Using new laws that protect small businesses from unfair contract terms the Australian Competition and Consumer Commission (ACCC) has taken action in the Federal Court against JJ Richard & Sons Pty Ltd.

The case is the first of its kind and serves as a warning to large businesses to review their standard form contracts with small businesses and consider revising any clauses that may otherwise risk being rendered void and unenforceable if challenged as "unfair" under the unfair contract laws.

Background: the unfair contracts regime at a glance

Since 2010, the Australian Consumer Law (ACL) has provided consumers with protection against unfair contract terms imposed on them via standard form contracts. On 12 November 2016, the unfair contract term provisions in the ACL were extended to cover terms of standard form contracts to which small businesses are parties.

Contracts for the supply of goods and/or services will amount to a "small business contract" if, at the time of entering into the contract:

  • the counterparty is a business employing fewer than 20 people; and
  • the upfront price payable under the contract is no more than $300,000 or $1 million if the contract is for more than 12 months.

A term of a standard form small business contract will be "unfair" if it is one-sided and excessive, that is, it creates a "significant imbalance" between the parties, is not reasonably necessary to protect the benefiting party's legitimate interests and would cause detriment to the other party. Such a term may be declared void and unenforceable.

To assist businesses to understand the new regime, the ACCC published a report in November 2016, "Unfair Terms in Small Business Contract: A Review of Selected Industries", that provides helpful and practical guidance on the types of clauses in standard form business-to-business (B2B) contracts that the ACCC considers may be problematic.

2017 has seen a ramping up of the ACCC's investigation and enforcement of the unfair contract term laws.

In early 2017, the ACCC announced that the unfair contract terms regime would be a key area of focus and enforcement. The ACCC has a number of in-depth investigations already underway and is actively seeking to take on cases as a means of establishing the breadth of the new unfair contract terms law as a key protection for small businesses in Australia.

In July 2017, the ACCC reported that it had engaged with businesses such as Uber, Fairfax Media, Jetts Fitness, Lendlease Property Management and Sensis who had agreed to amend their standard form B2B contracts to address concerns raised by the ACCC about particular clauses.

The commencement of the JJ Richards proceedings is the first court action in this space.

The alleged case against JJ Richards

The ACCC alleges JJ Richard's standard form small business contracts contain eight unfair contract terms:

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

The ACCC is seeking declarations from the court that the terms are unfair and thus void. It is also seeking injunctions to prevent JJ Richards from relying on those terms with existing customers and from entering into future contracts with small businesses that contain those terms.

Key takeaways and response

The case is a reminder to businesses to take particular care to review the terms of their standard form B2B contracts and assess whether the terms can be justified as reasonable before imposing them on small businesses.

Determining whether some terms in a B2B contract are unfair can at times be complex, with a number of terms likely to fall within a grey area. Any term would need to be considered in the context of the contract as a whole, industry practices and whether the interest being protected can be protected through an alternative (and fairer) approach.

The ACCC's guidance on unfair contract terms has identified common themes in potentially unfair contract terms which include:

  • unilateral variation of rights;
  • lack of reciprocity;
  • automatic renewal;
  • wide indemnities; and
  • liquidated damages.

While the courts will be the ultimate arbiter in determining whether a term is unfair under the ACL, the ACCC's guidance on the issue helps to serve as a useful safety check for all businesses when preparing new standard form contracts (or reviewing existing agreements). Ultimately, if a legitimate interest can be protected in a more measured manner, this may be preferable to risking the entire clause being rendered void and unenforceable as a result of an unnecessary overreach.