Unfair Contract Terms and Small Business Contracts

13 November 2018

Publications

Lessons from initial enforcement actions

On 12 November 2016, the “unfair contract terms provisions” of the Australian Consumer Law (which previously only applied to ‘consumers’ contracting for personal or domestic purposes) were extended to also apply to standard form small business contracts.

Following an initial education campaign, the ACCC has now initiated a number of enforcement actions, including two matters which have been the subject of judgment in the Federal Court.  This article offers some observations as to the key lessons that can be learned from the actions to date, and the likely focus of enforcement action going forward.

What is a “standard form small business contract”?

The unfair contract terms provisions only apply to a limited category of business to business contract.

For a business contract to be regulated, the following criteria must apply:

  • at least one of the parties to the contract must have less than 20 employees (including casual staff employed on a regular or systematic basis);
  • the “upfront price” payable under the contract does not exceed $300,000, or $1 million where the contract term is greater than 12 months;
  • the contract must be for the supply of goods or services or the sale or grant of an interest in land; and
  • the contract must be “standard form”, which broadly means that it must be presented on a “take it or leave it” basis, with no genuine opportunity to negotiate the terms.

If a contract meets the above criteria, any term in that contract is at risk of being deemed “unfair” if it:

  • causes a significant imbalance in the parties’ rights and obligations;
  • would cause detriment (financial or otherwise) to a party if relied on; and
  • is not reasonably necessary to protect the interests of the party advantaged by the term.

In assessing a term for unfairness, regard will also be had to the transparency of the contract (i.e. if the term is expressed in reasonably plain language, is legible and presented clearly to the affected party) and the contract as a whole.

Terms of a standard form small business contract which are deemed ‘unfair’ will be void and unenforceable.

Lessons from enforcement actions to date

As at the date of this article, there have been three enforcement actions brought by the ACCC in the Federal Court, with two having proceeded to final judgment.  Both concluded cases involved consent judgments, where liability was admitted, but the cases nonetheless provide a useful insight into the enforcement approach of the ACCC, and (to a lesser extent) the attitude of the Court.

ACCC -v- J J Richards [2017] FCA 12241

In the lead up to the unfair contract terms protections being extended to small business customers, the ACCC had published a report in which it identified a number of common terms used in standard form contracts in a number of industries (including the waste management industry) which the ACCC  was concerned might be unfair contract terms under the Australian Consumer Law. The ACCC’s report discussed ways to avoid including unfair terms in standard form contracts.

In December 2016, the ACCC wrote to JJ Richards to draw its attention to the ACCC’s report and inform JJ Richards that the ACCC was investigating whether terms in contracts being offered by providers of waste management services gave rise to concerns under the Australian Consumer Law. The ACCC also requested copies of JJ Richard’s relevant standard form contracts, which were ultimately provided to the ACCC in April 2017. On review of the contracts provided by JJ Richards, the ACCC formed the view that JJ Richards’ standard form contracts contained a number of contract terms that were likely to be unfair under the Australian Consumer Law. The ACCC also formed the view that, despite being aware that the unfair contracts terms protections had been extended to small businesses and that the ACCC was investigating whether JJ Richards’ standard form contracts contained unfair contract terms, JJ Richards had not addressed the ACCC’s concerns. This led to the ACCC issuing proceedings against JJ Richards.

JJ Richards settled the matter with the ACCC, and the Federal Court was asked to find (by consent) that 18 terms of JJ Richards’ standard form contracts were unfair, and to declare them void. While the Court did not need to evaluate contested evidence, it was nonetheless required to make findings on the evidence sufficient to support the declaratory and injunctive relief that had been sought.  As such, the judgment is more than merely an indication of the ACCC’s views as to what constitutes an “unfair” term.

