Pashalidis t/as Bodyworks Fitness Clubs v Commissioner for Fair Trading [2004] ACTSC 23 (23 April 2004)

Last Updated: 23 April 2004

STEPHEN PASHALIDIS t/as BODYWORKS FITNESS CLUBS v COMMISSIONER FOR FAIR TRADING

COMMISSIONER FOR FAIR TRADING v STEPHEN PASHALIDIS t/as BODYWORKS FITNESS CLUBS

[2004] ACTSC 23 (23 April 2004)

CONSUMER PROTECTION - Fitness Industry Code of Practice - membership agreements - minimum term with provision for membership to continue until cancelled - whether contravention of provision prohibiting sale of memberships for more than 12 months - whether membership after minimum term involves continuance or renewal of initial membership - whether forms of agreement clearly set out rights and responsibilities of supplier and consumer - failure to state that agreement for a period of three months or more subject to a cooling off period.

Fair Trading Act 1992 (ACT), ss 34, 36

Fair Trading Regulations 1995 (ACT), reg 4(a)

Fitness Industry Code of Practice

Tebbutt v Egg Marketing Board of New South Wales [1976] 2 NSWLR 179

Canizales v Microsoft Corporation [2000] NSWIRComm 118; (2000) 99 IR 426

Mellows v Low [1923] 1 KB 522

No SC 474 of 2003

No SC 549 of 2003

Judge: Crispin J

Supreme Court of the ACT

Date: 23 April 2004

IN THE SUPREME COURT OF THE )

) No. SC 474 of 2003

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: STEPHEN PASHALIDIS t/as BODYWORKS FITNESS CLUBS

Plaintiff

AND: COMMISSIONER FOR FAIR TRADING

Defendant

ORDER

Judge: Crispin J

Date: 23 April 2004

Place: Canberra

THE COURT ORDERS THAT:

1. the proceedings be dismissed.

IN THE SUPREME COURT OF THE )

) No. SC 549 of 2003

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: COMMISSIONER FOR FAIR TRADING

Plaintiff

AND: STEPHEN PASHALIDIS t/as BODYWORKS FITNESS CLUBS

Defendant

ORDER

Judge: Crispin J

Date: 23 April 2004

Place: Canberra

THE COURT ORDERS THAT:

1. it be declared that in entering into agreements constituted by forms providing for monthly membership and a monthly debit authority agreement such as that which formed the basis of the agreement between the defendant and Ms Cheryl King on 25 November 1998, the defendant breached the Fitness Industry Code of Practice prescribed by the Fair Trading Regulations 1995 (ACT) as a Code of Practice under the Fair Trading Act 1992 (ACT) in the following respects:

(a) by failing to ensure that such membership agreements set out clearly and unambiguously the rights and responsibilities of the supplier and consumer;

(b) by failing to ensure that such agreements stated that an agreement for a period of three months or more was subject to a cooling off period; and

(c) by selling memberships for periods greater than 12 months.

2. it be declared that in entering into agreements constituted by forms providing for monthly membership and a monthly debit authority agreement such as that which formed the basis of the agreement between the defendant and Ms Julie Taylor on 4 August 2001, the defendant breached the Fitness Industry Code of Practice prescribed by the Fair Trading Regulations 1995 (ACT) as a Code of Practice under the Fair Trading Act 1992 (ACT) in the following respects:

(a) by failing to ensure that such membership agreements set out clearly and unambiguously the rights and responsibilities of the supplier and consumer;

(b) by failing to ensure that such agreements stated that an agreement for a period of three months or more was subject to a cooling off period; and

(c) by selling memberships for periods greater than 12 months.

1. Both proceedings, numbered SC 474 of 2003 and SC 549 of 2003 raise issues as to whether the use of certain forms of agreement by Stephen Pashalidis t/as Bodyworks Fitness Clubs ("Mr Pashalidis") has contravened the Fitness Industry Code of Practice ("the Code"). The Code is prescribed as a code of practice by reg 4(a) of the Fair Trading Regulations 1995 (ACT) pursuant to the power provided by s 34 of the Fair Trading Act 1992 (ACT) ("the Act"). The Act contains provisions for enforcement of the provisions of any such code of practice.

