The effectiveness of the Unfair Contracts Regime has been tested in the Federal Court for the first time since provisions were extended in 2017 to protect small businesses. Applying these laws in the case of JJ Richards & Sons Pty Ltd, the Federal Court determined that muiltiple terms in the standard form small business contract used by JJ Richards & Sons Pty Ltd were unfair and therefore void and unenforceable.
While the unfair contract terms provisions of the Australian Consumer Law (ACL) have been in force since 2010 for consumer contracts, affording consumer protection against unfair contract terms, small businesses contracts were left vulnerable until recently.
It wasn’t until late 2016/early 2017 that contract laws were extended to cover standard form Business to Business (‘B2B’) contracts for small business contracts.
The provisions apply to standard form contracts entered into, or varied, after November 12, 2016 between parties where at least one party is a small business employing fewer than 20 people and where the upfront price payable under the contract is no greater than $300,000 or $1million if the contract is for more than 12 months.
Standard form contract issues commonly arise where the terms are part of a standard contract template and where the receiving party has little bargaining power to negotiate the terms. The contract is generally issued on a ‘take it or leave it’ basis.
A term is considered “unfair” if it is one-sided and creates a ‘significant imbalance between the parties’ rights and obligations, is ‘not reasonably necessary to protect the advantaged party’s legitimate interests’ and would cause detriment to the other party.
In determining whether a standard form contract is “unfair”, the Court considers the relative bargaining power of each party and also what is reasonably necessary to protect the stronger party’s legitimate interests.
Common unfair contract terms include terms that allow one party to avoid or unreasonably limit their liability without a corresponding right to the weaker party, unilaterally terminate the contract without notice or unilaterally increase prices after the contract has been entered into.
The ACCC recently tested the effectiveness of these laws in protecting Australian small businesses in the case against JJ Richards, one of the largest waste management companies in Australia.
The ACCC claimed numerous clauses in JJ Richards standard form small business contracts breach the new unfair contract terms provisions relating to small business.
The unfair contract terms raised in the ACCC’s action included allowing JJ Richards to unilaterally increase its prices, removing any liability for JJ Richards where its performance is “prevented or hindered” even where the customer is not responsible, allowing JJ Richards to charge customers for services not rendered for reasons that are beyond the customer’s control, allowing JJ Richards to suspend its service but continue to charge the customer if payment is not made after seven days and creating an unlimited indemnity in favour of JJ Richards.
The Federal Court declared that eight of the standard form contracts issued by JJ Richards were “unfair terms” in that they created a significant imbalance between JJ Richards and its customers, and were not reasonably necessary to protect JJ Richards’ legitimate interests, and were therefore void and unenforceable.
The Court made orders by consent, including that JJ Richards be restrained from applying or relying on the relevant terms, publish a corrective notice on the home page of its website, provide a copy of the orders to each small business who is a party to a standard form contract with it and establish and implement an ACL Compliance Program for a period of three years.
Whilst there are currently no penalties for having a term determined unfair by the court, businesses need to carefully review standard form contracts to avoid risk of being subject to investigation and potential enforcement action by the ACCC.
Businesses should avoid the following types of clauses in standard form contracts, which the ACCC has identified as being problematic across various industries:
- requiring one party to bear the risk of a high-cost, low-probability event;
- creating an automatic extension period of the contract;
- enabling unilateral changes to the contract terms;
- affecting the ability of the other party to vary the contract terms, limit their obligations, terminate or renew the contract;
- imposing excessive penalties on the ‘weaker’ party for breach or termination of the contract;
- affecting or limiting the remedies available by one party for breach by the other party.
- enabling unilateral avoidance or limitation of the terms of the contract.