A recent court case in the Federal Court of Australia has tested the application of the unfair contracts regime to small businesses.

The Australian Consumer Law Act applies to protect consumers from unfair contract terms in standard form contracts and in November 2016 was extended to protect small businesses.

A small business is one that employs less than 20 people and covers contracts:

  • For the supply of goods, service and sale of land;
  • Where the upfront price is no more than $300,000 (or $1 million if the contract runs for more than 12 months).

The effect of the unfair contracts regime is to prohibit business to business contracts from containing terms that:

  • Cause a significant imbalance in the parties' rights and obligations;
  • Are not reasonably necessary to protect the legitimate business interests of the benefiting party; and
  • Cause detriment to the party relying on the clause.

The Australian Competition & Consumer Commission (ACCC) took action against JJ Richards & Sons Pty Limited, a large waste management company. The Federal Court declared by consent that eight terms in the JJ Richards standard form contract were unfair and therefore void. The unfair terms were:

  • Automatic renewal of the contract unless it was cancelled within 30 days before the end of the term;
  • A unilateral right for JJ Richards to increase the price;
  • No liability for JJ Richards if it was prevented or hindered in any way from performing the services;
  • Requiring payment for services not provided for reasons beyond a customer's control;
  • Granting JJ Richards an exclusive right to remove waste from the customer's premises;
  • An ability to suspend service but continue to charge if payment not made within 7 days;
  • An unlimited indemnity in JJ Richards favour; and
  • No ability to terminate if monies still owed and continuing to charge equipment rental after termination.

In New Zealand, the Fair Trading Act 1986 prohibits the use of unfair contract terms in standard form contracts (such as terms of trade) with consumers i.e. people acquiring the services for personal, domestic or household use . At this stage, the Fair Trading Act does not apply to standard form contracts with small business so it remains to be seen if our government will take a similar approach.

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.