INSIGHTS: Fair Go! Are your standard contracts unfair?

The Federal Court in ACCC v JJ Richards & Sons has provided guidance on what may constitute an unfair contract term in a small business contract.

As of 12 November 2016, statutory protections in the Australian Consumer Law (ACL) against unfair contract terms in standard form consumer contracts was expanded to include small business contracts

The ACL provides that a term is unfair if:

• it would cause a significant imbalance in a party’ 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.

A small business contract is one in which at least one party is a small business, which casts a wide net as to the contracts to which the protections apply. A standard form contract will be covered by these provisions even if both parties are small businesses. For these purposes, a small business is one that employs less than 20 staff members.

ACCC v JJ Richards & Sons [1]

Recently, the Federal Court provided some helpful guidance in relation to what an ‘unfair’ term might look like.

The ACCC instituted proceedings in the Federal Court against JJ Richards & Sons Pty Ltd (JJR) alleging that eight clauses in its standard form contract were void because they are unfair under the ACL.

This was the first time the ACCC took court action to enforce the protections in relation to small business contracts, having identified that a large operator was using unfair contract terms that cause harm to small businesses.

JJR is one of the largest privately-owned waste management companies in Australia and provides recycling, sanitary, and green waste collection services, and at the time had approximately 26,000 of their standard form contracts on foot.

The ACCC alleged that until at least April 2017, JJR entered into or renewed standard form contracts containing 8 terms that were unfair because, (reflecting the definition of an unfair term in section 24 of the ACL) they:

1. created a significant imbalance in the rights and obligations of JJR and its small business counter-party
2. were not reasonably necessary to protect JJ Richard’s legitimate interests; and

• would, if relied on, cause significant financial detriment to small businesses.

Terms Considered ‘Unfair’

The terms impugned by the ACCC, some of which may be included in many standard contracts, dealt with:

• Automatic renewal: binding customers to subsequent contracts unless they cancel the contract within 30 days before the end of the term
• Price variation: allowing JJR to unilaterally increase its prices
• Agreed times: removing any liability for JJR where its performance is prevented or hindered in any way
• No credit without notification: allowing JJR to charge customers for services not rendered for reasons that are beyond the customer’s control (due to holiday closure, lack of access or other reason)
• Exclusivity: granting JJR exclusive rights to remove waste from a customer’s premises
• Credit Terms: allowing JJR to suspend its service but continue to charge the customer if payment is not made after seven days
• Indemnity: creating an unlimited indemnity in favour of JJR
• Termination: preventing customers from terminating their contracts if they have payments outstanding and entitled JJR to continue charging customers equipment rental after the termination of the contract.

The ACL enables a court to declare an unfair term void and for the contract to continue to operate if it can do so without the unfair term. The Court declared these terms were unfair and therefore void by operation of the ACL.

The Federal Court decision provides useful guidance on the application of the ACL, and is a timely reminder of how important it is to review your standard contract/s to ensure they do not include terms that may be considered ‘unfair’ and be at risk of being declared void and therefore inoperative.

If you require advice on re-drafting your standard contracts or negotiating your contracts, please contact our Corporate Advisory team.

Disclaimer: This information is current as of May 2018. This article does not constitute legal advice and do not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of this article.

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