As previously blogged, the extension of Australia’s unfair terms regime under the Australian Consumer Law (ACL) to business-to-business (B2B) contracts took effect from 12 November 2016. The protections apply to standard form small business contracts that meet the prescribed thresholds around employee numbers and contract value (as explained in our earlier blog here).

Background

In the 2014-15 Budget, the Government provided $1.4 million to the ACCC to support the implementation of the new regime. As per the Explanatory Memorandum to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015, it was expected that the ACCC “would utilise existing implementation and enforcement architecture regarding the unfair contract term protections for consumers, and that ACCC guidance for small businesses could draw from previous guidance provided to consumers.”

In anticipation of the new law, the ACCC undertook a targeted review of 46 standard form small business contracts in seven industries:

  • advertising
  • retail leasing
  • franchising
  • agriculture
  • independent contracting
  • telecommunications
  • waste management.

The ACCC’s report details common clauses it considers may be unfair.

Common issues identified by the ACCC across industries

The ACCC identified the following types of clauses as problematic across all the industries it reviewed:

  • Unilateral variation (all seven sectors). The ACCC was concerned by broad and unfettered variation clauses permitting the large business to unilaterally vary aspects of the contract and indicated such clauses are “equally problematic” in the small business space as in the consumer contract space. One issue identified was a lack of any prior notice of a change to the small business. The ACCC was of the view that customers should always receive adequate prior notice of any unilateral variation (though this of itself is unlikely to be enough to prevent an otherwise unfettered unilateral variation right from being unfair). The ACCC also identified those contracts that did not not afford the small business the opportunity to terminate the contract once the unilateral change has taken effect as problematic. In the telecommunications space, the ACCC was concerned with charges imposed on customers who choose to cancel their contract in response to a unilateral variation (such as upfront installation fees and equipment costs, which may sometimes be more than any early termination charge (ETC) or penalty fee).
  • Limited liability and wide indemnities (all, excluding agriculture sector). The ACCC raised concerns with those clauses requiring the customer to indemnify the large business for any loss or damage suffered. It highlighted that such clauses are often used to reduce damages that may be claimed by the customer for breach of contract by the large business. Changes the ACCC considered acceptable include amending the clause to exclude the customer’s liability in situations where the large business was negligent, or caused or contributed to the loss or damage. The ACCC also recommended making indemnities clearer about the types of losses the larger business would be indemnified from (thereby ensuring indemnities are not unreasonably broad) and drafting these clauses to clarify that the contracts do not limit the legal rights a customer might have to claim for losses under the consumer guarantees regime in the ACL.
  • Termination clauses (all, excluding waste management and agriculture sectors). The ACCC has concerns with clauses that permit the large business to terminate for any breach of the contract. Proposed amendments included restricting termination to material breaches and providing a reasonable period for the small business to remedy the breach (if it is capable of remedy). The ACCC reasoned that any ETC should reflect a genuine pre-estimate of loss if the customer terminates the contract early (and take into account saved cost), while ETCs that equate to the customer paying out the remainder of their contract are likely to be unfair.

Sector-specific issues

The ACCC identified a number of issues that are relatively sector specific. By way of example, in the agriculture industry, the ACCC identified issues such as broad rights afforded to large businesses to reject or downgrade produce and to vary quality of produce requirements and pricing terms.

Franchising operation manuals

In the franchising sector, the ACCC had concerns that franchise agreements tend to permit the franchisor to unilaterally vary an operations manual (a standalone document containing important rules or obligations applicable to the franchise) without notice or restriction on the type of changes that may be made. Overall, the ACCC was not satisfied with the responses provided by participating franchisors and considered more could be done to limit this wide variation right, while recognising such terms are essential to allow franchisors to flexibly adapt the franchise system in a changing market. Unilateral variation of a separate standalone document incorporating important rules and obligations was also an issue in the retail leasing space (e.g. shopping centre rules).

Auto renewals

The ACCC focused on terms that allow for automatic renewal for a further fixed period unless the customer opts out, especially in the advertising and waste management sectors. The ACCC recognised that automatic renewals of a contract are not necessarily unfair and they may be practical and efficient for both parties in the circumstances of an ongoing agreement. Whether or not an automatic renewal clause is likely to be unfair depends on the specifics of the clause and the imbalance between the parties (e.g. whether reasonable notice is given and whether a customer is given reasonable time to give notice stopping the renewal). The ACCC pointed to the recent Federal Court decision that Chrisco Hampers had included an unfair contract term in its lay-by agreements, where consumers had to ‘opt out’ in order to avoid having further direct debit payments deducted by Chrisco after their lay-by had been paid for.

B2C unfair terms protection

The unfair contract terms law applying to standard form consumer agreements commenced on 1 July 2010 and prior to this, in June 2010, the ACCC and ASIC, along with state and territory consumer protection agencies, released A guide to unfair contract terms law, to assist businesses and consumers understand their rights and obligations under the law (which has since been updated).

In May 2013, the ACCC released a report on the outcomes of its unfair contract terms industry review, to identify issues remaining after the implementation of the unfair terms regime. In this report, the ACCC also highlighted the following areas of concern in the consumer space:

  • unilateral variation (terms that allow the business to change the contract without consent from the consumer)
  • termination rights (terms unfairly restricting the customer’s right to terminate)
  • broad indemnity clauses and exclusions of liability (terms that make the consumer liable for things that would ordinarily be outside of their control)
  • entire agreement clauses (terms that prevent the consumer from relying on representations made by the business or its agent).

There is therefore likely to be some overlap between the unfair terms issues arising in both a consumer and small business context, although we will have to wait and see how a court ultimately views alleged unfairness in a B2B context.