David v Goliath: Unfair Contract Terms for Small Businesses
The recent decision by the Federal Court of Australia in Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd  FCA 1224 (‘ACCC v JJ Richards’) sets out the Court’s position following the amendments to the unfair contract terms regime under the Australian Consumer Law (‘ACL’).
The amendments – Small Business and Unfair Contract Terms Act
On 12 November 2016 the Treasury Legislation Amendment (Small Business and Unfair Contract Terms Act 2015 (Cth) (‘Amendments’) came into effect. The Amendments were purposed with protecting small businesses and extending the existing protections against unfair contractual terms under the ACL.
The amendments apply to standard form contracts entered into or renewed on or after 12 November 2016 where:
- the contract was for the supply of goods or services, or the sale or grant of an interest in land;
- at the time the contract was entered into, at least one of the parties to the contract was a business that employs less than twenty (20) people (a small business); and
- the upfront price payable under the contract was:
- no more than $300,000 for contracts with a term of one (1) year or less; or
- no more than $1,000,000 for contracts with a term of more than one (1) year.
In the event that the court deemed the contract term to be unfair, the term will be void and the rest of the contract will continue to apply to the parties.
ACCC v JJ Richards
The ACCC chose an appropriate target to test the scope of the Amendments. Being one of the largest privately-owned waste management companies in Australia, JJ Richards was involved in approximately 26,000 standard form contracts for the provision of waste management services to small businesses. The ACCC sought declarations that a number of terms in JJ Richard’s small business contracts were unfair, and consequently void.
The Federal Court Decision
Of the eighteen (18) clauses in JJ Richard’s standard form contract, the following eight (8) were deemed unfair to small business owners and thus, were declared void:
Clause 1 – Automatic Renewal: This clause bound JJ Richards customers to subsequent contracts, unless either party cancelled the contract within thirty (30) days before the end of the initial term. JJ Richards was not required to provide notice of the contract expiry and / or the automatic renewal.
Clause 4 – Price Valuation: This clause permitted JJ Richards to increase costs unilaterally without providing customers the ability to terminate the contract and / or vary the contract if they did not agree with the price change. The scope of the right to increase costs was immensely broad and open to a number of reasons, including:
1. increased operation costs;
2. changes in disposal fees;
3. site profitability;
4. changes to disposal facilities; or
5. increased government levies.
Clause 6 – Agreed Terms: This clause effectively alleviated JJ Richards of any liability in failing to perform their services. The clause covered any form of prevention of hindering of performance, irrespective of the cause.
Clause 7 – No Credit Without Notification: This clause had the effect of allowing JJ Richards to charge for services that they had not provided. Customers were required to seek credit for the unwarranted charges within fourteen (14) days from the invoice date.
Clause 9(i) – Exclusivity: This clause provided that JJ Richards had exclusive rights to remove waste from a customer’s premises, including any removal of waste, recyclables, combustible liquids and dangerous goods. It was held that this clause impinged on the rights of customers to enter into a contract with whomever they wished.
Clause 16 – Credit Terms: JJ Richards were permitted to suspend a service if a customer failed to pay, while charging fees associated with overdue payment during the period of suspension.
Clause 17 – Indemnity: This clause provided an unlimited indemnity in favour of JJ Richards in respect of all liabilities, claims, damages, actions, costs and expenses, including any breach of warranties, covenants and conditions.
Clause 18 – Termination: This clause prohibited customers from terminating their agreement with JJ Richards while their account was outstanding.
In his judgment, Moshinsky J noted that the impugned terms were also drafted in legal language and presented in small font, so as to contribute to their unfairness. The Court ordered, by consent, that JJ Richards must take the following corrective action:
- JJ Richards were restrained from relying on the above unfair contract terms in any of its contracts entered into or renewed after 12 November 2016;
- That JJ Richards cannot enter into any standard form contract for a period of five (5) years from the date of the orders, if such a contract contains any of the unfair contract terms summarised above;
- Within fourteen (14) days of the orders, JJ Richards was required to publish a corrective notice on its home page, customer portal and any other URL it uses to market and supply waste management services;
- JJ Richards, at its own expense, 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
- JJ Richards must enter into an ACL 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 decision in ACCC v JJ Richards stands as a reminder to businesses to take particular care when assessing the terms of business to business contracts. It provides a welcome scope to the Amendments and enables small businesses to avoid the substantial financial loss that can be associated with unfair contract terms. Our Litigation team has extensive experience in competition and consumer law matters. If you require any advice regarding the Amendments, please submit an online enquiry or call us on (07) 5592 1921.