In Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 the ACCC contended that a number of terms in a standard form contract were “unfair” with regards s 24 of the ACL.

The Provisions

To be classed ‘unfair’ under the Australian Consumer Law (ACL), a term must:

• cause a significant imbalance in the parties’ rights and obligations;
• not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
• cause financial or other detriment (such as delay) to a small business if it were relied on.

The amendments to the ACL extended the unfair contract provisions to small business contracts. A small business contract occurs when:

• the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
• at the time of the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
• either of the following applies:
  1. the upfront price payable under the contract does not exceed $300,000;
  2. the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

If a court or tribunal finds that a term is ‘unfair’, the term will be void. The balance of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Background

JJ Richards and Sons Pty Ltd (JJ Richards) is in the business of providing waste management services. Since the introduction of the small business protections in November 2016, JJ Richards has renewed or entered into more than 26,000 standard form contracts, including with small businesses as defined in the ACL.

The unfair contract terms under dispute

The ACCC claimed that 8 of the clauses in JJ Richards’ standard form contract were unfair contract terms for small businesses.

1. Automatic renewal clause: This clause bound JJ Richards’ customers to an automatic contract renewal, unless cancelled within 30 days of the expiring initial or subsequent contract. Customers could inadvertently miss the termination date, resulting in lengthy unwanted contract periods. Further, the clause did not require JJ Richards to notify clients of contracts nearing their end and the possibility of automatic renewal.
2. Price variation clause: This clause allowed JJ Richards to increase prices during the term of the agreement by giving 30 days’ notice of the increase. It provided the customers with no opportunity to negotiate or terminate the contract due to higher costs.
3. Agreed times clause: According to this clause JJ Richards “will use all reasonable endeavours to perform the collections at the agreed times”. The company accepted no liability in the event that service did not occur, regardless of the cause. In other words, if hindrance was due to outside factors, the customer bore the risk with no corresponding benefits.
4. No credit without notification clause: This clause allowed JJ Richards to charge clients for services not provided. Even if the reason for no rendered services was beyond the customer’s control, JJ Richards could still charge its fee. Further, the clause made it the customer’s responsibility to make a credit request.
5. Exclusivity clause: This clause granted JJ Richards exclusive rights for removal of all waste and recyclables from the customer’s premises. As a result, clients could not seek alternative options of waste removal, even where JJ Richards did not provide the service required. Also, this inhibited the rights of the clients to seek better or more affordable services.
6. Credit terms clause: This clause required customers to pay their accounts within 7 days. In the event that payment did not occur within this period, JJ Richards could suspend services and continue charging the client during the suspension period. The clause did not give customers equivalent rights, such as withholding payment for failure to provide services.
7. Indemnity clause: This clause gave JJ Richards unlimited indemnity. The indemnity applied even in cases where the loss incurred was not the fault of the client.
8. Termination clause: This clause provided that customers could not terminate the contract unless their account was paid in full. Further, JJ Richards would not remove the equipment and could continue to charge rental while not providing any services.

Outcomes and Court orders

The Court concluded that each of the above Terms was “unfair” within the meaning of s24 of the ACL. Therefore, where these terms were contained in small business contracts, they were void for being unfair.

The Court ordered that JJ Richards take the following remedial action:

1. JJ Richards could not rely on any of the unfair contract terms;
2. For a period of five years, JJ Richards may not enter into a standard form contract containing any of the above mentioned unfair contract terms;
3. Within 14 days, JJ Richards must publish a corrective notice in a prominent place on the home page of its website, on its customer portal and other URLs it may use.
4. JJ Richards must give a copy of the Court’s to every small business party that entered into or renewed a standard form contract with JJ Richards after 12 November 2016.
5. For a period of three years, JJ Richards must establish and maintain an ACL Compliance Program. This is to ensure the training of all employees in the correct application of the unfair contract terms law.

Conclusion

Based on the ACCC’s clampdown on standard form contracts, it is imperative that care is taken when issuing a standard form contract to a small business. Although businesses may be reluctant to move away from standard terms they have used for long periods, inaction may prove costly.

Related articles

Standard Terms: How Binding are They?

Unfair Contract Terms Protections to Cover Small Businesses

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Unfair Contract Terms for Small Businesses Tested in Court appeared first on Elliott May.

Changes to the Australian Consumer Law (ACL) have impacted the drafting and litigation of contracts. In this context, how binding are standard terms?

Standard terms are binding:

1. If at common law the terms are incorporated into a contract or agreed to, and
2. If so, whether this is changed by a statutory protection

Are the standard terms incorporated into the contract at common law?

The type of agreement determines if the standard terms are included into a contract at common law. Broadly this means:

• if the terms are agreed by signature generally they are binding
• the same applies if the terms are agreed by clicking a button to show acceptance
• alternatively if the terms are said to be agreed (by conduct) then:
  • the terms are incorporated into the contract and binding if given to the customer before making the contract and if the terms are of a usual type expected by the client
  • if the terms are unusual then they will only be included and binding if they are clearly brought to the attention of the client
  • terms not given ahead of time to the customer are not generally binding

ACL unfair standard terms protection

However, as of 12 November 2016 the Australian Consumer Law (ACL) protects small businesses from unfair terms. The protection applies to standard form contracts. Previously the ACL only covered individuals and consumers.

