Consumer watchdog on the hunt for unfair terms in B2B contracts

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The recent decision by the Federal Court of Australia (FCA) in ACCC v JJ Richards & Sons Pty Ltd[1] is expected to empower small businesses to negotiate terms of standard form contracts.  It also serves as a timely reminder for large businesses to review their standard form contracts and practices.

The Australian Competition and Consumer Commission (ACCC) succeeded in its contention that eight terms in service agreements used by JJ Richards & Sons Pty Ltd (JJ Richards) were unfair and therefore void.

What is the relevant law?

The Australian Consumer Law (ACL) provides that an unfair contractual term of a standard form contract will be void.  The contract may continue to bind the parties, to the extent that the contract can continue without the void term.

What are “unfair contract terms”?

A contractual term is “unfair” under the ACL if it satisfies the following three conditions:

  • it causes a significant imbalance in the parties’ rights and obligations;
  • it is not reasonably necessary to protect the legitimate interests of the party who is advantaged by the term; and
  • it causes detriment to one party if relied upon by the other.

The unfair contract term regime previously applied only to standard form “consumer contracts”, that is, contracts entered into by individuals for personal, domestic or household goods or services.    As of 12 November 2016 the regime was extended to cover standard form “small business contracts”.  A “small business contract” is a contract for the supply of goods or services or sale or grant of an interest in land in which:

  • At least one party is a business that employs fewer than 20 persons; and
  • The upfront price payable does not exceed $300,000 (for contracts of 12 months or less) or $1,000,000 (for contracts of more than 12 months).

The provisions regarding unfair terms apply to standard form contracts only.  The ACL sets out various considerations in determining whether a contract is “standard form”.  These include the relative bargaining power of the parties, who prepared the contract and whether there were opportunities given to negotiate.   It is important to note that once a party to a proceeding alleges that a contract is standard form, the onus is on the other party to prove that it is not.

JJ Richards’ service agreement was considered a standard form contract because it was offered on a take it or leave it basis and could not be negotiated by the customer.

What went down in Court

JJ Richards provides waste-management services to tens of thousands of Australian consumers and businesses, subject to the terms of its service agreements. Amongst other things, the service agreements that came under the microscope in the FCA gave JJ Richards the following rights:

  • To lock customers into future contracts unless the customer cancelled within the 30 day period prior to the end of the term;
  • To unilaterally increase its prices;
  • To avoid liability when the performance of its obligations was hindered or prevented in any way;
  • To charge for services not rendered, including in circumstances where the failure to render services was outside the control of the customer;
  • The exclusive right to remove waste from customers’ premises;
  • To suspend services and continue to charge the customer unless payment had been made within 7 days;
  • To be indemnified for an unlimited amount by the customer; and
  • To prevent customers from terminating the contract if they had outstanding payments, and to continue charging the customer for any equipment rentals.

By way of consent orders, the FCA declared all 8 of the above terms to be unfair and therefore unenforceable. The orders provide that JJ Richards is prevented from relying on these terms in future, has to publish a corrective notice on its website, notify all small businesses that were party to its service agreement and implement a program for compliance with the ACL for a period of 3 years.

Significance of the case

This was the ACCC’s test case for enforcing the newly expanded unfair contract terms regime. It has made an example of JJ Richards and serves as a general deterrent to the use of unfair terms in standard form contracts with consumers and small businesses.  In public statements made after the FCA handed down its decision, the ACCC was not shy to admit that it is actively investigating other large businesses for similar contraventions of the ACL.

In the wake of this case, large businesses will need to review their standard form contracts in order to ensure compliance with the ACL and to understand which terms are at risk of being declared unfair.

Small business owners can take comfort in the outcome of this case, and should take the time to understand their rights under the ACL, should the need arise to dispute the terms of a standard form contract in future.

Pointon Partners have a wealth of experience in the areas of contract law and consumer law. If you require legal advice or have any queries in relation to this article, please do not hesitate to contact our office on (03) 9614 7707.

2018-08-28T15:13:10+00:00November 2nd, 2017|Categories: Commercial, Litigation|Tags: |