Australia: The Unfair Contract Terms Regime To Small Businesses In The Federal Court And The Approach Of The ACCC

Last Updated: 30 November 2017
Article by Prudence Smith and Nicolas Taylor

Summary

ACCC brings the first two cases under the unfair contracts provisions. The provisions affect contracts with consumers and small businesses (with 20 employees or less). The cases will provide much needed guidance as to the application of these laws.

In November 2016, the unfair contracts regime was extended to contracts with small businesses. Significant areas of potential exposure arise in relation to clauses seeking to limit liability, unilaterally vary prices or provide indemnity clauses. Guidance as to the Australian Competition and Consumer Commission's ("ACCC") approach is gained from proceedings commenced in the Federal Court of Australia for alleged contravention of this regime under the Australian Consumer Law ("ACL") as well as a handful of examples where businesses have amended their approach following the introduction of the new law. These proceedings are important for all businesses as they are the first time that the ACCC has taken action to enforce the regime in relation to small business contracts.

The Provisions

The relevant provisions of the ACL provide that a term in a standard form contract is unfair, and therefore void, if it:

  • Creates a significant imbalance in the parties' rights and obligations under the contract;
  • Is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • Would cause detriment to the other party if it were to be applied or relied upon.

The unfair contract terms regime in the ACL initially only applied to standard form consumer contracts, however in late 2016 it was extended to apply to standard form contracts with small businesses entered into or renewed after 12 November 2016. Small business contracts are defined as contracts that meet the following criteria:

  • The contract is for the supply of goods or services, or the sale or grant of an interest in land;
  • At the time the contract was entered into, at least one party to the contract is a small business (i.e., a business that employs less than 20 people); and
  • The upfront price payable under the contract is no more than AUD$300,000, or AUD$1 million if the contract is for more than 12 months.

In the first case, the ACCC commenced proceedings against JJ Richards on 6 September, alleging that the following terms in their standard small business contracts are unfair:

  • A term binding customers to subsequent contracts unless they cancel the contract within 30 days before the end of the term;
  • A term allowing JJ Richards to unilaterally increase its prices;
  • A term removing any liability for JJ Richards where its performance is "prevented or hindered in any way";
  • A term allowing JJ Richards to charge customers for services not rendered for reasons that are beyond the customer's control;
  • A term granting JJ Richards exclusive rights to remove waste from a customer's premises;
  • A term allowing JJ Richards to suspend its service but continue to charge the customer if payment is not made after seven days;
  • A term creating an unlimited indemnity in favour of JJ Richards; and
  • A term preventing customers from terminating their contracts if they have payments outstanding and entitles JJ Richards to continue charging customers equipment rental after the termination of the contract.

JJ Richards provides recycling, sanitary, and green waste collection services. The ACCC will seek to have the contract terms declared unfair (and therefore void), and is also seeking an injunction to prevent JJ Richards from entering into future contracts which contain these terms.

Subsequently, the ACCC then commenced proceedings against Servcorp Ltd and two of its subsidiaries, similarly alleging that several clauses in its standard form contracts with small businesses should be declared void on the basis that they are unfair. Servcorp supplies serviced office space and virtual office services such as office suites, secretarial services, IT, communications and personal assistants.

In this case, some of the alleged unfair contract terms include:

  • The automatic renewal of a customer's contract and allowing Servcorp to unilaterally increase the contract price after the renewal, without prior notice to the customer;
  • Permitting Servcorp to unilaterally terminate the contract and impose penalties on the customer;
  • Unreasonably limitting Servcorp's liability or imposing unreasonable liability on the customer;
  • Permitting Servcorp to unilaterally determine whether the contract has been breached; and
  • Permitting Servcorp to unilaterally acquire the customer's property without any notice.

The ACL also provides a list of terms that may be unfair, which is helpful for businesses in undertaking their own assessment of their contracts. At face value, it appears that many of the terms listed above in JJ Richards' and Servcorp's contracts fall within that list, and are therefore void. However, businesses should not take this list as exhaustive or definitive and a review of their standard form contracts, having regard to the degree of "unfairness" between the parties and the overarching definition of "unfair" provided in the ACL, is advisable.

It is also possible that had JJ Richards or Servcorp taken a more conciliatory attitude towards the ACCC's investigation, litigation (and the subsequent negative publicity) could have been avoided, in particular in respect of those terms where it is less clear whether they are unfair. By consent, the federal court has declared that terms were unfair and consequentially void. Also of significant assistance to small businesses is the identification by the ACCC of businesses that have changed their contracts in response to the new regime:

  • Uber changed its standard driver agreement by which it had previously been able to terminate the agreement "without cause". Following the change, termination was limited to certain circumstances, including acting reasonably in order to protect its legitimate interest.
  • Fairfax Media (publishers of MySmallBusiness) changed a term in its advertising contract that allowed it to refuse or withdraw a customer's advertisement for any reason at any time. Following the change, this is now limited to certain situations such as where the advertising may be illegal, defamatory or obscene.
  • Sensis had to amend terms that automatically renewed its small business customers contracts and entered into a court enforceable commitment with the ACCC.
  • Jetts Fitness changed a wide-ranging restraint of trade clause in a franchise agreement to reduce the period and geographical scope of the restraint.

The approach of the ACCC has certainly moved from informative and educating to enforcing. When launching its "Small Business in Focus" report earlier this year, the ACCC predicted increasing enforcement action and that has certainly been shown to be true. Whilst there are no specific penalties for a contravention of the regime, existing penalties available for a contravention on any of the unconscionable conduct or misleading and deceptive offences could be relied on by the ACCC if the terms are not disclosed.

Most Common Unfair Terms

As a guide, terms which have a higher risk of offending the regime include:

  • Automatic Renewal. Clauses that provide for an automatic renewal may be unfair if the party bearing the more onerous obligations under the agreement are prevented from opting out prior to renewal.
  • Unilateral Variation. These allow one party to vary the clauses such as the amount of fees payable. The terms might be unfair where the power to amend is unrestrained, insufficiently disclosed upfront and where the other party is not given the right to terminate if the varied terms are unacceptable.
  • Termination Rights. One-sided termination rights could expose one party to a significant detriment if relied on. Broad terms should be reviewed and replaced with a term encompassing more specific rights.
  • Limitations on Liability and Indemnities. Terms likely to cause difficulty are those which shift the burden of liability for loss and damage caused by one party to another. Limitations on liability or indemnities which require one party to protect the other party from loss or damage dependent on some set of circumstances may be unfair unless it were to exclude loss or damage caused or contributed by the first party.

Clearly a close review of these contracts is necessary to stay out of the ACCC's sights. 

William Maher and Matthew Whitaker, associates in our Sydney Office, and Jay Tseng, an associate in our Hong Kong Office, assisted with the preparation of this Update.

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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