What is a standard form contract? The ACL does not provide a definition. However, in broad terms it is a contract between two parties. The one sets the terms and conditions while the other party is in a “take it or leave it” position. They also have little or no ability to negotiate better terms.

These one-sided contracts are common. Small businesses enter into them on a daily basis for financial products and services. Examples are car rental agreements, credit card or business loan contracts and telecommunication contracts. In addition, many contain contract terms that some may consider unfair.

Even if a set of standard terms are binding at common law, if a term is ‘unfair’, it may be declared void under the ACL.

What is an ‘unfair’ term in a standard form contract? 

A term is ‘unfair’ if it:

• causes a major difference in the rights and duties of the parties involved
• is not reasonably needed to protect the interests of the stronger party
• would cause harm, financial or other, to the small business if applied

However, only a court can decide if a term is ‘unfair’. The court needs to study the contract as a whole. In the context of the contract is there another term that balances the unfair term? Also the transparency of the term is considered.

A transparent term is:

• legible
• written in understandable language
• clearly presented
• readily available to all parties impacted by the term

Terms that are not transparent are those hidden in the fine print of the contract. Also terms written in complex, legal language that is not easily understood fall into this category. 

What about excluded contract terms?

A contract term is excluded from unfair protection if it:

• outlines the main subject of the contract (eg the length of the contract or the types of goods/services included)
• decides the upfront price payable
• is permitted by the law of a state, territory or the Commonwealth

What if a court finds a term ‘unfair’?

In conclusion, a term of a standard form contract may be declared void if a court finds it unfair. It is as if the unfair term never existed. However, if the contract is able to function without the unfair term then it is still binding on all parties involved.

Related article

Unfair Contract Terms Protections to Cover Small Businesses

Unfair Contract Terms for Small Businesses Tested in Court

This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances.

The post Standard Terms: How Binding are They? appeared first on Elliott May.

In February 2017, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) released its report “Inquiry into Small Business Loans” (the Report).  The Report targets the laws and practices of authorised deposit taking institutions (Banks) and their small business loan contracts. If implemented, will it also impact private lenders?

Which recommendations should private lenders be aware of?

Default restrictions

A number of Recommendations could well impact both Banks and private lenders.  Most concerning for private lenders is Recommendation 3. It states:

Recommendation 3: For all loans below $5 million, where a small business has complied with the loan payments requirements and has acted lawfully, the bank must not default a loan for any reason.  Any conditions must be removed where banks can unilaterally:

• value existing security assets during the life of a loan
• invoke financial covenants or catch-all ‘material adverse change’ clauses

In Provident Capital Ltd v Papa [2013] NSWCA 36 Macfarlan JA states that “public interest does not necessarily require so-called asset lending to be proscribed, or even deterred” (read our full summary of the Papa decision). However, Recommendation 3 seems to limit asset lending practices. 

Let’s look at an example. A borrower meets the required payments but technically defaults under the loan, by allowing another financier to caveat the security property. Under Recommendation 3 the lender may not be allowed to balance its risk portfolio by charging the standard interest rate. Nor can the lender re-value the property to find out the extent of the risk.

30 Business day notice period

Recommendation 4: A minimum 30-business day notice period to all changes to general restriction clauses and covenants (except for fraud and criminal actions) be added to give borrowers more time to respond and react to a potential breach of conditions.

There is some value in providing notice periods to borrowers following a technical breach of a covenant, for example, restructuring a corporate entity. However, applying a mandatory notice period may cause issues.

Of particular concern to private lenders is the minimum 30-business day notice period. Some private loans are only three months in length. A 30-business day notice period covers a third of the loan term and greatly increases the risk of lending.

One-page summary

Recommendation 6: For loans below $5 million, banks must provide a one-page summary of the clauses and covenants that may trigger default or other detrimental outcomes for borrowers.

There are benefits to including a summary of the contract and the clauses that trigger default.  It helps borrowers understand the basic expectations of the loan. It also saves small business borrowers time and money on legal advice, so they spend less time away from their businesses. 

However, there are risks for the lender when providing a summary. While loan documents are often complex, many of the clauses containing detrimental effects for the borrower protect the lender from additional risk.  Providing a one-page summary is impractical. And it may negatively affect a lender’s rights in a dispute with a borrower.

Let’s look at another example. A lender defaults on a loan based on a non-monetary covenant, such as a company entering voluntary administration. While the full loan documentation lists this clause, the summary does not include it as an event of default. The lender could have this interpreted against it in a dispute. 

Providing a summary of the terms to the borrower could lead to an increase in litigated disputes.

Provide a choice of valuer

Recommendation 8: All banks must provide borrowers with a choice of valuer, a full copy of the instructions given to the valuer and a full copy of the valuation report.

This is logical. If a borrower pays for the valuation, then they should get the instructions and the report.  However, larger Banks and private lenders use different methods of valuation. Banks often have panels of experts from large valuation firms who do their valuations.  By contrast private lenders rely on smaller, local valuation firms. So it may not be possible for a private lender to offer a borrower a choice of valuers.