2. In the proceedings numbered SC 474 of 2003, Mr Pashalidis sought declarations that the membership forms and membership payment arrangements issued by him to all current and prospective members are not in breach of cl 7(4) or cl 7(5) of the Code.

3. In the proceedings numbered SC 549 of 2003, the Commissioner for Fair Trading ("the Commissioner") initially sought a broad declaration to the effect that the agreements breached the Code. However, during the course of argument Mr Nash, who appeared on the Commissioner's behalf, indicated that he sought more specific declarations reflecting the allegations in par 2 of the Statement of Claim that the use of both the "older" and "newer" agreements breached the Code by -

(a) Failing to set out clearly the rights and responsibilities of the supplier and consumer. Clause 7(2)(b) of the Code.

(b) Failing to state that an agreement for period longer than 3 months is subject to a 7 day cooling off period. Clause 7(2)(c). [sic]

(c) Failing to set out the total amount payable for membership for a specified period. Clause 7(2)(d)(iii).

(d) Selling memberships for periods greater than 12 months. Clause 7(4)(a).

(e) Entering membership agreements which are not in writing. Clause 7(3).

(f) Renewing memberships for periods exceeding 15 months. Clause 7(5)(c).

4. Ms Ronalds, who appeared for Mr Pashalidis, did not oppose this reformulation of the Commissioner's claim but maintained that there were no grounds for any such declarations.

5. The proceedings were heard together by consent.

6. It was common ground that Mr Pashalidis had used two forms of agreement, though he gave unchallenged evidence to the effect that he had ceased using what was described as the "older" form of agreement in September 2003 and that no contracts that had been entered into by means of that form remain in effect. Accordingly, Ms Ronalds sought to confine the scope of the proceedings to issues relating to the newer form of the contract, contending that the grant of any declarations in relation to the older form would be futile. In Tebbutt v Egg Marketing Board of New South Wales [1976] 2 NSWLR 179 Hutley JA said at 184-185 that declarations have always to be translated into concrete legal reality and that whilst courts had made some declarations, in what his Honour described as historical situations, they had done so in cases in which the declaration had served the continuing legal interests of the applicant or of a class of which he or she was a member. In the same case, Samuels JA dismissed an application for declaratory relief, observing that a declaration could not relevantly affect the plaintiff's legal rights or attain the object sought. Ms Ronalds argued that the same observations could be made in the present case - no declaration as to whether the use of the older form had contravened relevant provisions of the Code could affect the Commissioner's legal rights and, since there were no current agreements based upon that form, the rights of Mr Pashalidis and members would also remain unaffected.

7. On the other hand, Mr Nash submitted that it would be appropriate to provide declaratory relief in relation to both forms of agreement since the relevant portions were similar, the relevant provisions of the Codes that had prevailed throughout the periods in which the different forms had been used were identical and use of the older form had been abandoned only after the institution of proceedings. Indeed, Mr Pashalidis' Statement of Claim which was filed with his Originating Application on 8 August 2003 expressly sought a declaration that "the membership form and the membership payment arrangement for all current members of the plaintiff" were not in breach of cl 7(5) of the Code. The payment arrangements for at least some of the then current members would clearly have been made pursuant to the older forms.

8. More importantly, the Commissioner's power to request an undertaking as to discontinuance of conduct, future compliance with the Code and rectification of any consequences of contravention arises under s 36 of the Act but only when it appears to the Commissioner that the person in question has carried on business in contravention of a prescribed code. There is a continuing dispute between the parties as to whether the older form had complied with the relevant provisions of the earlier or current Code. If this dispute were to be resolved in the Commissioner's favour, he would be entitled to take the view that Mr Pashalidis had carried on business in contravention of a prescribed code and that his powers under s 36 had thereby been enlivened. In all the circumstances, I am satisfied that it is appropriate to consider the application for declaratory relief in respect of both forms of agreement.

