Small Business Unfair Contract Terms – One Year On

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February 2018

Summary

Since the 2016 amendments to unfair contract term provisions of the Australian Consumer Law with respect to standard form contracts entered into with small businesses, the ACCC has been actively seeking out and assessing alleged unfair contract terms in accordance with their Compliance and Enforcement Policy.

Their first Court action, taken against JJ Richards & Sons Pty Limited, resulted in contract terms being declared void and unenforceable against that company’s small business customers, and dealt harsh financial and reputation blows to the company.

If you want to know more about protecting the rights of your small business, read our full article below.

Background

Amendments to unfair terms of consumer contracts (Section 23) under Australian Consumer Law (ACL), took effect on 12 November 2016.  The provisions of this law apply to ‘standard form’ consumer contracts – i.e. those contracts offered on a ‘take it or leave it’ basis, and not negotiated between the parties, which are typically used for the supply of goods or services or the sale or grant of an interest in land.  The amendments made included an extension to cover terms of business-to-business ‘standard form’ contracts (B2B ‘standard form’ contracts) to which small businesses are parties.  This gave small businesses significant rights in respect of unfair terms in contracts they have with larger corporations.

Contracts for the supply of goods and/or services will amount to a B2B ‘standard form’ contract if, at the time of entering into the contract:

  • At least one of the parties is a business employing fewer than 20 people (including casual employees); and
  • The upfront price payable under the contract is no more than $300,000 or $1M if the contract is for more than 12 months.

Under the ACL, a term of a B2B ‘standard form’ contract is unfair (and a Court may deem it void and unenforceable) if it would cause a significant imbalance in a party’s rights and obligations arising under a contract, if it is not reasonably necessary in order to protect the legitimate interests of a party who would be advantaged by the term, and if it would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.  All three elements of unfairness must be proven in order for a term to be deemed unfair.

For example (and without limitation), the term of a B2B ‘standard form’ contract would be considered unfair if:

  1. it permits or has the effect of permitting one party, but not another party, to terminate, vary the terms of, or renew/not renew the contract;
  2. it permits or has the effect of permitting one party to assign the contract to the detriment of another party without that other party’s consent; or
  3. it limits or has the effect of limiting one party’s right to sue another party.

If a B2B ‘standard form’ contract term is found to be unfair by a Court, the rest of that contract will continue to bind the parties, to the extent that it is capable of operating without that unfair term.

The amendments to the ACL affected B2B ‘standard form’ contracts with small business owners in a vast range of sectors, including (but not limited to) telecommunications, advertising, franchising, agriculture, retail leasing, waste management and independent contracting.

So.. what happened?

When the amendments took effect in November 2016, the Australian Competition and Consumer Commission (ACCC) began assessing alleged unfair contract terms in accordance with their Compliance and Enforcement Policy, with small business unfair contract terms becoming a particular priority.

A number of investigations were commenced by the ACCC, as it actively sought to take on cases throughout Australia.  In addition, in July 2017 the ACCC reported that it already had businesses such as Fairfax Media, Uber, Sensis and Lendlease Property Management agreeing to amend their B2B ‘standard form’ contracts to address concerns the ACCC had raised with respect to particular clauses.

One of the companies contacted by the ACCC during its investigations was JJ Richards & Sons Pty Limited (JJ Richards).

The JJ Richards case

Since the amendments to the ACL, JJ Richards carried on a business providing waste management services in Australia, and entered into or renewed at least 26,000 contracts for it to provide those waste management services.  JJ Richards’ customer base largely consisted of small business owners and its services were provided to those small business owners pursuant to a B2B ‘standard form’ contract.

After the commencement of the amendments to the ACL, the ACCC corresponded with JJ Richards, whereby the ACCC sought to draw JJ Richards’ attention to the new provisions, inform JJ Richards that it would be investigating new contracts being offered by providers of waste management services, and request copies of relevant contracts from JJ Richards.  Whilst JJ Richards acknowledged that it was aware of the new provisions, confirmed it was in the process of undertaking a review of its service agreements, and (eventually) provided the contracts as requested, ultimately JJ Richards did not address any of the concerns raised by the ACCC, who was then forced to take the matter further.

