You work as the head of Legal Compliance for major Australian telecom company Virgo. Virgo offers the latest mobile phones either for outright purchase or on a plan via its network services in competition with Telstra, Optus and others.

Virgo has decided that it will manufacture its own phone and offer it, together with the usual competitor brands it offers, for either outright purchase or on a contract plan.

At the monthly management meeting, Virgo's head of Research & Development, Corey Ander, announces that the new phone the company has been working on is now ready for production. The phone has a new eye detection system that enables the user to unlock the phone using iris scanning via the phone's camera. The phone is to be called the 'EyePhone'. It has a simar look to the latest phones of Virgo's competitors but, as Corey says, "They all look the same these days". The eye detection system does not work very well but it is still something new and hopefully will appeal to customers seeking the latest fads.

The EyePhone will be sold at Virgo's stores throughout Australia and will be displayed next to the latest iPhone and Samsung phones. The price for the EyePhone will be $1500 outright. This is slightly more expensive than competitor prices despite the EyePhone having poorer specifications. The EyePhone costs about $100 each to produce.

Virgo's head of Sales, Bill Moore, states that the high price is intentional; they do not expect that many people will buy the EyePhone outright but would opt for a plan instead. The high outright price will generate an impression that the EyePhone is comparable to the top phones in terms of quality but customers would not purchase it outright (most do not with any phone anyway), instead they would be enticed by the phone plan that would be offered.

Bill says that Virgo aims to entice customers to take up the EyePhone by offering an unbeatable contract. Virgo will offer the EyePhone for free on a two year contract for $30 per month which includes unlimited national calls, text messages and 10GB of data per month. This plan is so cheap that it beats its nearest rivals by far. Customers should literally be falling over themselves to secure this plan.

Always worried about money, Virgo's Accountant Laura Norder asks Bill how Virgo can afford to offer such a cheap plan and a free phone. Bill replies that because of the new terms they want to put into their standard contracts, customers will end up paying a lot more than $30 per month. He explains that Virgo will be updating their standard contracts to include the following terms:

1.Plans can only be paid by monthly direct debit from the customer's bank or credit card account;

2.Customers cannot cancel their contract before the two year term has expired. If they do, they agree that Virgo can take from their account the monthly fees for the remainder of the contract and the upfront price of $1500 for the phone;

3.Customers who exceed their 10GB of data will be charged at a rate twice as high as even the most expensive competitor;

4.The Customer agrees that Virgo can, at its discretion, increase the monthly plan price on individual plans by $5 per month every 3 months without notice.

Bill believes that most customers will simply sign the contract without reading it, as most customers tend to do.

However, Bill intends to raise the monthly price by $5 every 3 months for existing customers, i.e. new customers will still sign up at $30 per month and then receive the increases every three months thereafter, like other existing customers. The plan itself costs Virgo $20 per month per customer and each plan account also contributes $20 per month to all operating expenses for Virgo to break even.

Bill says that he believes that the incredibly low price of the plan and the free phone justifies Virgo having to raise prices in other areas and that even with price increases every 3 months, overall, customers will still not spend more than the average of other plans available in the market, in fact at an average price of $55 per month over the two year contract, customers will still be getting a great deal for unlimited calls, texts and 10GB of data per month and a great free phone. Bill doubts that any customer would be concerned about the price increases.

Bill shows the group the following table:

Month

Cost/Month

Cost/ Quarter

Month

Cost/Month

Cost/Quarter

Month 1-3

30

90

Month 16-18

55

165

Month 4-6

35

105

Month 19-21

60

180

Month 7-9

40

120

Month 22-24

65

195

Month 10-12

45

135

TOTAL CUSTOMER COST

$1320

Month 13-15

50

150

Cost of Phone

$100

Plan Cost to Virgo (24 x $20)

$480

Operating costs contribution per plan (24 x $20)

$480

Average monthly cost to consumer

$55

TOTAL VIRGO COST

$1060

PROFIT PER PHONE/PLAN

$260

Ginger Vitus, Virgo's of Marketing then shows the group the advert they have designed to launch the EyePhone, it is as follows:

Everyone generally agrees that the advert is great.

Virgo's Production manager Jack Hammer then raises an issue with the group. He says that road access to the factory, where the EyePhone is manufactured, may be impacted by major government roadworks and that in 6 months' time, there may be a period of 6 months during which all road access will be impossible and the factory will not be able to operate.

The factory is actually on premises rented by Virgo for 5 years and Virgo has occupied the premises for only 1 year so far. Virgo is building its own factory on land it owns in order to ramp up production in the near future, but this factory will only be operational a year from now. This means if the leased factory premises cannot be accessed for 6 months, the new factory will not be operational until the end of that 6 months and so there will be no production whatsoever for 6 months.

Virgo's CEO, Lotta Power, tells the group that she has been giving the issue some thought. She proposes that Jack increase production immediately, using 24-hour production if necessary, to stockpile enough product for the 6 months of no access. Then, once access is blocked, Virgo will tell its landlord that the lease has been frustrated and is therefore terminated. This will get them out of a lease they will no longer need when their own factory starts production!

The group is pleased with all the progress so far and leaves in a good mood. However, you have some concerns about everything discussed in the meeting and when you mention this to Lotta, she asks you to put your concerns to her in a memo/report.

Your task is to write ONE memo/report to CEO Lotta Power outlining your concerns in relation to the information and discussion at the meeting. In particular you need to discuss:

1)Whether or not the use of the name 'EyePhone', the fact that it looks similar to an Apple iPhone, and the advert may constitute misleading and deceptive conduct;

2)Whether or not the new standard contract terms may be classed as unfair contract terms pursuant to legislation; and

3)Whether or not Lotta Power is correct about the lease being terminated by frustration if the road is blocked for 6 months.