Since the unfair contract terms (UCT) regime in the Australian Consumer Law (ACL) was extended to ‘small business contracts’ in November 2016, the ACCC has stated that the application of the UCT regime to small business contracts would be a key enforcement priority and focus areas.
The ACCC has delivered on that promise, commencing proceedings against waste management company JJ Richards and serviced office space and virtual office services provider Servcorp.
On 19 October, the Federal Court declared, by consent, that eight of the terms in one of the standard form contracts used by JJ Richards & Sons Pty Ltd were void and unenforceable. The orders made against JJ Richards & Sons Pty Ltd were that it:
- cannot (and must not) apply or rely on any of the terms found void;
- must publish a corrective notice on the home page of its website;
- must notify certain people who entered into or renewed a standard form contract with the company; and
- must establish an ACL compliance program.
While there have been a small number of decisions by the courts on the unfair contract terms regime as it applies to consumer contracts since the national UCT regime commenced on 1 July 2010,1 this decision marks the first time that the regime has been applied in the context of B2B arrangements.
Since the elements of the test of ‘unfairness’ are expressed in broad terms, as outlined below, the decision provides some guidance on some of the factors that are relevant in a B2B context when considering whether a particular term (a) would cause a significant imbalance between the parties’ respective rights and obligations under the contract and (b) is reasonably necessary in order to protect the legitimate interests of the advantaged party.
In particular, organisations that use standard form contracts in their dealings with small businesses (either as purchasers or suppliers of goods or services) should review their standard form contracts:
- for clauses that when re-expressed in broad terms could extend to grant the organisation a right or benefit, even in circumstances where the organisation was at fault or the other contracting party wasn’t at fault. These can potentially be narrowed down to address only risks arising out of the conduct of the other contracting party;
- clause-by-clause to critically assess what interests of the organisation each clause is seeking to protect, whether those interests are ‘legitimate’ and also whether each clause is individually (and in the context of the contract as a whole) reasonably necessary to protect the relevant interests of the organisation; and
- to ensure the contracts are presented clearly and legibly.
What is the unfair contract terms regime?
The UCT regime applies to standard form ‘small business contracts’, and provides that any ‘unfair’ term in such a contract is void and unenforceable. Small business contracts are those in which at least one party employs fewer than 20 persons and in which the upfront price of the contract is equal to or less than AUD 300,000 (for contracts with a term of one year or less) or AUD 1,000,000 (for multiyear contracts).]#
The ACL doesn’t explain what constitutes a ‘standard form’ contract, but it is essentially a pre-prepared contract that isn’t open to negotiation.
A term is ‘unfair’ if
(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
In applying the principles outlined above it is necessary to have regard to the contract as a whole and the extent to which the term is transparent.
The terms that were put in the bin by the court
The Federal Court found that each of the terms set out in the table created a significant imbalance between the respective rights and obligations of JJ Richards & Sons Pty Ltd and its customers.
Also, while JJ Richards & Sons Pty Ltd did not seek to argue that any of the terms were reasonably necessary to protect the legitimate interests of the advantaged party, the Federal Court provided short reasons explaining why in its view each of the terms was not ‘reasonably necessary’.
The table summarises each of the terms found to be unfair and the Court’s reasoning for its finding that the terms created a ‘significant imbalance’ and were not reasonably necessary to protect the legitimate interests of the advantaged party.
Additionally, in finding that the terms set out in the table as lacking transparency, the Federal Court stated that the terms were drafted in legal language and not in plain English, they were presented in an unclear manner in a small font size and did not draw the customer’s attention to them.
Companies therefore need to carefully consider how their standard contracts are presented and in particular should use plain English, avoid the use of legal jargon, and present contracts that are presented in a legible type face, at a legible size, with white space to assist readers.
What steps can contracting parties take?
Contracting parties that use standard form contracts to engage will small businesses (either as purchasers or suppliers of goods) should again review their contracts with a critical eye to ensure that the terms:
- do not cause a significant imbalance between the parties;
- are reasonably necessary to protect their legitimate interests;
- would not cause the other party detriment if enforced; and
- are clearly presented in plain English.