Consider the following two different scenarios involving customer refunds. Firstly,  you have set up your new subscription website and, as per your terms and conditions, subscription is payable in advance. What, then, should you do if your client decides halfway through the subscription period that they no longer require the service and want to cancel?

Secondly, you are selling goods through your website, and you take cash before delivery. What do you do if your customer changes their mind and would like to cancel their order?

Standard Form Contracts and Unfair Terms

At the outset, one of your primary objectives in any new commercial enterprise will be to meet all of your customer’s reasonable expectations. Even if they cancel, you will want to provide them with a good experience without compromising your position too much.This is particularly the case if the contracts you are setting up are standard form contracts.

Your customers cannot negotiate a standard form contract, such as a typical Website Terms of Use. Standard form contracts may be subject to review under the law governing Unfair Contracts Terms. This is part of the Australian Consumer Law and the various states’ and territories’ Fair Trading Acts. This law already benefits consumers and is likely to be extended by mid next year to small businesses who are your customers.

Importantly, when dealing with these issues, you need to be aware of the “usual” practice in your industry. But it will still be necessary for you to consider whether this industry practice is unfair. It is no defence to a claim of unfair contracts terms that everyone else in the industry is doing it. The law is intended to allow terms to be declared void because of unfairness despite the prevailing industry practice. Nasty surprises that amount to a lack of good faith will most likely be found unfair if challenged because they “depart from good standards of commercial morality or practice.

Pay TV is a classic example of an industry where subscription fees are generally paid monthly in advance. They range between $40-$100 per month and effective at the end of that month, you can cancel your subscription at any time.

Unfair Contracts Terms and fixed term contracts

Contrast this example with the practice in gym contracts where there is often a fixed one-year term during which you cannot cancel, and then it becomes a month-to-month arrangement after that.

Some gym contracts were found wanting in a number of areas following challenges under the Unfair Contracts Terms law. For example, in Director of Consumer Affairs Victoria v Trainstation Health Clubs Pty Ltd [2008],  VCAT held many clauses in a gym membership contract to be unfair, including the two summarised below:

  • The Customer can terminate this Contract on or after the minimum term expires. Termination occurs provided that the Customer pays all instalments and fees due up to the date of termination. The customer must provide one full calendar month written notice of the termination.
  • The Customer can terminate this Contract before the minimum term expires. The Customer must pay all instalments and fees due up to the termination date and provide 1 full calendar month written notice. A cancellation fee of $75 + $2 per week for each fulfilled week of the contract must accompany the notice.  

VCAT held that these were unfair. Among other things, they considered the effect of these terms as stated in the gym membership contract. VCAT explained that the contract’s effect was to transform a 12-month contract into a 13-month contract, and a 1-month contract into a 2-month contract.

VCAT further held that these clauses, as drafted, gave customers the mistaken impression that they provided the only lawful means of terminating the contract. Of course, consumers have rights to terminate their contracts if suppliers breach the terms of the contract by failing to live up to the consumer guarantees in the ACL and the Fair Trading Acts.

Among other things, VCAT considered the effect of these terms as stated in the gym membership contract. VCAT explained that the contract’s effect was to transform a 12-month contract into a 13-month contract, and a 2-month to 2-month contract.

VCAT further held that these clauses, as drafted, gave customers the mistaken impression that they provided the only lawful means of terminating the contract. Of course, consumers have rights to terminate their contracts if suppliers breach the terms of the contract by failing to live up to the consumer guarantees in the ACL and the Fair Trading Acts.

At the other end of the scale, imagine if you were charging several thousand dollars a year for a subscription to businesses for a professional marketing service. It might be more appropriate for you to provide customers with a refund of their unused subscription after a period of notice of one to two months has expired.

When customers select that you ship their goods, it is fairly standard to provide that customers can cancel at any time up to when the goods are packed for shipment. Once this has occurred, the order cannot be cancelled. Likewise, if the order is for creating or manufacturing goods, normally, it could only be cancelled prior to work commencing on the order.

Key Take-Aways

So what are our take-away tips?

  • Be sure to research the practice in your industry, and
  • Seek professional advice when drafting your contracts to minimise the chance that your cancellation policy could be held to be void for being unfair

If you have any questions about customer refunds or need assistance in drafting your terms and conditions, you should speak with one of LegalVision’s experienced business lawyers. Please call us on 1300 544 755 and talk to us about how we can best help you.

Catherine Logan

Ask Catherine a Question

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.