9. The older form of agreement consisted of an untitled document which contained provision for the stipulation of a joining fee, a monthly rate and the number of payments. It then stated -

CANCELLATION - Bodyworks (BWK) offers suspension facilities for 12 month members which have been payed in full. It is a policy of BWK that this is a standing authority to deduct the agreed payments for the minimum period set out above i.e. If the period stated is for 12 months then 12 deductions will be made from the stated account. Cancellation is possible for medical or travel reasons only and must be in writing with documentation (e.g. doctor's certificate or letter). [sic]

10. Despite the apparent specificity of the provisions for payment, the form was accompanied by another document entitled "Monthly Debit Authority Agreement", the relevant portions of which were in the following terms -

I give authority to Bodyworks Fitness Club to debit my savings/cheque/credit account for the amount specified above. I acknowledge that these debits will occur on the 20^th day of each month, for the minimum period of twelve months.

I understand that after the initial period, my membership will continue until I choose to cancel. I also understand that cancellation of membership must be in writing with 30 days notice.

If I wish to cancel my membership before the completion of the initial period I incur a cancellation fee of $70.00. I understand that cancellation at this point must also be in writing.

11. The newer form of agreement also contained provision for the stipulation of a joining fee and a monthly rate but included provision for a minimum number of monthly payments to be stipulated. The form included the following passage -

MONTHLY DEBIT AUTHORITY AGREEMENT:

I give authority to Bodyworks Fitness Club to debit my savings/cheque/credit account for the amount specified above. I acknowledge that these debits will occur on or about the 20^th day of each month, for the minimum period stated above. I understand that after the initial period, my membership will continue until I choose to cancel. This must be done in person, giving Bodyworks Fitness Club 30 days notice. If I wish to cancel my membership before the completion of the initial period I will incur a cancellation fee of $70.00. I understand that cancellation at this point must also be in person and in writing, giving 30 days notice . . .

12. Both the old and new forms contained a disclaimer of any liability arising out of or connected with the use of any services or facilities provided by Bodyworks and/or their agents and employees or the premises. However, the newer form also contained an acknowledgement by the customer to the effect that he or she had read and adhered to "all conditions and rules of the Bodyworks Fitness Club Membership".

13. The newer form was accompanied by a further document referred to as a "Direct Debit Request" which authorised the customer's financial institution to make the monthly payments to Bodyworks Fitness Club. This document stated that the authorisation was to remain in force "in accordance with the terms described in the Service Agreement". The "Service Agreement" was presumably a reference to what the membership form described as the "Monthly Debit Authority Agreement". It was common ground that there was no other agreement between Mr Pashalidis and members that could have been so described.

14. During the course of the hearing, Mr Pashalidis sought to raise allegations as to the Commissioner's conduct in executing a search warrant on his premises and in taking action against him when, he suggested, such action had not been taken against any of his competitors. However, these allegations did not appear relevant to any issues that had been raised on the pleadings and I ruled that the evidence was inadmissible.

15. The pleadings were somewhat irregular since neither Statement of Claim contained an adequate statement of the facts relied upon and neither party had filed a defence. However, neither Ms Ronalds nor Mr Nash took any point about the paucity of pleadings and it quickly emerged that there was no substantial dispute as to the facts relevant to the competing claims. The real issues between the parties stemmed from differing interpretations of various provisions of the Code and/or the terms of the agreements.

16. Whilst, as I have mentioned, the Originating Application by Mr Pashalidis in proceedings numbered SC 474 of 2003, was filed prior to that filed by the Commissioner in proceedings numbered SC 549 of 2003, the issues between the parties are more clearly identified in par 2 of the Statement of Claim in the latter proceedings and I will deal with those issues in sequence.

The requirement for the agreement to set out clearly the rights and responsibilities of the supplier and consumer.

17. Clause 7(2)(b) of the Code provides that a supplier of a fitness service ("a supplier") shall ensure that a membership agreement sets out clearly and unambiguously the rights and responsibilities of the supplier and the consumer. In my opinion both the older and newer forms of agreement clearly failed to comply with this requirement. As Mr Nash pointed out, neither form clearly explains that monthly payments will continue to be made by the customers' financial institution to Mr Pashalidis beyond the minimum period of the contract.

