisdiction that is unrelated to both parties and does so to give one party an advantage over the other. Aside from the UCT provisions, there is "some authority" that a choice-of-law clause may only select a system of laws that has a "substantial, though not necessarily predominant, connection with the contract" (M Davies, A Bell and P Brereton Nygh’s Conflict of Laws in Australia (9th edn) LexisNexis Butterworths, 2013, [19.15]).

Adjudication clauses

The effect of the UCT laws on adjudication clauses has not been considered in any Australian cases but there have been a number of UK cases that considered them in the context of the similar (but not identical) UCT laws that exist in the UK. Westminster Building Company Limited v Beckingham [2004] 1 BLR 265 upheld an adjudication clause in a residential building contract for reasons including that it "does not significantly exclude or hinder the consumer's right to take legal action ". Lovell Projects Limited v Legg and Carver (2003) BLR 452 also upheld an adjudication clause in a residential building contract because the "adjudication terms apply equally both to [the] contractor and employers". However, Picardi v Cuniberti [2003] 1 BLR 487 found that an adjudication clause in an architect's contract was void for reasons including that it imposed "a procedure … which will cause irrecoverable expenditure"; "[c]osts in an adjudication can be very significant"; and "the adjudicator shall be nominated … by the architect's own professional body" if the parties cannot agree on an adjudicator. Judge Toulmin placed weight on the fact that the UK version of the UCT laws specifically states that terms, which have the object or effect of "excluding or hindering the consumer's right to take legal action … particularly by requiring the consumer to take disputes exclusively to arbitration", may be unfair. Judge Toulmin considered this "significant" even though the case dealt with adjudication and not arbitration. The equivalent provision in the Australian UCT laws does not specifically refer to arbitration and instead contains a general reference to "a term that limits, or has the effect of limiting, one party’s right to sue another party".

Conclusion

Choice-of-law, jurisdiction and arbitration clauses are at least partly motivated by a desire to protect a business from the cost and inconvenience of dealing with disputes in different jurisdictions, according to different laws and with court procedures that may be inconvenient and unfamiliar compared to arbitration. The decisions of Dialogue v Instagram and Gonzalez v Agoda support the view that a business has a legitimate interest in "seeking to protect itself from claims being litigated in the courts of countless countries applying countless different substantive and procedural laws" and taking steps to "enabl[e] a more efficient way to manage disputes". Provided a choice-of-law, jurisdiction or arbitration clause is reasonably necessary to protect these interests, it will not be unfair under the UCT laws. The onus will be on the business to show that these are legitimate interests and the clause is reasonably necessary to protect them. The business can also assist its prospects of upholding the clause by making it transparent through clearly bringing it to the other party's attention and using simple, plain language.

Peter is an editor of the Australian Competition and Consumer Law Commentary provided by Wolters Kluwer Australia | CCH

^[1] This issue is addressed in detail in Peter Sise, “How does a choice-of-law clause affect the operation of the unfair contract term provisions?” (2016) 32(7) Competition and Consumer Law News 242.^{Back to article}

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