Australia: Unfair B2B contracts – JJ Richards decision gives small businesses a glimmer of hope

Last Updated: 26 February 2018
Article by Geoff Baldwin

The most recent development in the law related to unfair business to business (B2B) contracts is the first decided case on legislation specifically aimed at contracts to which small businesses, rather than individuals, are parties.

Typically the unfairness in a B2B contract can arise because of the vast imbalance in bargaining power between a small company and a much larger one.

Unfair contracts legislation historically aimed at consumer protection

Since the time, many decades ago, when legislation was first made to help people who had got into contracts which were unfair to them, most of the emphasis has been on consumer protection.

As the use of "standard form" contracts in consumer transactions has grown, consumers who wanted the product had no real choice other than to sign an unfair contract, because all suppliers of the product used similar standard form contracts.

Increasing protection from bad business deals commencing in 1980s

Protection for individuals who got into bad business deals has been around for longer than might be thought: the NSW Contracts Review Act 1980 gave courts the power to deal with "unjust" contracts, and the NSW Retail Leases Act (originally enacted in 1984) gave tenants of premises used for retail businesses various protections, including five-year security of tenure.

Recent amendments to Franchising Code of Conduct

More recently, franchises have been in the news, mainly to do with the unfair treatment of the employees of franchisees, and further amendments were made in 2017 to the ACCC Franchising Code of Conduct.

While that focus has been on underpayment of employees, very frequently the motive for underpayment is that the franchise deal itself is financially burdensome on the franchisee employers.

Small Business and Unfair Contract Terms Act

Federal legislation aimed specifically at contracts to which small businesses, rather than individual people, are parties is the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015, which took effect (despite the date in the title) on 12 November 2016.

The Act applies to "small business contracts" which are imposed through a standard form contract, where one party is a small business employing fewer than 20 people and the upfront price payable under the contract is no more than $300,000 (or $1 million if the contract is for more than 12 months).

What is an unfair contract term?

The Act specifically focuses on terms of standard form contracts which are unfair.

Broadly, a contract term is unfair if it favours one party to the extent that it creates a "significant imbalance" between the parties, and the imbalance is not reasonably necessary to protect the interests of the favoured party.

Standard form B2B contracts used by large service company found to be unfair

The first decision on this legislation was handed down in October 2017, in the case Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224.

JJ Richards is a large business offering waste removal and recycling services. The Federal Court found that a number of terms in the standard form contracts used by JJ Richards were unfair according to the criteria set out in the legislation.

The consequence of a provision being unfair is that it is void and thus unenforceable. The contract as a whole does not become unenforceable, but the unfair terms are. In this litigation JJ Richards acknowledged that the particular terms identified by the court were indeed unfair.

The terms judged unfair included provisions:

  • preventing the client from engaging anyone other than JJ Richards to remove waste from the client's premises
  • shielding JJ Richards from liability for non-performance, whether or not the client had anything to do with the failure
  • allowing JJ Richards to raise its prices unilaterally; and
  • giving JJ Richards an unlimited indemnity

No cause for unbridled optimism in wake of court decision

While it is good to see the courts confirming the clear intention of the Act, it is important to realise the limits of the protection offered by the Act. Arrangements which appear unfair may turn out, on closer analysis, not quite as they appeared.

For example, recently a class action taken by bank customers challenging fees imposed for late payments failed, because the bank convinced the court that it suffered more than merely minor inconvenience when payments were late.

JJ Richards decision may help small businesses negotiating B2B contracts in future

Also, the fact that legislation is progressively providing additional protections in relation to unfair contracts does not constitute not a licence to be careless. Making "due diligence" inquiries is essential, and there is a huge volume of material on the internet which can help in checking on the advisability of entering into a contract.

But, if you have done your best and yet find yourself caught, you may have a lifeline. And, importantly for small businesses, it may now be possible to persuade the other party to reconsider some terms of a standard form contract, by citing the JJ Richards case.

Geoff Baldwin
Commercial contracts
Stacks Champion

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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