18. The older form stated that it is a policy of Bodyworks that the form was "a standing authority to deduct the agreed payments for the minimum period set out above, i.e. If the period stated is for 12 months then 12 deductions will be made from the stated account". [sic] Consistent with this statement, the accompanying "Monthly Debit Authority Agreement" authorised deductions for the monthly amount "for a minimum period of twelve months". It is true that this statement was followed by an acknowledgement that, after this initial period the customers' membership would continue until he or she chose to cancel it, but there was nothing in either document to indicate that the customer was authorising payments to be made by direct debit after the end of the stated minimum membership period.

19. Similarly, the newer membership form included acknowledgement that debits would occur on or about the 20^th day of each month for the minimum period stated and required the customer to acknowledge that after the initial period expired, his or her membership would continue until he or she chose to cancel it. But neither this agreement nor the accompanying "Direct Debit Request" suggested that monthly payments would be made automatically by direct debit after the conclusion of that period.

20. Ms Ronalds submitted that a reasonable consumer would have understood that it was his or her responsibility to ensure that the contract was cancelled if further membership was not required beyond the minimum period. However, I see no reason to suppose that all members who had ceased to regularly use the club premises would have prudently instituted some means of reminding themselves of the need to cancel their membership at the appropriate time. It seems more likely that at least some would have assumed that the repayments by direct debit would simply cease at the end of the minimum period and that a request for further payment or some other communication would, in due course, alert them to the need to make a further decision as to whether to continue with or cancel the membership.

21. More fundamentally, the older form said nothing about the rights acquired by the customer as a consequence of becoming a member and whilst the newer form refers to the conditions and rules of club membership, it does so only in the context of extracting an acknowledgement from the customer to the effect that he or she had read the details of them carefully and would adhere to them. There is nothing in either form that expressly imposes any obligation upon Mr Pashalidis or confers any right upon the member to do anything other than cancel the membership in person and by giving 30 days notice in writing, or upon payment of the cancellation fee if applicable, or to suspend membership upon the stated conditions. The forms do not purport to confer any entitlement for the member to use equipment, receive instruction or even enter the club premises.

22. Mr Grainger, the Chief Executive of Fitness Australia, that is the peak industry body which purports to set standards for the fitness industry, expressed the opinion that the membership form was in line with current industry practice. If that is so, then current industry practice in this respect is wholly inadequate and better standards need to be set.

The requirement to state that an agreement for a period longer than three months is subject to a seven day cooling off period.

23. Clause 7(2)(c) of the Code provides that a supplier shall ensure that a membership agreement states that an agreement for a period of three months or more is subject to a cooling off period and cl 10(1) states that the cooling off period is seven days beginning on the date of purchase. The consumer is entitled to terminate the membership within this period. It was conceded that neither form of agreement contained the required statement.

The requirement to set out the total amount payable for membership for a specified period.

24. Clause 7(2)(d)(iii) provides that a supplier shall ensure that a membership agreement discloses the total amount payable for membership for a specified period. If, properly construed, the agreements provided for membership for a specified period then neither form complied with this requirement.

25. However, the difficulty that arises in relation to this and other issues in the case lies in determining whether the forms of agreement, properly construed, provided for a specified term of membership with provision for subsequent and successive memberships on a month by month basis or, alternatively, whether they provided for terms of membership of essentially indefinite duration that would subsist until cancelled, subject to a prima facie requirement that they continue for a minimum term. This question is discussed later in this judgment.

26. For present purposes it is sufficient for me to state that in my opinion neither form provided for the sale of memberships for specified periods and therefore cl 7(2)(d)(iii) had no application to them.

The prohibition on selling memberships for periods greater than 12 months.

27. Clause 7(4) provides, inter alia, that a supplier shall not sell a membership for a period greater than 12 months.

28. The issue most strenuously debated by counsel for the parties was whether the use of either form of agreement contravened this clause. Ms Ronalds submitted that neither form suggested the sale of memberships for periods greater than 12 months. Any agreements effected by means of the forms should be seen as providing for memberships of indeterminate duration subject only to the requirement for payment of a cancellation fee if cancelled by a member within the initial or minimum period or alternatively, as providing for memberships for periods of 12 months followed by further periods added on a month by month basis.

