Introduced in November 2016, new provisions of the Australian Consumer Law prohibit businesses from inserting unfair terms into their standard-form contracts with small businesses.
Until now, the new regime hasn’t been put to the test, but this month, the Australian Competition and Consumer Commission has put its money where its mouth is, and commenced proceedings against garbage and waste management giant J.J. Richards & Sons Pty Ltd (J.J. Richards), and against office services supplier Servcorp Ltd (Servcorp) on the basis of alleged unfair terms in their standard form contracts. The ACCC has also recently been successful against Advanced Hair Studio Pty Ltd (Advanced Hair) in obtaining refunds for consumers affected by unfair terms contained in its contracts.
The new unfair contract terms regime
The new small business contract terms regime introduced new provisions which prohibit standard form contracts with small businesses from containing terms which:
- cause significant imbalance in the parties’ rights and obligations;
- are not reasonably necessary to protect the legitimate business interests of the benefiting party; and
- cause detriment to the party relying on the clause.
Terms are assessed on a case-by-case basis, and any term found to be “unfair” can be declared void and unenforceable.
ACCC’s contentions regarding the J.J. Richards contracts
Earlier this month, the ACCC commenced Federal Court proceedings against J.J. Richards, alleging that several terms in J.J. Richards’ standard form contract meet the three-pronged test for unfairness outlined above.
The ACCC alleges that the following are unfair contract terms:
- binding customers automatically to subsequent contracts unless the contract is cancelled within 30 days before the end of the term;
- allowing J.J. Richards to increase its prices without the consent of the customer;
- denying any liability for J.J. Richards where its performance is “prevented or hindered in any way”;
- permitting J.J. Richards to charge for services not rendered for reasons beyond the customer’s control;
- allowing J.J. Richards exclusive rights to remove waste from customer premises;
- forcing customers to continue to pay, even when J.J Richards’ service is suspended;
- granting an unlimited indemnity in favour of J.J. Richards;
- preventing customers from terminating their contracts if they have payments outstanding; and
- allowing J.J. Richards to continue charging customers for equipment rental, even after the termination of the contract.
If the ACCC successfully argues its case, J.J. Richards’ contracts could be declared at least partially void, and J.J Richards could be stopped from relying on those clauses in future. This may have a huge impact on how J.J. Richards runs its $680 million dollar business.
ACCC’s contentions regarding the Servcorp contracts
The ACCC has more recently gone after Servcorp, alleging that Servcorp’s standard form contracts contain terms which go beyond what is necessary to protect its legitimate business interests, and would cause detriment to small businesses if relied upon. The ACCC has taken issue with terms which:
- allow the contract to automatically roll over, at an increased contract price, without notice to the small business;
- allow the unilateral termination of the contract by Servcorp;
- permit Servcorp to impose consequences on the customer akin to penalties;
- limit Servcorp’s liability to an unreasonable extent;
- permit Servcorp to unilaterally determine whether the contract has been breached; and
- allow Servcorp to acquire the customer’s property without any notice to or consent from the customer.
The ACCC has gone one step further in its claims against Servcorp; in addition to an injunction preventing Servcorp from relying on their unfair contracts, and declarations that the unfair terms are void, the ACCC is also seeking publication orders, compliance program orders, and costs against Servcorp.
ACCC’s concerns regarding the Advanced Hair contracts
Advanced Hair supplies hair loss treatments and procedures as part of 3 to 12 month programs.
A cancellation clause in its contracts required customers to pay the entire cost of the program even if they had attended only one or two laser sessions. The ACCC took issue with that term as the cancellation fees were far greater than the cost to Advanced Hair of the early cancellation.
As a result, Advanced Hair has, amongst other things, amended it contracts, has established an Australian Consumer Law compliance program, and will be offering refunds of identified customers of 80% of the contract price less $150 for each laser therapy session that the customer attended.
What does this mean for you?
This case is indicative of the ACCC’s willingness to identify, investigate, and pursue businesses that continue to include unfair contract terms in their standard form contracts.
The consequences of being found to have unfair terms can be very serious; in addition to injunctions and declarations that terms are void and unenforceable, the courts can make a range of orders, including the payment of the ACCC’s costs of investigating and prosecuting an unfair contract term, that your business undergo compulsory Australian Consumer Law compliance training, or even that your use of unfair contract terms be advertised publicly.
Based on the nature of the ACCC’s allegations in the above-mentioned cases, it appears that the types of clauses which may be considered unfair include clauses allowing the service provider to unilaterally decide such important things as the term of the contract, the contract price, and the ‘penalties’ imposed on small businesses for breaches or early cancellation of contracts. The ACCC also appears to be particularly concerned about overly broad limitations of liability and indemnities in favour of the service provider.
If you use standard form contracts as part of your business, it is essential that you have those contracts reviewed by an experienced legal professional. As the test for unfairness is fact-dependent, it may not seem immediately obvious which terms are allowable, and which will cross the line to disadvantage small businesses and therefore become unfair terms for the purposes of the Australian Consumer Law.