Only a Court or Tribunal has the power to decide that a term is unfair, making it void or unenforceable and not binding on the parties.  In this regard, the ACCC commenced proceedings against JJ Richards in the Federal Court of Australia – making it the first Court action brought against a business under the amendments to the ACL.

In these proceedings, the ACCC alleged that the B2B ‘standard form’ contracts between JJ Richards and its customers contained eight unfair contract terms:

  • Automatic renewal (clause 1) – binding customers to subsequent contracts unless they cancelled their contract within 30 days prior to the end of the initial term.
  • Price variation (clause 4) – permit JJ Richards to unilaterally increase its prices.
  • Agreed terms (clause 6) – remove any liability for JJ Richards where its performance is “prevented or hindered in any way”.
  • No credit without notification (clause 7); – allow JJ Richards to charge customers for its services not rendered for reasons that are beyond the customer’s control.
  • Exclusivity (clause 9(i)) – grant JJ Richards exclusive rights to remove waste from a customer’s premises.
  • Credit terms (clause 16) – allow JJ Richards to suspend its service but continue to charge the customer if payment is not made after seven days.
  • Indemnity (clause 17) – create an unlimited indemnity in favour of JJ Richards.
  • Termination (clause 18) – prevent the customer terminating the contract if they have payments outstanding and entitle JJ Richards to charge customers equipment rental after the termination of the contract.

The results were in..

On 13 October 2017, His Honour Moshinsky J determined that those eight terms were unfair contract terms and were therefore void.  Further, he made orders:

  1. restraining JJ Richards from applying or relying on those terms in existing standard form contracts with small businesses and from entering into further standard form contracts with small businesses that contract these terms for a period of 5 years;

 

  1. directing JJ Richards publish on a prominent place on the home page of its website, on its customer portal and any other URL used by it to market and supply waste management services, a corrective notice in terms stipulated by the Court;

 

  1. directing JJ Richards provide a copy of the Court’s orders to its small business customers (20 employees or less) who were a party to a contract entered into or renewed after 12 November 2016, within 14 days;

 

  1. directing JJ Richards to establish and implement an ACL Compliance Program to be undertaken by each of its employees who deal with its customers, and maintain and continue to implement this ACL Compliance Program for a period of three years; and

 

  1. Pay its own costs of the proceedings.

A full copy of His Honour Moshinsky J’s Reasons for Judgment can be found here.

Key points to consider

The outcome of proceedings struck a huge financial and reputational blow for JJ Richards, which could have been avoided if due consideration was given and action had been taken to comply with the ACL amendments.

For the rest of us, the JJ Richards case highlights the importance of taking particular care to review the terms of all B2B ‘standard form’ contracts, from both sides of the coin – whether you are the business providing the contract and services to your customers, or whether you are a small business entering into the contract for services.  You need to ensure that the terms of your B2B ‘standard form’ contract (or the contract you entered into) is in line with the amendments to the ACL, in that they do not appear to be one sided and excessive, create a significant imbalance between the parties or cause disadvantage or detriment to another party.

It is important to remember that the ACCC targets larger businesses issuing B2B ‘standard form’ contracts to small businesses and investigates their contracts generally, rather than acting on behalf of any one entity with respect to their individual contract with the business being investigated.

If you are a small business and have entered into a B2B ‘standard form’ contract which you believe has terms that are unfair, contact us today for advice on the best course of action, to protect your rights as a consumer.

Craig Higginbotham and Lynette Prichard
20 February 2018

By | 2018-02-20T11:30:26+00:00 February 20th, 2018|Business, Contract Law|Comments Off on Small Business Unfair Contract Terms – One Year On