29. There appears to be no authority directly on point but, in support of these arguments, Ms Ronalds argued that useful analogies could be drawn from two other situations. First, contracts of employment for a specified period terminable by notice from either party have been held not to constitute a fixed term contract for the period in question: Canizales v Microsoft Corporation [2000] NSWIRComm 118; (2000) 99 IR 426 per Peterson J at 445-446. Second, in the case of a tenancy from year to year a springing interest arises at the commencement of each year which is only determined by a proper notice to quit: Mellows v Low [1923] 1 KB 522 per McCardie J at 525.

30. In any event, Ms Ronalds submitted that Mr Pashalidis did not, by entering into the agreement, "sell" a membership for a period greater than 12 months contrary to cl 7(4) of the Code. She maintained that the clause was intended to prohibit the sale of memberships in circumstances which would involve members incurring a financial liability extending for periods greater than 12 months. In the present case, whilst the agreements clearly contemplated that memberships might continue for greater than that period, members did not at any time incur a liability extending beyond 12 months because they were free to cancel their membership at any time. Hence, it could not be said that Mr Pashalidis had sold a membership extending beyond the proscribed period.

31. This was persuasively argued but, having carefully considered Ms Ronalds' submissions in the light of the stated objectives of the Code, I have concluded that the relevant provision should not be interpreted in the manner suggested. I do not accept that cl 7(4) was intended to prohibit the sale of memberships for periods greater than 12 months only if there was no provision for earlier cancellation. Nor do I accept that cl 7(4) was not intended to apply to memberships for a minimum term of 12 months followed by continuing membership of indefinite duration. In my opinion, the transactions effected by both the older and the newer forms involved the sale of memberships that would subsist until cancelled, upon payment of a single joining fee and the undertaking of a liability to make monthly payments throughout their currency. The members acquired rights to maintain their memberships beyond the 12 month period stipulated at the same monthly rate without paying a further joining fee. In these circumstances, I am satisfied that both of the agreements contravened cl 7(4) notwithstanding the provision for cancellation of the membership at an earlier time.

32. Arguments by analogy are not always valid and the two situations adverted to by Ms Ronalds are quite different from those with which the relevant provisions of the Code are concerned. Furthermore, unlike contracts of employment or periodic tenancies in which each party clearly receives a quid pro quo for any continuing liability which he or she may accrue, a member who has long since ceased to use Mr Pashalidis' facilities but overlooked the need to cancel his or her membership may, in reality, receive nothing in return for the continuing expenditure. Furthermore, whilst it is difficult to imagine anyone forgetting where they work or where they live, it is easy to imagine a busy person overlooking the need to cancel a club membership after the agreed term of membership has expired and the membership is maintained only by automatic deductions from a bank account. I do not accept that only people who could fairly be described as irresponsible consumers could be expected to suffer losses in this way. Nor do I accept that the protection offered by cl 7(4) was intended to extend only to consumers alert to the potential implications of badly drafted clauses embedded in the fine print of contracts.

33. Mr Pashalidis gave evidence that he would incur additional administrative expense in having contracts renewed whenever the initial term expired and that this may have to be passed on to members by means of increased fees and charges. Mr Nash pointed out that Mr Pashalidis had deposed the fact that there was a usual practice of sending a notice by mail to each member at the end of their initial membership period to remind them of the expiry date of their membership and that this notice was usually followed by a telephone call. Mr Nash argued that renewal forms could be sent out at the same time. Ms Ronalds rejoined that the evidence that Mr Pashalidis had given concerning the additional costs of re-signing members had not been challenged in cross-examination or rebutted. I accept this submission, though I do not accept the suggestion that the interpretation favoured by the Commissioner would in some way compel Mr Pashalidis to deprive renewing members of the benefits of any lower monthly rates prevailing at the time when they first joined the club and force them to pay the same rates as those who joined later.

