On 6 September 2017, the Australian Competition and Consumer Commission (ACCC) instituted proceedings in the Federal Court against one of Australia’s largest privately-owned waste management firms, JJ Richards, alleging a number of terms in its standard form contracts with small business customers are “unfair”.  This is the first prosecution of its kind since the unfair contract terms regime in the Australian Consumer Law (ACL) was extended to cover small business contracts in November 2016.  The ACCC is seeking declarations that the terms are unfair, and therefore void, as well as injunctions to restrain JJ Richards from relying on the terms in future contracts.

Key messages

• This unprecedented court action makes good on the ACCC’s promise to quickly move to an enforcement style approach to protecting small businesses from unfair contract terms.  The ACCC squarely put businesses on notice that, following its education and consultation phase in the lead up to the new laws, it would adopt a focused enforcement approach to target non-compliant businesses.
• Businesses should ensure they have reviewed and assessed whether relevant standard form contracts require amendment to minimise the risk of terms being challenged on the basis of unfairness.
• This case will provide greater insight into how the courts will apply the provisions given there has only been a small number of cases in relation to consumer contracts.  While the test for unfairness is the same for both consumer and small business contracts, of particular interest will be the factors the Court considers relevant in assessing unfairness in the small business context and whether these may differ from the consumer context.

Background

Under the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth), the unfair contract terms regime in the ACL that applied to standard form consumer contracts was extended to apply to standard form “small business contracts”.  The new provisions apply to contracts entered into or renewed from 12 November 2016, or to terms in existing contracts varied from that date.

A contract will be a “small business contract” if it is for the supply of goods or services, or a sale or grant of an interest in land, and:

• one party to the contract employs fewer than 20 persons; and
• the upfront price does not exceed $300,000, or, if the contract has a term of more than 12 months, the upfront price does not exceed $1 million.

The law contains a rebuttable presumption that a contract is a standard form contract, meaning the onus is on the defendant to prove that the contract is not standard form.

The unfair contract regime provides a three-pronged test of unfairness.  A term is unfair if:

• it would cause significant imbalance in the rights and obligations of the parties to the contract;
• it is not reasonably necessary to protect the legitimate interests of the business advantaged by the term; and
• it would cause detriment to a party if applied or relied upon.

If a Court finds a term is unfair, the term is declared void and will have no effect.  To the extent it is capable of operating without the unfair term, the contract will remain on foot and continue to bind the parties.

The fact that a contract contains an unfair term does not of itself give rise to a contravention of the ACL or make a business liable to pecuniary penalties.  However, a declaration that a term is unfair gives rise to other remedies under the ACL including the ability for the Court to make compensation orders or orders for non-party consumer redress.

‘Rubbish’ contracts – allegations against JJ Richards

The ACCC alleges that eight terms in JJ Richards’ standard form contracts with small businesses are unfair and therefore void.  The eight terms are:

• binding customers to subsequent contracts unless they cancel the contract within 30 days before the end of the term;
• the ability to unilaterally increase prices;
• excluding liability where JJ Richard’s performance is “prevented or hindered in any way”;
• charging customers for services not rendered for reasons beyond the customer’s control;
• giving JJ Richards’ exclusive rights to remove waste from a customer’s premises;
• the ability for JJ Richards’ to suspend its service but continue to charge the customer if payment is not made after seven days;
• giving an unlimited indemnity in favour of JJ Richards; and
• preventing customers from terminating their contracts if they have payments outstanding and entitling JJ Richards to continue charging customers equipment rental after termination.

Several of these terms are similar to those identified by the ACCC as problematic in its review of waste management contracts in 2016.  The waste management industry was one of seven industries whose contracts were reviewed by the ACCC to identify potentially unfair terms in the lead up to the commencement of the new laws.  The ACCC reviewed a total of 46 contracts from a number of large businesses and engaged with those businesses on a voluntarily basis to amend or remove the terms identified.  The waste management industry was not initially selected as one of the industries to be reviewed but was included due to concerns raised with the ACCC regarding the prevalence of standard form contracts in the sector.  The outcome of the ACCC’s review in respect of each industry is set out in its report titled “Unfair Terms in Small Business Contracts: A Review of Selected Industries” (the Report). 

The ACCC contacted two of the largest providers of waste management services in Australia to participate in the review.  The identity of those providers was not disclosed in the Report.  The ACCC identified three types of clauses in these contracts it considered potentially unfair:

• automatic renewal of contracts unless the small business opts out in a prescribed period.  The ACCC noted that both providers worked with the ACCC to refine their respective clauses and the circumstances in which they would operate;
• broad unilateral variation clauses, such as the right for a service provider to change its fees at any time.  In this case, the service provider agreed to amend this clause to limit the circumstances in which it was permitted to adjust its fees; and
• limited liability and wide indemnities, such as a clause providing that the small business customer would not be liable for loss or damage if the provider failed to provide services on scheduled times or cancelled or suspended those services.  After engagement with the ACCC, this clause was removed by the service provider. 

Given the similarities between some of the terms identified in the Report and the allegations made by the ACCC against JJ Richards, the Report should assist to provide guidance to businesses of the ACCC’s views regarding potentially problematic terms in their contracts and ways in which they could minimise risks associated with such terms.

Next steps

We will be following this matter closely and provide updates as it progresses through the Courts.