Unfair Contracts

Unfair Contract Terms Update

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Overview

The introduction of unfair contract laws has visited a major change in the law relating to standard form commercial agreements. When first introduced in July 2010 the laws only applied to consumer contracts - however from November 2016 the laws were extended to cover small businesses. 

Review of Unfair Contract Laws

There is presently a statutory review being conducted in relation to the extension of the unfair contract laws to small businesses. The time for submissions closed in December 2018 and the review findings are likely to be known by mid 2019.

The review is considering most aspects of the operation of the unfair contract laws including:

  • the definition of a “small business” which is currently defined as a business which employs less than 20 people and the upfront price payable under the contract is less than $300,000 in a single year or $1 million if the contract extends for more than 12 months. Concern has been expressed by a variety of stakeholders that the “head count” aspect of the definition has practical difficulties. The review is also considering whether the amount of $300,000 is an appropriate threshold. The ACCC has indicated that it will submit to the review that the definition of a “small business” be expanded so that more businesses are brought within the regime;

  • whether further clarification should be given in the legislation as to what constitutes a “standard form contract”;

  • whether it is appropriate to continue to maintain the exemptions in the legislation which apply to terms that define the main subject matter of the contract or set the upfront price payable under the contract;

  • whether further examples or clarification should be provided in the legislation as to what constitutes an "unfair" term.

 

Other potential changes

The ACCC is pushing for changes to the Competition and Consumer Act 2010 (Cth) to allow the pecuniary penalty and other enforcement provisions of the Act to apply to unfair conduct breaches as they do for other breaches of the Australian Consumer Law, such as misleading deceptive or unconscionable conduct. So far the government has resisted those calls. It will be interesting to see if the present review process makes any recommendations on this issue. A change to the law in this area will apply significant added pressure to businesses to ensure their standard form contracts are compliant with the unfair contract laws - especially given the recent increase in the maximum pecuniary penalty order from $1.1 million to $10 million per breach.

Investigation Powers Strengthened

In October 2018, the ACCC’s investigative powers were boosted to enable it to compulsorily obtain information, documents and evidence to determine if a contractual term may be unfair. These new powers apply only in relation to contracts entered into on or after October 2018.

Conclusions

Unfair contract laws have visited a major change on consumer and commercial transactions throughout Australia - especially since November 2016 when the laws were expanded to cover small businesses. The present review process may make recommendations which further expand that reach and potentially result in breaches of the laws being subject to financial penalty orders. We will report further once the recommendations of the review are made public. In the meantime, it would be prudent for businesses to keep their standard form contract terms under review to ensure that they remain compliant with the unfair contract laws.  

For further information please don’t hesitate to contact:

Daniel St George
Senior Associate
daniel@couttslegal.com.au
1300 268 887

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.

Australia's first unfair contracts regime case

Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224

On 13 October 2017, the Federal Court of Australia made its first order against another party in respect of the recent amendments to the unfair contracts regime under the Australian Consumer Law. Late last year, the Australian Consumer Law was extended to apply to small businesses on and from 12 November 2016 and it was with great anticipation that small and large businesses alike have waited to see the outcomes of the first case under the unfair contracts regime.

We have previously released two articles in respect of the new unfair contracts regime and the links to those articles can be found here:

As we previously reported, the new unfair contracts regime covers contracts for supply of goods or services or for the sale or grant of an interest in land. The regime applies equally to new contracts, and to existing contracts that are extended, renewed or varied.

Background

JJ Richards & Sons Pty Ltd is a waste management solutions company, which has been in business in Australia since 1932. It has standard form contracts which are issued time and time again to other parties, including to small businesses. Since the commencement of the unfair contracts regime, JJ Richards entered into or renewed a minimum of 26,000 contracts to provide waste management services in the form of a standard form contract.

The type of standard form contract in breach of the regime was JJ Richards two page, short form Terms and Conditions service agreement. The contract comprised a front cover page which would be updated to include the parties’ details such as customer number, date of the agreement, term of the agreement, addresses for each party, where the services are located and the nature of the services. The Terms and Conditions are a one page, short, 18 clause terms and conditions which were not changed by JJ Richards for each customer, but were left fixed and attached to the front cover page.

The unfair contract terms summarised:

The Court found that eight particular areas of the JJ Richards contract were unfair contract terms:

(1)  Automatic renewal (This clause bound JJ Richards customers to an automatic renewal of the contract, unless either party cancelled the contract by written notice within a prescribed, limited time frame. The clause did not provide that JJ Richards was required to provide its clients with notice of the contract about to expire and the upcoming automatic renewal.)

