Putting one's cards on the table is a good way to reduce risks of terms being considered later as unfair.
Applying for the first time new laws that protect small businesses from unfair contract terms, the Federal Court has declared, by consent, that eight terms in the standard form contract used by JJ Richards & Sons Pty Ltd to engage small businesses are unfair and therefore void.
The outcome serves as a warning to all businesses to review their standard form contracts with small businesses and to consider revising any clauses that may otherwise risk being rendered void and unenforceable if challenged as "unfair" under the unfair contract laws.
The unfair contracts regime
Since 2010, the Australian Consumer Law has provided consumers with protection against unfair contract terms imposed on them via standard form contracts. These provisions were extended in late 2016 to cover terms of standard form contracts to which small businesses are parties.
Standard form contracts employ standardised, non-negotiated terms. They commonly arise where:
- one party has all or most of the bargaining power relating to the transaction;
- the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; and
- one party, in effect, was required either to accept or reject the terms of the contract in the form in which they were presented.
Contracts for the supply of goods and / or services will amount to a "small business contract" if:
- the counterparty is a 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.
A term of a standard form contract will be "unfair" if it is one-sided and excessive, that is, it creates a "significant imbalance" between the parties 1, is not reasonably necessary to protect the benefiting party's legitimate interests 2 and would cause detriment to the other party.
In determining whether terms are "unfair", a court will also read the term(s) in the context of the entire contract and will take into consideration the transparency of the contract, including how upfront, easy to read and clearly presented the contract is to the affected party.
The case alleged against JJ Richards
JJ Richards is one of the largest privately-owned waste management companies in Australia and provides recycling, sanitary and green waste collection services.
The ACCC alleged that JJ Richard's standard form small business contracts contained eight unfair contract terms:
- binding customers to commit to subsequent contracts unless they cancel the initial contract within 30 days before the end of the term;
- allowing JJ Richards to unilaterally increase its prices (price variation clause);
- removing any liability for JJ Richards where its performance is "prevented or hindered" even where the customer is not responsible (performance clause);
- allowing JJ Richards to charge customers for services not rendered for reasons that are beyond the customer's control (or potentially for reasons within JJ Richards control - for example, equipment failure);
- granting JJ Richards exclusive rights to remove waste from a customer's premises (exclusivity clause);
- allowing JJ Richards to suspend its service but continue to charge the customer if payment is not made after seven days;
- creating an unlimited indemnity in favour of JJ Richards (indemnity clause); and
- preventing customers from terminating their contracts if they have payments outstanding and permitting JJ Richards to continue charging customers equipment rental after the termination.
Decision of the Federal Court
The parties agreed that the impugned terms, which the Federal Court noted "tend[ed] to exacerbate each other", created a significant imbalance between JJ Richards and its customers. The Federal Court was also satisfied that the terms were not reasonably necessary to protect JJ Richards' legitimate interests.
By way of example, the:
- price variation clause was said to cause a significant imbalance because the clause imposed no corresponding benefit upon customers to terminate the contract or change the scope of services in the event that JJ Richards decided to unilaterally increase its prices. Also, because the price variation clause allowed JJ Richards to increase its prices for any reason, eg. simply to increase revenue, the clause was not necessary to protect JJ Richards' legitimate interests;
- performance clause was said to cause a significant imbalance because it removed any liability for JJ Richards where performance of its services had been prevented or hindered, even where the customer was not responsible for the prevention or hindrance or where JJ Richards was better placed to mitigate the risk of the prevention or hindrance. Also, because the performance clause required the customers to assume the risk of non-performance under circumstances they did not control, the clause was not necessary to protect JJ Richards' legitimate interests;
- exclusivity clause was said to create a significant imbalance because the clause limited the customers' general right to contract with whomever they want. Also, because JJ Richards did not require exclusivity in relation to waste management in order to conduct its business, the clause was not necessary to protect JJ Richards' legitimate interests; and
- indemnity clause was said to create a significant imbalance because it indemnified JJ Richards for losses which could have been avoided by JJ Richards, without providing a corresponding benefit for the customer. Also, because the indemnity clause indemnified JJ Richards for losses not caused by its customers, the clause went beyond what was reasonable necessary to protect JJ Richards' legitimate interests.
What does this mean for businesses?
Although there are no fines or penalties for having a term declared unfair, all businesses will need to consider the enforceability of their B2B standard term contracts to minimise the risks that various terms might be declared void.
In considering whether B2B standard terms are likely to be declared void businesses should be particularly aware of clauses that:
- require one party to bear the risk of a high-cost, low-probability event;
- create an automatic rollover extension of the contract;
- allow one party to vary the contract unilaterally;
- affect or remove the ability of the other party to vary the contract terms, limit their obligations, terminate or renew the contract;
- levy excessive fees;
- impose excessive interest rates on outstanding moneys; and / or
- affect or limit a party's ability of redress or remedies for breach by the other party.
What can businesses do when using standard term contracts?
It is recognised that standard form contracts are commonly used in business and are an efficient and cost-effective option. In the consumer area the courts have emphasised that terms may not be unfair if they are clearly drawn to the other party's attention prior to the agreement (eg. Jetstar Airways Pty Ltd v Free  VSC 539). Putting one's cards on the table is a good way to reduce risks of terms being considered later as unfair.
- The ACCC releases a report on "unfair" terms in business-to-business contracts and says get ready for enforcement
1 The Federal Court in JJ Richards & Sons Pty emphasised that the "significant imbalance" requirement is met if a term is so weighted in favour of the supplier as to tilt the parties' rights and obligations under the contract significant in its favour.
2 A term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise: section 24(4) of the ACL.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.