Australia: Are your contracts unfair? Do not get caught out by the unfair terms legislation now applying to business to business (B2B) contracts

Last Updated: 30 November 2018
Article by Laszlo Konya and Jonathan B Slade


The doctrine of freedom of contract is a fairly standard one in Australian law, as well as in most Western legal traditions. The doctrine recognises that individuals should have the freedom to strike whatever bargain they choose.

However, as it turns, the situation between contracting parties in Australia is actually not that clear-cut. In fact, the freedom of contract doctrine is fettered under Australian law, and never has this been so true until now, with the recent expansion of the unfair contract terms legislation to capture business to business (B2B) contracts.

An overview of the legislation, which commenced on 12 November 2016, can be found in our earlier article here. Needless to say, it extends the unfair contract terms regime, which hitherto applied only to "consumer contracts" – contracts entered into by individuals for personal, domestic or household goods or services – to standard form "small business contracts" where at least one party to the contract is a small business (a business that employs fewer than 20 people), and the upfront price payable does not exceed $300,000 (for contracts of 12 months duration or less) or $1,000,000 (for contracts of more than 12 months duration).

Our article above discussed the first case to test the new legislation, Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224. In that case, the ACCC took JJ Richards & Sons Pty Ltd, a waste-management company, to court over eight terms in its service agreements that were ultimately found to be void for unfairness. Since then, the ACCC has continued its hunt for companies that include "unfair terms" in their standard form small business contracts, and the next company to be caught in the firing line is Servcorp Limited, in the Federal Court of Australia (FCA) case of Australian Competition and Consumer Commission v Servcorp Limited [2018] FCA 1044.

Are your standard form contracts at risk?

In Servcorp, the company and its related entities entered into agreements with a number of small businesses for the supply of serviced office spaces and virtual office services such as office suites, secretarial services, IT and communications, in 24 locations around Australia.

The contracts considered by the FCA were entered into prior to 12 November 2016, when the unfair contract terms regime as applicable to small business contracts commenced. The regime nevertheless applied to each of the impugned contracts as they had been renewed after that date.

The contracts were prepared prior to any discussions between the parties and the parties were presented with the contracts without being invited to negotiate their terms (apart from the main subject matter of the contracts). This meant they satisfied the statutory definition of a "standard form contract".

The terms declared by the Court to be unfair had the effect of:

  • automatically renewing a customer's contract, unless the customer had opted out, and allowing Servcorp to then unilaterally increase the contract price;
  • permitting Servcorp to unilaterally terminate a contract;
  • unreasonably limiting Servcorp's liability or imposing unreasonable liability on the customer;
  • allowing Servcorp to unilaterally vary the contract price without notice or limitation (there was no requirement that any price increase be fair or reasonable or could be subject to negotiation);
  • permitting Servcorp to keep a customer's security deposit if a customer failed to request its return;
  • entitling Servcorp to unilaterally determine when a notice had been validly served by a customer; and
  • penalising a customer if it convinces another customer of Servcorp to move to a competitor.

The effect of the FCA's declaration was that all of the impugned terms were void.

Servcorp was also required to implement a compliance program to ensure it did not contravene the legislation in future, and pay the ACCC's costs in the proceeding, fixed at $150,000.

Key takeaways

The two Federal Court decisions and the earlier ACCC report, " Unfair terms in small business contracts: A review of selected industries", show that the ACCC is on the prowl for companies that use standard form B2B contracts with terms that may be considered unfair.

The ACCC expects companies to take action by removing unfair terms from these contracts. Companies who fail to do so may face enforcement action in the Federal Court. JJ Richards & Sons Pty Ltd and Servcorp Limited are just the first two companies to get caught in the ACCC's sights.

To ensure that your business does not fall foul of the unfair contract terms legislation, you should check your standard form contracts for any terms that may be slanted too far in favour of your business or that may unreasonably prejudice the rights of another party (whether they may be small businesses or consumers).

Alternatively, if you have entered into a standard form contract that has onerous terms that unfairly favour another party, then you may be entitled to relief from complying with such terms.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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