(2)  Price variation (This clause gave JJ Richards the right to increase costs unilaterally without allowing a corresponding right for the customer to terminate the contract or for the customer to change the scope in scale of service provided if the customer did not agree to the price change. The right to increase costs was essentially not limited, it could cover any reason including (but not limited to) increased operation costs, changes in disposal fees, site profitability, changes to disposal facilities or increased government levies or charges.)

(3)  Agreed times (This clause provided that JJ Richards was only required to use reasonable endeavours to perform the waste collection service at the agreed times but then further provided that JJ Richards accepted no liability where [their] performance is prevented or hindered in any way. JJ Richards liability was not restricted only to situations where the customer had prevented or hindered the performance of JJ Richards. Instead, it covered any form of prevention or hindering of performance, irrespective of cause. This required JJ Richards customers to assume risks that they could not control and for which there was no corresponding benefit for assuming such risks.)

(4)  No credit without notification (Essentially, this clause provided that JJ Richards could charge customers for services that JJ Richards had not provided. The clause then put the onus on the customer to have to seek a credit request for the charges, within a limited defined timeframe of 14 days from the invoice date. The clause contained a “catch all” allowing JJ Richards to charge for any service if it was unable to perform the service for any reason. It was found this created a significant imbalance and required the customer to make a credit request even where JJ Richards had failed to provide the services for reasons within JJ Richards control.)

(5)  Exclusivity (This clause gave JJ Richards exclusive rights to remove waste from a customer’s premises for any removal of waste, recyclables, combustible liquids and dangerous goods. This was irrespective of whether or not the contract covered only one of those four types of waste removal. That is, if a customer had a contract solely for removal of recyclables, for example, that customer also granted JJ Richards exclusivity for all of the other waste services despite that those services were outside of the scope of the contract. It was noted that, among other things, this impinged on the rights of customers to enter contracts with whomever they wished.)

(6)  Credit terms (This clause provided that JJ Richards could suspend its service if a customer failed to pay. JJ Richards could also continue to charge customers the fees associated with the overdue payment during the period of suspension. That is, JJ Richards could continue billing during a service suspension. It was noted that this create an imbalance in the parties rights and obligations, particularly because the customer was not afforded the right to withhold payment if JJ Richards failed to provide services for example.)

(7)  Indemnity (This clause provided an unlimited indemnity by the customer in favour of JJ Richards in respect of all liabilities, claims, damages, actions, costs and expenses… as a result of or arising out of or otherwise in connection with the agreement… This clause covered the ability of JJ Richards to recover costs and losses even those that did not arise due to the fault of the customer. The clause did not require JJ Richards to stop, avoid or mitigate the losses. There was no corresponding indemnity offered to the client in respect of JJ Richards.)

(8)  Termination (This clause prevented customers from terminating the contract if the customer had an outstanding payment owing under the contract. The clause also entitled JJ Richards to continue charging customers for rental equipment until the outstanding payment was made (and provided JJ Richards did not need to remove the equipment (and stop the payments running) until the customer first made the outstanding payment.)

Court orders

The Court orders required JJ Richards to take a range of measures and corrective action including:

(a)  JJ Richards cannot rely on any of the unfair contract terms in any of its contracts entered into or renewed after 12 November 2016;

(b)  That JJ Richards cannot enter into any standard form contract for a period of five years if such a contract contains any of the unfair contract terms summarised above;

(c)  JJ Richards was required to publish a corrective notice on its home page, customer portal and any other URL it uses;

(d)  JJ Richards must provide a copy of the orders to each person who is a party to a standard form contract where that party is also a small business; and

(e)  JJ Richards must enter into an Australian Consumer Law Compliance Program to be undertaken by each employee of JJ Richards or any other person involved in the JJ Richards business that deals with Australian customers in relation to contracts (including small business customers of JJ Richards). The program is designed to minimise [JJ Richards] risk of future use, application or reliance on unfair contract terms in standard form contracts that are small business contracts. The program must be maintained and implemented for a period of three years.

Practical lessons learned

This case is a timely reminder that care and careful thought is required when issuing a standard form contract to a small business. Whilst standard form contracts can be useful, all standard form contracts need to be fair and balanced and in keeping with the requirements of the Australian Consumer Law. 

On the flip side, if you are a small business and you believe that you have entered into a contract that contains unfair contract terms, you may be able to take steps in relation to those unfair terms.