34. In any event, whilst the possibility of compliance costs and inconvenience may form part of the context within which the purpose of a relevant provision may have to be construed, such consequences must frequently be accepted as an unavoidable price of consumer protection legislation. It cannot simply be assumed that neither the legislature or those responsible for drafting delegated legislation could intend to protect relevant consumers in a particular manner unless that could be accomplished without cost or inconvenience.

35. In the present case, notwithstanding Ms Ronalds' able submissions, I am satisfied that both the older and newer forms of agreement provided for the sale of memberships which were to be of indefinite duration with, in many if not most cases, a minimum period of 12 months, albeit subject to earlier cancellation upon payment of a cancellation fee when applicable. Consequently, the use of both forms of agreement contravened cl 7(4).

The prohibition on entering membership agreements which are not in writing.

36. Clause 7(3) provides that a supplier shall not enter a membership agreement with a consumer unless the agreement is in writing and is signed by the consumer.

37. The main thrust of Mr Nash's argument did not involve any contention that there had been a breach of cl 7(3). The allegation seems to have been pleaded only to enable the Commissioner to respond to any suggestion that the real agreement between the parties may not have been encapsulated within the relevant documents but in oral or unsigned collateral agreements by seeking a declaration that any such agreements would themselves have contravened the Code.

38. In fact, the evidence does not suggest that Mr Pashalidis entered into any agreements that did not involve the use of either the older or the newer forms. It is true that neither form contained terms apparently conferring any substantial rights upon members in return for the money they had agreed to pay and that such rights could be deduced, if at all, only by implication from surrounding circumstances including, perhaps, any conversation that occurred at the time the relevant forms were executed. As I have already mentioned, both forms breached the requirements of cl 7(2)(b) to set out clearly the rights and responsibilities of the supplier and consumer. Nevertheless, I am not satisfied that there was any breach of cl 7(3).

The prohibition on renewing memberships for periods exceeding 15 months.

39. Clause 7(5)(c) provides that a supplier shall not offer to renew a membership where the total membership would, at any time, exceed 15 months.

40. Again, this contention did not form part of Mr Nash's primary arguments and seems to have been pleaded to enable the Commissioner to respond to any suggestion that continuing membership following the minimum period stipulated in the forms may have constituted a renewal rather than an extension of the initial membership by seeking a declaration that this construction would also have involved a contravention of the Code.

41. In fact, Mr Pashalidis himself, seemed uncertain as to how to characterise membership during this continuing period, but Ms Ronalds ultimately submitted that such a membership did involve a continuance of the existing membership rather than a renewal. Mr Nash did not contend to the contrary. In my opinion, the language used in the relevant forms and the fact that the memberships were to be maintained and the payments to continue without any act or even decision being taken to renew them clearly demonstrates that the initial membership was simply to continue until cancelled and no question of renewal arises.

42. It follows that Mr Pashalidis' application for a declaration that the use of the newer form does not involve any breach of cl 7(4) of the Code must fail but, for the reasons already given, I am satisfied that the use of the form does not, ipso facto, involve any breach of cl 7(5). As previously mentioned, the latter issue seems to have been raised by the Commissioner only to counter an argument that Mr Pashalidis did not ultimately maintain, and, since the contingency did not arise, there is no need for a declaration concerning this issue. The action by Mr Pashalidis will be dismissed.

43. In the circumstances it will be declared that, in entering into agreements with current and potential members based upon the older and newer forms of agreement and associated forms by which the members were to authorise direct debits from financial institutions, Mr Pashalidis breached the Code in the following respects:

(a) by failing to set out clearly and unambiguously the rights and responsibilities of the supplier and the consumer as required by cl 7(2)(b);

(b) by failing to state that an agreement for a period of three months or more is subject to a cooling off period as required by cl 7(2)(c); and

(c) by selling memberships for periods greater than 12 months as proscribed by cl 7(4).

44. I will hear counsel as to costs.

I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Crispin.

Associate:

Date: 23 April 2004

Counsel for the plaintiff: Ms C Ronalds

olicitor for the plaintiff: Nicholas Dibb Solicitors

Counsel for the defendant: Mr I Nash

Solicitor for the defendant: Office of Fair Trading

Date of hearing: 13 April 2004

Date of judgment: 23 April 2004