Warning to all businesses: unfair contract laws enforced

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The Australian Competition and Consumer Commission has taken waste management company JJ Richards & Sons (JJ Richards) to court for breach of the small business unfair contract laws that came into effect in November 2016. This is the first legal action that the Australian Competition and Consumer Commission (ACCC) has commenced to enforce the new laws.

This eBulletin looks at what small businesses can learn from this first enforcement from the ACCC.

The unfair contract terms regime

The unfair contract provisions in the Australian Consumer Law (ACL) were extended in November 2016 to cover standard form contracts involving small businesses. You can read our previous eBulletin about this extension here.

The effect of the law is that terms in standard form contracts could now be considered to be '"unfair" and therefore void. Under the ACL, an unfair term is one which causes a significant imbalance in the rights and obligations of a supplier and its small business customers, which is not reasonably necessary to protect the supplier's legitimate interests, and which would cause significant financial damage to the small business customer if relied upon by the supplier.

However, to date there has been little practical guidance for business as to what particular clauses are likely to fall foul of the law and in what circumstances.

The ACCC and JJ Richards

The ACCC alleges that JJ Richards, one of the largest private waste management companies in Australia, entered into standard form contracts containing unfair terms until at least April this year. In 2016, the ACCC had identified the waste management industry, among a number of other sectors, as one in which small business contracts often contained unfair terms.

The eight clauses challenged by the ACCC include clauses allowing JJ Richards to unilaterally increase its prices, allowing JJ Richards to charge customers for services not rendered for reasons beyond the customer's control, binding customers to subsequent contracts unless they cancel the contract within 30 days before the end of the term, and creating an unlimited indemnity in favour of JJ Richards.

Whether a clause in a standard form contract is unfair under the ACL depends on the facts, including the nature of the goods or services being provided and the risk undertaken by the supplier. However, some clauses are likely to be almost always unfair, such as a unilateral and unfettered right of the supplier to increase its prices.

The ACCC is seeking declarations that the allegedly unfair terms are void, and injunctions to prevent JJ Richards from relying on or further using those terms in contracts with small businesses.

The future for small business contracts

It is hoped that this current action will bring some much needed clarity regarding the effect of the legislation.
In the meantime, if you are a supplier to small business and have not already done so, we recommend that:

  • standard form contracts used with small business be reviewed to determine whether they contain any terms that are clearly one-sided and which go further than is reasonably necessary to protect your interests;
  • existing small business contracts be reviewed to determine whether they are subject to the new unfair contracts regime on variation or renewal, and if so, whether any terms in that contract may be considered an unfair term; and
  • any term in a standard form contact or existing small business contract that is an unfair term be amended.

We also suggest you provide training to staff involved in negotiating contracts to ensure that they are aware of potential limitations on the enforceability of terms that might be included in a small business contract.