Further references

Unfair contract terms and small businesses: Examples and practical considerations

What are some examples of unfair contract terms?

There are a number of examples regarding the types of clauses which could be found to be unfair terms. The table below shows some but not all of the examples which may be relevant. 

In some situations, the very type of clause highlighted below can actually be fair, reasonable and effective and it is important to think about each contract on a case by case basis. Not every type of clause below is unfair in every set of circumstances.


Type of Clause: Limited Liability

Examples

  • Clauses that limit liability irrespective of fault;
  • Clauses that do not provide for proportionate reduction in liability for contribution to the loss or damage by the other party.

Practical Considerations

  • Parties should be liable for the loss they cause or contribute to.
  • Consider whether the other party should be liable:

o  For your negligence;

o  To the extent you cause or contribute to the loss or damage

  • Whether it is appropriate to attempt to exclude consumer rights under the Australian Consumer Law.

Type of Clause: Broad Indemnity

Examples

  • Clauses that require one party to indemnify the other party including for loss or damage that was not caused by the party providing the indemnity.

Practical Considerations

  • The indemnifying party should be “on the hook” for the loss or damage that they cause and to the extent that they cause it.
  • Consider the indemnifying party should be responsible:

o  For their negligence;

o  To the extent only that they cause or  contribute to the loss or damage.


Type of Clause: Entire Agreement

Examples

  • Clauses that provide that the agreement supersedes all prior agreements and contains all things necessary and relevant to the subject matter of the contract.

Practical Considerations

  • Is it clear that some pre-contractual representations can still be relied upon?
  • Are only previous written agreements superseded?

Type of Clause: Unilateral Termination

Examples

  • Clauses that allow one party but not the other to terminate.
  • Term penalising only one party for breach or termination

Practical Considerations

  • Does the termination take place only after first providing the other party with reasonable notice?
  • Does the other party have a prior opportunity to rectify the breach prior to termination?
  • Is termination for a minor or trivial breach?

Type of Clause: Unilateral Variation

Examples

  • Clauses that allow only one party to vary the contract, but not the other.

Practical Considerations

  • Is the other party given prior notice of the change before it takes effect?
  • Does the other party have the ability to terminate the contract if they do not agree to the change?
  • If the other party can terminate, are they refunded their reasonable fees and charges paid in advance?
  • Can either party vary the contract for specific clear reasons?
  • Can the contract only be varied by written (clear) agreement between the parties?

Type of Clause: Unilateral renewal or automatic renewal

Examples

  • Clauses that allow one party to renew (or not renew) but do not provide the same right for the other party.

Practical Considerations

  • Is the unilateral renewal or the automatic renewal clause adequately disclosed to the other party?
  • Is there provision for notice regarding the renewal?
  • Is there a reasonable period to take action or provide notice to stop the renewal?
  • Is there any termination or other fee payable if the renewed contract is terminated?
  • Is there a potential option to terminate at the end of the initial term (and prevent the renewal or roll-over)?
  • Can the automatic renewal provisions be “turned off” in the contract?
  • Is the other party provided with notice where the agreement has a roll over or automatic renewal, but that roll over or automatic renewal is not applied (that is, the agreement is terminated)?

Type of Clause: Unilateral variation of price

Examples

  • Clauses that allow one party to vary the price but do not allow the other party a corresponding right to terminate.

 

Practical Considerations

  • Is the change in price simply a result of passing on a cost which is outside a party’s control (for example, a third party increase or a cost increase due to change in law)?
  • Is notice of the price change provided to the other party, in advance?
  • Can the other party terminate the contract if it does not agree to the price variation?
  • Is any penalty imposed on the other party if it terminates the contract if it does not agree to the price variation?

This article has been published as an addition to part one: Spotlight on unfair contracts and small businesses.

Spotlight on unfair contracts and small businesses

The unfair contracts regime under the Australian Consumer Law was extended to apply to small businesses on and from 12 November 2016 and is already in force. It covers contracts for supply of goods or services or for the sale or grant of an interest in land.

The changes apply to new contracts, together with existing contracts that are extended, renewed or varied.

Here we provide you with a good starting point for your contract reviews irrespective of whether or not you prepared the contract or whether the other party provided the contract to you to sign.

You may have an unfair contract if you have a standard form contract with a small business and your contract contains an unfair term. 

