Unfair despite symmetry: court rules mandatory arbitration clauses may be unfair
The Federal Court decision in AghaeiRad v Plus500[1] is an important development in the application of the unfair contract terms regime, particularly in respect of dispute resolution clauses. It confirms that mandatory arbitration clauses under standard form contracts may be unfair where their practical effect is to prevent a party from accessing courts or participating in class actions, even where the clause is seemingly symmetrical and applies to both parties.
Key takeaways
In AghaeiRad, the Federal Court ruled a mandatory arbitration clause in a standard form User Agreement was void as an unfair contract term under section 12BF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
The relevant clause was found to be unfair notwithstanding it had been drafted symmetrically.
In an earlier case of Kaprik v Carnival[2], the fact that the relevant class action waiver clause was stated as being specifically for the benefit of the operator (and therefore asymmetrical) was an important factor in finding that clause to be unfair.
AghaeiRad is therefore important as it confirms that mandatory arbitration under standard form contracts may be unfair where their practical effect is to prevent a party from accessing courts or participating in class actions, even where the clause is seemingly symmetrical and applies to both parties.
The case also opens the door for courts to hold that other symmetrical terms cause a significant imbalance where there is an asymmetric practical effect. When drafting standard form contracts businesses cannot assume that just because a clause has been drafted symmetrically that it will not be an unfair term
Background
Plus500 is part of a fintech group and operates an online platform for trading over the counter Contracts for Difference, knowns as CFDs. The platform is marketed broadly and non-professional investors or consumers can deposit as little as $100 into their trading accounts.
The applicant, Mr Ali AghaeiRad, completed an online registration process during which he was required to tick a box confirming he had ‘read, understood and agree[d] to the terms of’ various hyperlinked documents, including a User Agreement. Although he had checked the box confirming he had done so, Mr AghaeiRad had not in fact opened or read the User Agreement or any of the other hyperlinked documents. Mr AghaeiRad subsequently lost $111,948 trading on the platform and commenced representative proceedings alleging misleading or deceptive conduct, unconscionable conduct and breach of contract.
Clause 23 of the User Agreement contained a dispute resolution clause. More specifically, clause 23.3 provided that if a dispute could not first be resolved by negation or mediation it shall be automatically referred to arbitration under the Resolution Institute Arbitration Rules (Arbitration Clause).
Plus500 sought orders that Mr AghaeiRad’s proceeding be permanently stayed and the parties be referred to arbitration, in accordance with the Arbitration Clause.
Mr AghaeiRad contended that Plus500’s stay application should be dismissed for a number of reasons, including that the Arbitration Clause was an unfair contract term under section 12BF of the ASIC Act.
Findings on unfair contract terms
As a preliminary matter, the Court found that the Arbitration Clause formed part of the agreement between Mr AghaeiRad and Plus500, notwithstanding that Mr AghaeiRad had not read the User Agreement. As a form of ‘clickwrap’ agreement, despite his ignorance of the terms of the User Agreement, Mr AghaeiRad’s checking of the box manifested his assent to the User Agreement and all of the terms within it. Whether the User Agreement included terms that were relevantly unfair was a different question.
It was uncontested that the User Agreement was a standard form consumer contract. What was disputed was whether the Arbitration Clause was unfair.
The Court applied the test for unfairness under section 12BG(1) of the ASIC Act, which requires a term to (a) cause a significant imbalance in the parties' rights and obligations; (b) not be reasonably necessary to protect the legitimate interests of the advantaged party; and (c) cause detriment to a party if applied or relied on.
Transparency
In determining whether a term of a contract is unfair, a court must take into account the extent to which the term is transparent. While the Arbitration Clause was legible and readily available, the Court found the Arbitration Clause lacked transparency in the sense of conveying its effect to customers in reasonably plain language or by clear presentation.
The User Agreement was one of five documents presented to prospective customers and the Arbitration Clause appeared on page 30 of the 50-page User Agreement. The Arbitration Clause was not foreshadowed in the summary at the start of the User Agreement and the arbitration component was buried mid-sentence within a sub-clause primarily addressing mediation. Critically, the clause was silent on its most significant practical effects; that it would prevent customers from bringing court proceedings or participating in a class action.
Significant imbalance
The Court held that the Arbitration Clause caused a significant imbalance in the parties' rights and obligations for three reasons. First, the clause effectively prevented customers (being the only parties realistically likely to bring proceedings) from having recourse to a court. Second, the availability of arbitration was only theoretical for most customers such as Mr AghaeiRad because the cost of arbitration was prohibitive relative to the likely value of most claims, particularly given that a large proportion of claims would involve small amounts. Third, the clause prevented customers from bringing or participating in class actions.
Notably, the Court rejected Plus500's submission that the Arbitration Clause was not imbalanced because it applied equally to both parties, holding that a ‘symmetrical’ term can nevertheless cause a significant imbalance where it has an asymmetric practical effect.
Not reasonably necessary to protect legitimate interests
Plus500 bore the onus of proving that the Arbitration Clause was reasonably necessary to protect its legitimate interests. Plus500 advanced three justifications: compliance with its AFSL obligations; facilitating the final, fair, efficient and cost-effective resolution of complaints; and ensuring a common procedure and forum for dispute resolution with each of its customers. The Court rejected each of these.
In particular, the Court noted that no complaint had ever proceeded to arbitration, and the practical effect of the Arbitration Clause was to ensure that disputes were not further pursued by dissatisfied customers once internal dispute resolution, mediation and the AFCA process had been exhausted. Any interest Plus500AU had in claims being brought in a common forum and with a common procedure was not sufficiently compelling to overcome the detriment of effectively precluding all customers from bringing individual claims or class action proceedings.
Detriment
The Court found that detriment was clearly established. If the Arbitration Cause were enforced, Mr AghaeiRad would be deprived of the ability to prosecute his claim in an appropriate court and would lose the advantages of class action procedures.
This decision is an important development in the application of the unfair contract terms regime to dispute resolution clauses.
In an earlier case, Dialogue Consulting Pty Ltd v Instagram, Inc[3], the relevant clause requiring the parties to use arbitration to resolve disputes was held not to be unfair (although that case is distinguishable on its facts). While in the case of Kaprik v Carnival[4], the fact that the relevant class action waiver clause was stated as being specifically for the benefit of the operator (and therefore asymmetrical) was an important factor in finding that clause to be unfair.
This case is therefore important as it confirms that mandatory arbitration under standard form contracts may be unfair where their practical effect is to prevent a party from accessing courts or participating in class actions, even where the clause is seemingly symmetrical and applies to both parties. Further, the case opens the door for courts to hold that other symmetrical terms cause a significant imbalance where there is an asymmetric practical effect.
Clauses in standard form contracts that require the parties to use arbitration will not always be unfair (as Dialogue v Instagram shows). However, businesses that include dispute resolution clauses in standard form contracts should carefully consider whether such clauses can withstand scrutiny under the unfair contract terms provisions of the ASIC Act and the Australian Consumer Law, particularly if the clause requires the parties use arbitration or seeks to prevent a party from participating in any class action.
Further, when drafting standard form contracts businesses cannot assume that just because a clause has been drafted symmetrically that it will not be an unfair term. Businesses will need to carefully consider whether the term causes a significant imbalance in the parties’ rights and obligations.
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