Terms of standard form contract used to engage with small businesses declared unfair and void

Terms of standard form contract used to engage with small businesses declared unfair and void

Terms of standard form contract used to engage with small businesses declared unfair and void

Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224

The Australian Competition and Consumer Commission  has reached an agreement with national waste management company JJ Richards & Sons Pty Ltd in relation to unfair terms in a sub-set of approximately 26,000 standard form contracts entered into by JJ Richards for the provision of waste management services to small businesses.

In proceedings filed in the Australian Federal Court, the ACCC contended that the relevant contracts contained terms which were “unfair” within the meaning of s 24 of the Australian Consumer Law (ACL) and were therefore void and unenforceable.

The JJ Richards contracts

The relevant contracts were standard form contracts which contained terms that had the following effect:

  • automatic renewal (in most cases equal in length to the initial contract term) unless the customer cancelled the contract within 30 days before the end of the initial term;
  • increased prices for the waste management services on 30 days’ notice;
  • a waiver of liability where performance of the waste management services was prevented or hindered in any way, even where the customer was not responsible for the prevention or hindrance;
  • charges for services where JJ Richards attended but was unable to provide the services (even where the inability to provide the service was beyond the customer’s control);
  • granting JJ Richards the exclusive right to provide waste management services at the relevant premises, preventing the customer from engaging a second party to provide services of this nature;
  • suspension of the waste management services if payment on an invoice was not made within 7 days;
  • unlimited indemnification in favour of JJ Richards was created; and
  • the prevention of termination of contracts if charges were outstanding, and a right to continue charging for the rent of the waste management equipment which would not be collected until payment was made.

The ACCC contended that these terms were unfair.

Amendments to the Australian Consumer Law to extend unfair contract terms provisions to small business contracts

In November 2016 the ACL was amended to extend the operation of provisions relating to unfair contract terms to small business contracts. The amendments apply in relation to contracts entered into or renewed on or after 12 November 2016. The amendments provide that a term of a small business contract is void if the term is unfair and the contract is a standard form contract (where all customers are offered the same or similar contracts).

Under the ACL, a contract is a small business contract if:

  • the contract is for the supply of goods or services; and
  • at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 people; and
  • either the upfront price payable under the contract is less than $300,000, or the contract has a duration of more than 12 months and the upfront price payable under the contract is less than $1,000,000.

The ACL also sets out when a contract is unfair. A term of a small business contract is unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Section 25 of the ACL gives examples of the types of provisions which may be unfair.

The unfair contract terms

JJ Richards agreed that each of the eight identified terms were unfair under the ACL and were therefore void and unenforceable.

Justice Moshinsky also commented that the relevant terms were not transparent as the terms were:

  • not drafted in plain English, but rather were overly “legal” in nature;
  • not presented in a manner which was clear or readily accessible to a small business customer;
  • presented in a font size which was difficult to read; and
  • could be described as “densely packed”.

In order to resolve the proceedings, JJ Richards consented to orders being made by the Court which restrained it from relying on the relevant terms in existing small business contracts, and preventing it from using the terms in small business contracts moving forward. JJ Richards was also required to provide a copy of the orders to all of its small business customers who were party to an affected contract.

Key lessons

Businesses regularly engaged to provide goods and services to small businesses should be careful to ensure that the standard form contracts they provide to their customers do not contain clauses which, for example:

  • automatically bind customers to a renewal of the contract;
  • enable one party (in most circumstances, the provider of the goods or services) to alter the contract unilaterally;
  • limit the ability of customers to vary the contract, including to terminate the contract;
  • limit the ability of the customer to seek redress for the failure of the goods or services provider to perform its obligations under the contract; or
  • create an unlimited indemnity in favour of the goods or services provider, even where loss incurred is not the customer’s fault.

While the types of clauses which might be deemed to be unfair have not been exhaustively defined, in general, businesses should review and revise any terms of their standard form contracts which are of the same character as the examples set out in section 25 of the ACL.

Further, businesses should review the format and language of their standard form contracts to ensure that the terms and conditions are presented clearly and legibly, and are expressed in reasonably plain language. 

Businesses which fail to remove unfair terms from the contracts used to engage with small businesses risk being unable to rely on those terms if challenged under the unfair contract provisions of the ACL.

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