In November 2016, the scope of protections afforded to consumers under the Australian Consumer Law (ACL) was extended to protect small businesses (employing less than 20 persons) from unfair terms in standard form contracts.

Less than one year later, the Federal Court handed down a decision in respect of proceedings brought by the Australian Competition and Consumer Commission (ACCC) against waste management service provider, JJ Richards & Sons Pty Ltd (JJ Richards), for declaratory and injunctive relief on the basis that 26,000 of its contracts with small businesses had unfair terms[i].

Terms held by the Court to be unfair included the:

  • Automatic renewal clause – This clause bound customers to subsequent contracts, unless JJ Richards cancelled the contract within 30 days before the end of the contract term. The Court observed that the term created a situation where small businesses could inadvertently miss the window for termination or, if JJ Richards terminated, they had little opportunity to find an alternative waste services supplier. This created a significant imbalance of rights
  • The exclusivity clause – This clause was too broad and created significant imbalance because it prohibited the customer from contracting for additional waste management services, including services which were not covered by the contract.

Additional clauses, such as the price variation clause, indemnity clause, the no credit without notification clause and termination clause, were also held to be unfair. This was because they conferred benefits on JJ Richards without providing any corresponding rights to the respective small businesses with whom it contracted. This resulted in the small businesses assuming liability for matters which were out of their control or did not confer rights and obligations that corresponded with the nature of services the subject of the contracts.

The outcome for JJ Richards was that the impugned terms were held to be void. Therefore, if a dispute arose, they could not be relied upon or enforced by JJ Richards to achieve the commercial advantage which JJ Richards thought it had secured by having those terms in its contracts. The outcome for JJ Richards then is that at least part of the commercial basis upon which it contracted has been taken away.

It stands to reason that a party that seeks to secure some commercial advantage in its business relationships might use its contracts as one method of realising that end. The issue is where advantage crosses impermissibly into significant imbalance or unfairness and where such terms are not really necessary to protect that party’s legitimate interests.

Depending on the circumstances, such an outcome could mean that price or other terms agreed and the way that services are structured are no longer as commercially viable as forecast. So, the prospect of similar findings for other businesses should be considered as a significant governance and commercial risk that needs to be managed.

The broad effect of proceedings, aside from significant obligations imposed on JJ Richards to ‘make right’ its ‘wrongs’, was to send a strong message to those involved in the waste management and transport sector to be wary about the fairness of their contract terms with small businesses. In a way it is unsurprising that this sector should be the ACCC’s starting place in enforcing the new law, given that so much of industry is shaped by relationships with and amongst small businesses.

Warning signs that a contract term falls foul of the unfair contract provisions of the ACL include:

  • the term is in a contract with a small business employing less than 20 people
  • the upfront contract price is less than $300,000 (or $1,000,000 if the term is longer than 12 months)
  • the term creates significant imbalance between the parties’ obligations
  • the term is not reasonably necessary to protect the interests of party who is relying on the term.

Parties identifying these signs should consider:

  • ascertaining the number of persons employed by the business with whom you are contracting
  • amending the clauses to create reciprocal obligations or benefits
  • narrowing the scope of clauses to ensure that they correspond with the goods or services under the contract and the legitimate interests of the parties.