The terms declared by the Court to be unfair, and therefore void, were as follows:

  • Automatic Renewal – this clause had the effect of automatically renewing the contract unless the customer cancelled it at least 30 days before the end of the term. It is notable that, on its face, this clause in fact empowered the customer to choose whether the contract would renew.  However, the Court found the clause to create a significant imbalance to the detriment of the customer, because “JJ Richards was more likely to be aware of when customers’ contracts are coming up for renewal than small business customers, who as small businesses have limited resources and competing demands that mean they may not have effective systems in place to identify the termination period for their waste management contract”.
  • Price Variation – this clause had the effect of allowing JJ Richards to unilaterally increase its prices. The Court noted that JJ Richards’ costs may increase for reasons beyond its control, but found that “the price variation clause goes beyond what is reasonably necessary in order to protect JJ Richards’ legitimate interests”. 
  • Agreed Times – this clause had the effect of removing any liability for JJ Richards where its performance was prevented or hindered ‘in any way’. The Court noted that “JJ Richards is better placed than the JJR Customer to manage or mitigate the risk of the prevention or hindrance occurring”.
  • No Credit without notification – this clause had the effect of allowing JJ Richards to charge customers for services not rendered.
  • Exclusivity – this clause had the effect of giving JJ Richards exclusive rights to remove waste from a customer’s premises. The Court found that “Restricting JJR Customers from contracting with other parties for additional services causes a significant imbalance in the parties’ rights and obligations under the contract, because it limits JJR Customers’ general right to contract with whomever they want.”  This was found to not be reasonably necessary to protect JJ Richards’ legitimate interests because “JJ Richards does not need to have exclusivity in relation to waste management in order to conduct its business”.
  • Credit Terms – this clause had the effect of allowing JJ Richards to suspend its service but continue to charge the customer if payment had not been made after seven days.
  • Indemnity – this clause had the effect of creating an unlimited indemnity in favour of JJ Richards.
  • Termination – this clause had the effect of preventing customers from terminating their contracts if they have payments outstanding and entitling JJ Richards to continue charging customers equipment rental after the termination of the contract.

ACCC -v- Servcorp [2018] FCA 1044

The second action initiated by the ACCC was against Servcorp Limited, and two of its subsidiaries.  The ACCC sought declaratory and other relief on the basis that Servcorp’s standard form business contracts with small businesses contained numerous unfair terms.

In a statement to the ASX, Servcorp had initially indicated it intended to defend the action, stating: “[Servcorp] maintains that its serviced office agreements are negotiable contracts and do not constitute standard-form contracts regulated by the unfair contract terms regime under the Australian Consumer Law,”.  However, the matter was subsequently settled, and the Federal Court was asked to find (by consent) that 12 terms of Servcorp’s standard form contracts were unfair, and to declare them void.

The terms declared by the Court to be unfair, and therefore void, were as follows:

  • Automatic Renewal – similar to the automatic renewals clause in the JJ Richards standard form terms, this clause had the effect of automatically renewing the contract unless the customer gave the required notice to terminate before the end of the term. The court found that: “[Servcorp] are more likely to be aware of when contracts are due for renewal than small business customers.”.
  • Limitation of Liability – this clause required the counterparty to insure all goods held in the relevant premises and provides that Servcorp would not be held responsible for any loss, theft or damage to the goods howsoever caused.
  • Price Variation – this clause gave Servcorp the ability to vary the pricing of certain services at their discretion. The contract also provided that, where Servcorp did so, the counterpart had the right to terminate the contract on giving 30 days’ notice.  However, the clause was nonetheless deemed unfair.  The Court noted, in particular that “[t]here is no limitation on the face of the clause requiring [Servcorp] to act fairly or reasonably in any decision to change the pricing of the Services or indeed consult with the counterparty” and that the clause would “at least in the short term”, cause detriment to the counterparty if relied on by Servcorp.
  • Termination for Breach – one of the bases on which Servcorp could terminate the contract was if the counterpart was if the there was a breach of “any regulations or procedures issued or required by the landlord under the Headlease”. In declaring this unfair, the Court noted that “any asserted breach may not be a material breach, the counterparty may not have been notified of, or aware of, the breach or given an opportunity to remedy the breach, or the counterparty may have already remedied the breach”.
  • Termination for No Breach – under this clause, Servcorp had a right to terminate the contract without cause, on giving 30 days’ notice. The Court made a number of comments in finding this to be unfair, including: “That right can be exercised without cause or reason and without giving compensation to the counterparty. The period of one month is not determined by reference to the length of the relevant Service Contract. In contrast, the counterparty has very limited termination rights under each of the Service Contracts and does not have a corresponding right of termination which can be exercised without cause or reason on one month’s written notice.”.
  • Limitation of Liability –these clauses sought to limit Servcorp’s liability except in the case of gross negligence or wilful misconduct, and in some cases included an unlimited indemnity in favour of Servcorp. In deeming these clauses unfair, the Court noted that “there is no corresponding clause which limits [the counterpart’s] liability to [Servcorp] in this way”.
  • Non-solicitation – this clause restricted counterparties from enticing or persuading clients of Servcorp to move to a competitor business. In deeming this to be unfair, the Court noted that “the client is unlikely to know whether an entity is a client of one of the 25 offices managed by Servcorp”.

