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Is Arbitration Innately Unfair?

23 February 2018
Challenges Arising Under the Australian Consumer Law
It is increasingly common for large enterprises, particularly those who work internationally, to rely on compulsory arbitration clauses to settle disputes arising from their contracts. The reasons for this are many, but from an international perspective the most tangible benefit is the ability to remove the peculiarities of individual jurisdictions and place disputes into a central framework that suits the requirements (and understanding) of the business. The online marketplace only exacerbates this issue, with products and services offered to a wide variety of persons and corporations, with whom each contract may be subject to a different jurisdiction and different applicable law. Commercial arbitration promises enterprises certainty, but in removing protections put in place by the local jurisdiction, it may contradict applicable Australian law.

For standard-form contracts where: 

any party employs less than 20 people; and
where the upfront price payable under that contract is no more than $300,000 (or $1,000,000 if the contract is for more than 12 months) 

Additional restrictions relating to overall fairness apply to available terms. Despite their presence in the Australian Consumer Law, they apply not just to consumer contracts, but also to business to business transactions that meet that standard. In late 2017, the Federal Court in Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 handed down the first significant decision on the Australian “unfair contract terms” laws as they apply to business to business transactions. This case flags potential dangers for international enterprises trading in Australia, one of which is the now common arbitration clause.

Section 25(k) of the Australian Consumer Law explicitly notes as a type of clause that may be unfair, any clause which “limits, or has the effect of limiting, one party's right to sue another party”. Arbitration clauses would likely meet such a definition. Nor do the sections circumscribe unfairness to any specific kind of provision: the legislation is broad, and notions of fairness encompass, but are not limited to, whether or not a term grants one party an additional right, protects them from consequences to which the other party is subject, or creates a significant imbalance between the parties.

It is this last factor, imbalance, which weighs against the application of arbitration clauses when offered on a standard form basis. Australia has adopted English decision making as to the  substantive unfairness of a contract, taking a whole of document approach as set out in Director General of Fair Trading v First National Bank plc [2002] 1 AC 481. Arbitration clauses typically lift disputes out of local jurisdictions and place them in the “home” jurisdiction of the enterprise offering the contract. They also tend to reserve the matter to particular arbitrators, reserve nomination as to whom the arbitrator is to be, or confine conduct of that arbitration to a set of principles and rules conferred by a foreign body. Enterprises that regularly utilise arbitration as a dispute resolution method are naturally going to have more familiarity with how arbitration is conducted, and arbitration is often viewed as a remedy which favours the party requiring it. Arbitrators are not bound, as many jurisdictions are, to take into account vulnerability in bargaining power, nor are they required to apply set rules of construction which can serve to protect more vulnerable consumers. 

The mere fact that the other parties to a contract still have access to the arbitration remedy is not likely to cure any perceived defect: it is the practical impact and advantage granted which is of relevance, not the existence of any technical right of redress. The mere fact that arbitration may be held outside the Australian jurisdiction, and require contractors to engage in the expense and difficulty of travel, or to engage representation in the jurisdiction where the arbitration is conduct (if representation is allowed), may well be sufficient for the Australian courts to determine an imbalance.

Section 5 of the Competition and Consumer Act 2010 extends the application of the laws to companies conducting business in Australia, even where the relevant contract and choice of laws clauses place the home of the contract in another jurisdiction. Such clauses act to vest the contract as being entered into outside of Australia. Section 5 does not alter this fact, but instead extends the application of the provisions to conduct (including entering into contracts) undertaken outside Australia. On 22 December 2017, the Federal Court confirmed, in Valve Corporation v Australian Competition and Consumer Commission [2017] FCAFC 224, that this extension could not be contractually excluded, or excused by choice of law provisions. It is the carrying on of business in Australia which extends the terms, not a choice of law in the contract itself.

Traditionally, the discouragement from pursuing cross-jurisdictional cases has been that, even where relief is granted, enforcing that relief in another jurisdiction has proven problematic. It should be noted that fairness of contract provisions are enforceable (and enforced) by the ACCC, Australia’s competition and consumer agency. The ordinary commercial considerations which govern enforcement across jurisdictions are consequently less imperative: the agency has a vested interest in protecting and promoting Australian sovereignty in local contracts. Likewise, in addition to offending clauses being rendered void in the contracts in question, the breach of fairness of contract terms provisions can potentially give rise to penalties, as well as compensation.

As yet, the application of the unfair contract terms to arbitration clauses remains untested, however, the principal decisions mentioned above (JJ Richards & Sons Pty Ltd and Valve Corporation) are still very recent. Arbitration clauses may be the next item to be tested. If you intend to arbitrate disputes with an Australian connection, serious consideration should be given to the balance of convenience of such clauses and how – if at all – they seek to address any imbalance in power between the parties. DWF (Australia) is happy to review any such provisions, as well as wider questions relating to Australian commercial transactions from an international perspective.

Further Reading