Simplified documentation

Recommendation 7: For loans below $5 million, banks must put in place a new small business standard form contract that is short and in plain English.

The Treasury Amendment (Small Business and Unfair Contract Terms) Act 2015 aims to extend unfair contract terms protections to cover small businesses. The Report asks: have banks made changes to their small business loan documentation? Currently the loan contracts of the four major banks are under review by ASIC. This is as a reminder to private lenders to make small business contracts easier for borrowers to read and understand.

Establish Small Business Commissioner

Recommendation 15: Australian Securities and Investments Commission must establish a Small Business Commissioner.

The Report questions the ability of ASIC to meet the needs of borrowers. A Small Business Commissioner would provide expertise to ASIC on small business matters. The Report notes that it is rare for ASIC to act on a complaint against a lender. A Small Business Commissioner would allow ASIC to take a more active role, especially with the growth of the unfair protections legislation.

How does this impact on Private Lenders?

There is no immediate concern for private lenders or Banks. The recommendations are merely that – suggestions. There is no rule binding Banks or private lenders. However, with every new Inquiry into the banking sector, regulations tighten. Stricter banking practises seem to be the future of the banking sector.

How should private lenders treat the Report?  Generally, an entity referred to as a “private lender” is not an “authorised deposit-taking institution”.  So if greater regulation occurs it may not be binding on private lenders.

There are also differences between Banks and private lenders. Large Banks have strict procedures while private lenders are flexible and offer a more level bargaining position.  Similarly, private lenders often offer asset loans rather than cash-flow based loans. So it would seem unfair if the obligations outlined in the Report were applied to them.

Private lenders should know of the recommendations raised in the Report. These may never be legislated, but courts will be aware of the issues in the banking sector. They could consider the recommendations when deciding disputes about unfair loan contracts.

Conclusions

Before the Report, there were seventeen previous inquiries into the banking sector with limited actions taken. This suggests that the private lending sector is unlikely to face significant changes in the near future.

However, ASIC is checking the loan agreements of the four big banks with their small business customers. So private lenders should also review their small business loan contracts. Do they comply with the recent unfair terms legislation?

Related articles

Unfair Contract Terms Protections to Cover Small Businesses

This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Private Lenders: What is the Future of Small Business Loans? appeared first on Elliott May.

As of November 2016, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 extended the unfair contract terms protections to cover small businesses. Prior to this only consumers benefited.

The Changes to Unfair Contract Terms Protections

The changes apply to the Australian Securities and Investments Commission Act 2001 (ASIC Act), which covers financial services and products. It also applies to the Australian Consumer Law (ACL). Now that the amendments have taken effect, section 23(1) of the Australian Consumer Law reads:

 “A term of a consumer contract or small business contract is void if:

(a)   the term is unfair; and

(b)   the contract is a standard form contract.”

If a court finds that a term is unfair it will be invalid and will not bind the parties. However the rest of the provisions of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Small Business Contracts

A contract is a small business contract if:

1. the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
2. at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
3. either of the following applies:
   • The upfront price payable under the contract does not exceed $300,000; or
   • The contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

The number of employees working for a business excludes casual employees unless employed on a regular basis.

Standard Form Contracts

If a party to a proceeding claims that a contract is a standard form contract, then the court will assume this is the case unless proved otherwise. Section 27(2) of the ACL outlines a number of matters that a court must take into account in considering whether a contract is a standard form contract. These include the bargaining powers of the contracting parties and if the terms of the contract looks at the specific characteristics of another party or the particular transaction. Another consideration is if the contract was prepared without negotiation.

What is an Unfair Term?

Section 24 of the ACL states that a term is unfair if:

1. it causes a significant imbalance in the parties’ rights and duties arising under the contract; and
2. it is not reasonably necessary in order to protect the legitimate interests of the party who is advantaged by the term; and
3. it causes harm (whether financial or otherwise) to a party if it were to be applied or relied on.

While assessing if a term is unfair a court will consider whether the term is ‘transparent’. This means it is legible, expressed in plain language, presented clearly and is freely available to all involved parties. If the term hides in the fine print or legalistic, complex language is used, it is unlikely that the term will be considered transparent.

The court will also read the relevant term against the contract as a whole. For instance, other terms in the contract which offset the unfair term.

For more details on unfair terms visit the Australian Competition & Consumer Commission (ACCC) website.

Implications for lenders and credit providers

These changes are very broad in their application. So lenders (and other businesses) should review their standard form contracts used in transactions involving small businesses to ensure they are compliant. The following types of contractual terms are some examples of terms needing review:

• Default fee provisions and liquidated damages clauses;
• Automatic rollover provisions under lease agreements;
• Rights to unilaterally vary contracts;
• Clauses denying a party’s obligations to act reasonably and in good faith.

Related articles

Private Lenders: What is the Future of Small Business Loans?

Standard Terms: How Binding are They?

Unfair Contract Terms for Small Businesses Tested in Court

This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Unfair Contract Terms Protections to Cover Small Businesses appeared first on Elliott May.