Check your standard form contracts: Federal Court nullifies unfair contract terms in landmark small business action

Key Points

  • New laws were introduced under the ACL in 2016 which extended protection to small businesses for unfair contract terms.
  • The case of ACCC v JJ Richards & Sons Pty Ltd is the first action by the ACCC to challenge unfair contract terms in business to business transactions.
  • Businesses should consider whether terms in their standard form contracts with other businesses are unfair and therefore void.

The ACCC has for the first time succeeded in an action that protects small businesses from unfair contract terms in standard form contracts.  In a landmark decision, ACCC v JJ Richards & Sons Pty Ltd, the Federal Court has declared eight terms used by JJ Richards in its standard form contracts unfair and therefore void.

The Australian Consumer Law

The Australian Consumer Law (ACL) was amended in 2016 to extend protection from unfair contract terms in standard form contracts to small businesses.  Previously, that protection had only been available to consumers.

A standard form contract is “one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms – that is, it is offered on a ‘take it or leave it’ basis.”.

This often occurs if, as part of a transaction:

  • one party has all or most of the bargaining power
  • the contract was prepared by one party before discussing it with the other party and
  • the other party must accept or reject the terms as they are presented.

A small business contract is a contract:

  • for the supply of goods or services or an interest in land
  • entered into with a business that employs fewer than 20 people
  • in which the upfront price does not exceed $300,000, or $1,000,000 if the contract has a term greater than 12 months.

Terms in such contracts are considered unfair if they are demonstrably one-sided, not reasonably necessary to protect a party’s legitimate interests and will cause detriment to the weaker party.

Context and transparency are also important as courts must take into account the contract as a whole and the transparency of the terms – that is, are the terms in reasonably plain language, presented clearly and readily available?

Action against JJ Richards

JJ Richards is one of Australia’s largest waste management companies.  Since November 2016, when the ACL was extended to provide protection to small businesses, it has entered into or renewed at least 26,000 contracts, all of which were standard form contracts.

The action comes after the ACCC published a report in 2016 which clearly put JJ Richards on notice, highlighting its concerns about unfair contracts in several industries, including waste management services.

JJ Richards did not defend the action but agreed to a number of orders by consent.

Orders of the Federal Court

The Federal Court declared the following 8 terms in JJ Richards’ standard form contract unfair and therefore void:

  • Automatic renewal: binding a party to an automatic renewal of the contract if it did not terminate the contract 30 days before the end of the term
  • Price variation: allowing JJ Richards to increase its prices unilaterally and for any reason
  • No liability: removing any liability for JJ Richards where its performance is “prevented or hindered in any way”
  • No credit without notification: ability to render charges if JJ Richards attends the customer’s premises but, for any reason, cannot perform the service
  • Exclusivity: granting JJ Richards exclusive rights to remove waste from a party’s premises
  • Credit terms: allowing JJ Richards to suspend its service but continue to charge if payment is not made by a party after 7 days
  • Indemnity: creating unlimited indemnity in favour of JJ Richards for loss that could have been avoided by JJ Richards
  • Termination: preventing a party with outstanding payments from terminating and allowing JJ Richards to continue charging equipment rental until final payment occurs.

The Court found all these terms were not reasonably necessary to protect JJ Richards’ legitimate interests, and that when taken together tended to “exacerbate each other”, creating significant imbalance between the business and its customers.

As a result, the Court, among other things, restrained JJ Richards from relying on or contracting with the impugned terms, and ordered that the company provide a copy of the orders to each party to a relevant small business standard form contract.

How does this decision affect your business?

The Federal Court’s decision in JJ Richards & Sons sends an important reminder to large businesses that terms in contracts are considered unfair and void if they create a significant power imbalance between the parties, are not necessary to protect legitimate business interests and would lead to substantial financial detriment if relied on by a small business.

This is relevant to business in both the private and public sectors.

For government bodies, the law may apply to contracts when carrying out a business in trade or commerce for purposes that are not purely governmental or regulatory. The ACL defines government bodies as “the Commonwealth, a State, a Territory, an authority of the Commonwealth or an authority of a State or Territory”.

Can I still rely on standard form contracts?

The ACCC continues to seek out unfair contract terms with a second proceeding recently instituted against Servcorp Ltd and two of its subsidiaries. Servcorp supplies serviced office space and virtual office services such as office suites and personal assistants to many small business clients. The ACCC is seeking orders including declarations of unfair and void clauses, publication orders and injunctions.

However, don’t let this spook you into abandoning your standard form contracts; they continue to be an easy and efficient way to do business. Instead, you should check the contracts being used by your organisation are transparent and fair to all parties. You don’t want to be the subject of an ACCC action.

This means:

  • Revising any broad terms to ensure they do not go beyond what is reasonably necessary for legitimate business interests, such as automatic roll-over extensions
  • Addressing any significant power imbalances, such as allowing one party to vary the contract unilaterally
  • Considering the effect of the terms when applied in connection with each other.

If, after review, you remain concerned about your standard form business-to-business contracts, Hicksons can help. The Commercial team at Hicksons has developed a systematic approach to identifying and amending problematic terms in business-to-business contracts to ensure accurate, swift turnaround without causing disruption to your business.

Post by Ramza Martin and Bernard Evans

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