1.       Is my contract a standard form contract?

There are a number of factors that are taken into consideration to determine whether a contract is a standard form contract including:

  • Bargaining power of the parties to the contract* (one party has most of the bargaining power or all of it);
  • If the contract was “tailored” following discussions with the other party or prepared prior to any such discussions*;
  • Whether the contract is presented as “take it or leave it” or similar*;
  • Whether the contract was negotiated (or up for negotiation)* or in fact, presented as non-negotiable;
  • Whether the contract terms account for the specific nature/characteristics of the party or the subject matter*;
  • Whether the contract is routinely issued out in the same or similar format.

There is a presumption that a contract is a standard form. The business relying on the contract has the onus of proof to prove otherwise.

The items marked * above are relevant matters the court must take into account.

2.       Is my contract a small business contract?

One party must be a small business - employing less than 20 employees including casuals that are employed on regular and systematic basis.

The upfront price payable under the contract must be under the threshold:

  • Less than $300,000 if the contract duration is 12 months or less;
  • $1 million or less if the contract duration is over twelve months.

3.       Does my contract contain an unfair term?

The unfair contract terms do not apply to parts of the contract that:

  • Define the main subject matter (the goods or services relevant to the contract);
  • Set the upfront price payable (so long as that price is disclosed before the contract is entered into); and
  • Are required or permitted by law.

Parts of the contract specifically negotiated between the parties are less likely to be found to be unfair terms.

A contract term will be unfair if (considering the clause and the contract as a whole):

  • It causes significant imbalance in the parties’ rights and obligations (the court carries out a factual assessment of the available evidence);
  • The term is not reasonably necessary to protect the legitimate interests of the party who seeks to rely on the term;
  • The term would cause detriment (whether financial or otherwise) to the other party if the term was effective.

4.      What happens if my contract term is unfair?

If the court finds your contract term unfair, the term will be voided (struck out of the contract, as if it had never been in the contract to begin with). The rest of the contract continues to apply to the parties. 

However consider the practical ramifications and impact on the relationship of the parties if the parties have disputed the fairness of the contract terms and embarked on a formal resolution process in respect of that issue.

Where a court finds a term unfair there can also be a range of court remedies imposed including:

  • Injunction effectively preventing the other party from enforcing the term;
  • Compensation order in favour of the aggrieved party;
  • Non-redress orders.

Consider also the practical impacts on your time, resources, energy in pursuing or defending an unfair contract claim, not to mention the cost. Your reputation could also be affected.

5.       Where can I find further resources on unfair contracts extending to small businesses?

This article is one of two written in regards to unfair contracts and small businesses. Here you can read part two: Unfair contract terms and small businesses: Examples and practical considerations.

Small business protection from unfair contracts

The Australian Consumer Laws are designed to protect an individual against unfair practices. Under the proposed Unfair Contracts, some of these protections will be extended to protect small businesses as well (who don’t fall within the definition of consumer). The unfair Contracts Act is designed to make it harder for a business to enforce certain standardized contracts, or at least certain clauses in those contracts, against a small business. The kinds of terms that will be in the firing line include:

  • Clauses that allow one party to increase the price without allowing the other party to then terminate the contract.
  • Clauses that allow a party to vary the terms of the contract without informing the other party and allowing them to then terminate the contract.
  • Clauses that allow one party but not the other to terminate

Will these protections apply to franchising? Yes, if the upfront price of the contract is either less than $100,000.00 or if the contract duration is 12 months or more, the upfront price is no more than $300,000.00. Given the vast majority of franchise agreements are presented or a ‘take it or leave it’ basis and often do not allow the individual or small to terminate the agreement before the term, there could be a flurry of activity as franchisors update their agreements. Other typically clauses in franchise agreements that allow the franchisor to buy back the franchised business at an unfair amount or to reduce the obligations they offer to provide are likely to be now enforceable.

This Act was passed in October 2015 by Parliament and is expected to come into effect by the end of 2017. If you use a standardised contract, such as terms and conditions, now is the time to review your contracts. If you find clauses that give you all the power and your customer- be they an individual or a small business- none, you might need to re-phase the clause or perhaps get rid of it completely. Ask yourself if that clause is necessary to do business with you and protect your legitimate interests. If you have been using a standard contract “borrowed” off another business or maybe downloaded from www.whoknowswheres.com, it’s a great time to chat to us about getting a contract, or, terms and conditions that complies with these new amendments and is tailor made to your industry and your business.

The amendments to the Unfair Contracts bill mean, if you are a small business you will soon have another string on your bow if you were to end up in a dispute over a contract.

For advice on your business contracts click here to contact Coutts.