Since the Australian Consumer Law was amended to include protections for small businesses from unfair contract terms in November 2016, the Australian business community has eagerly awaited the testing of the new regime.

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.