ACCC -v- Mitolo

The third action initiated by the ACCC is against Mitolo Group Pty Ltd.  The action was commenced in June 2018, and remains before the Courts.

While there is no judgment at the date of this article and the full terms of the relevant contract have not been made public, the ACCC has stated that “[t]hese are some of the most egregious terms we have seen in agricultural contracts, and are key examples of the contracting practices in the sector that we want to address”.

The terms the ACCC has sought to have declared unfair, allow Mitolo to:

  • unilaterally determine or vary the price it pays farmers for potatoes;
  • unilaterally vary other contract terms;
  • declare potatoes as ‘wastage’ without a mechanism for proper review;
  • prevent farmers from selling potatoes to alternative purchasers; and
  • prevent farmers from selling their own properties unless the purchaser enters into an exclusive potato farming agreement with Mitolo

What is noteworthy about this case, is that many of these provisions appear (as described) to be commonplace across many agricultural industries – particularly where the crops being grown are registered varieties under the Plant Breeders Act 1994.  It will be interesting to see the full context and clauses once the matter is resolved or judgment is entered.

Lessons and observations from enforcement actions to date

It appears from the action taken to date, that particular kinds of clauses are likely to be a focus of the ACCC, namely:

  • automatic renewal provisions;
  • clauses allowing unilateral determination or increase of prices;
  • exclusivity provisions, where customers are restricted from contracting with other parties for other goods or services;
  • the inclusion of unlimited indemnities;
  • unreasonable restrictions on termination of contracts.

Another noteworthy aspect of the cases to date, is that they have all focused on contracts at a system-wide level, rather than looking at the particular circumstances of individual counterparts to those contracts.  This appears somewhat inconsistent with the requirement to assess the circumstances of the counterpart in determining if there is a significant imbalance between the parties, or if an offending clause is reasonably necessary to protect legitimate business interests.

Finally, it should be noted that the ACCC has indicated that enforcement of the unfair contract terms provisions in relation to small business contracts will continue to be a significant focus of its enforcement activities.  Moreover, ACCC Chairman Rod Sims has recently been strongly advocating for  the introduction of civil penalties where unfair contract terms are used, stating:

‘[w]hat we want is unfair contract terms to be made illegal and we want huge penalties to apply.”

While the government has yet to indicate if it will implement such changes, it should be noted that the introduction of civil penalties for inclusion of “unfair” terms would be a major departure from the current policy underlying the laws.  The government’s intention in introducing the prohibition was not to prevent the use of such clauses in all standard form contracts, but simply to ensure that for a particular category of counterparts (i.e. small businesses), that such clauses could not be relied on.

Whether or not civil penalties are introduced, it is clear that the unfair contract terms regime is already having a significant impact on the approach taken to drafting “standard terms” and will no doubt continue to do so as further judicial guidance is received.

Written by

Josh Simons | Partner | +61 8 8236 1122 | jsimons@tglaw.com.au

1 The author notes for transparency that Thomson Geer acted for the ACCC in this matter