The Federal Court declares eight standard form contract clauses to be void because they are unfair to small businesses

Until recently, small businesses were powerless in the face of unfair standard form clauses, such as for automatic renewal, termination and price increases. They simply had to take it or leave it.

On 12 November 2016, the new business-to-business (B2B) unfair contract terms laws came into effect and gave small businesses the same rights as consumers enjoy.

Now for the first time, the new laws have been before the Federal Court which has declared eight standard form clauses to be void because they are unfair to small businesses.

The decision of Federal Court of Australia is Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 (13 October 2017).

Justice Moshinsky declared that the clauses were unfair contract terms under section 24, and were void under section 23, of the Australian Consumer Law. He granted injunctions to prevent their future use, ordered a corrective notice on the website and a copy of the orders be sent to each small business it had contracted with.

The decision has wide ramifications for standard form contracts used in Australia.

This article contains a transcript of the eight clauses and a summary of the reasons why the clauses were unfair.

The ACCC’s enforcement of the unfair contract terms laws

In November 2016, the ACCC published a report: Unfair terms in small business contracts: A review of selected industries in which it identified ‘common terms of concern’ such as: Automatic renewal, Unilateral variation and Limited liability and wide indemnities.

On 28 March 2017, the ACCC issued a media release: Unfair contract terms under scrutiny in which the ACCC signalled it was investigating standard form contracts used in a number of industries which contained what it considered to be unfair clauses.

On 6 September 2017, the ACCC issued a media release: ACCC takes JJ Richards to court over alleged unfair contract terms. “This is the first time the ACCC has taken court action to enforce the new laws that protect small businesses from unfair contract terms,” ACCC Deputy Chair Dr Michael Schaper said.

On 19 October 2017, the ACCC issued a media release: JJ Richards contract terms declared unfair and void. “The Federal Court has declared, by consent, that eight terms in the standard form contract used by JJ Richards & Sons Pty Ltd (JJ Richards) to engage small businesses are unfair, and therefore void, following ACCC action.”

The proceedings against JJ Richards

The ACCC chose an appropriate target to test the unfair contract terms laws in JJ Richards.

JJ Richards is one of the largest privately-owned waste management companies in Australia. It provides recycling, sanitary, and green waste collection services.

The unfair contract terms laws protect small businesses which are defined as employing less than 20 people and apply where the contract is worth up to $300,000 in a single year or $1 million if the contract runs for more than a year.

JJ Richards had entered into 26,000 contracts, including small business contracts, from 12 November 2016 to September 2017. They all contained standard terms and conditions (except for a handful).

After the unfair contract terms laws were introduced in November 2016, JJ Richards did not change its standard clauses or engage with the ACCC to redraft them to reduce their unfairness. This was despite correspondence with the ACCC between December 2016 and April 2017.

In September 2017, once legal proceedings commenced, it acted quickly to reach agreement with the ACCC to strike out eight of its standard form clauses.

The Federal Court was requested to make declarations in accordance with the agreement, and in doing needed to consider the three requirements of section 24 of the Australian Consumer Law of what is an unfair contract term, namely:

A term of a consumer contract or small business contract is unfair if:

it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The eight standard form clauses the Court declared void and the Court’s reasons why

A transcript of each clause, followed by a summary of the Court’s reasons, now follows:

The automatic renewal clause

The Term Both Parties agree the prices overleaf reflect a long-term relationship and that is the spirit of the agreement.

The term of this agreement shall be for an initial period of [initial term] years.
The term shall be automatically renewed for further periods of [initial term] years thereafter unless terminated by either party giving written notice within 30 days prior to the end of the initial term or any renewed term.

The Court The limited period of time within which a JJR Customer can terminate the contract and the lack of any requirement in the contract for JJ Richards to provide notice to a customer that the contract is about to expire and … the automatic renewal … creates a significant imbalance in the respective rights and obligations of the parties ... [because] small businesses have limited resources and … may not have effective systems in place to identify the termination period for their waste management contract. The automatic renewal clause is not reasonably necessary to protect JJ Richards’ legitimate interests [because] contracts with JJR Customers are usually low value, with a low marginal cost to JJ Richards for each additional customer.
The price variation clause

Price Variations JJR may adjust its prices during the term of the agreement for reasons such as but not limited to increased operation costs, changes in disposal fees, site profitability, changes to disposal facility locations or increased government charges and levies by giving customers 30 days notice of such increase.

The Court The .. clause allows JJ Richards to unilaterally increase the price of JJR Waste Management Services for any reason. It creates a significant imbalance because there is not any corresponding right given to the JJR Customer to terminate the contract or obtain a change in the scope or scale of the service provided by JJ Richards or a lower price, [and it] goes beyond what is reasonably necessary in order to protect JJ Richards’ legitimate interests.
The agreed times clause

Agreed Times JJR will use all reasonable endeavours to perform the collection at the times agreed but accepts no liability where such performance is prevented or hindered in any way.

The Court … JJ Richards is better placed than the JJR Customer to manage or mitigate the risk of the prevention or hindrance occurring. The agreed times clause causes a significant imbalance in the parties’ rights [and goes beyond what is reasonably necessary to protect JJ Richard’s legitimate interests] by absolving JJ Richards of its performance obligations and requiring JJR Customers to assume the risk of non-performance under circumstances that they do not control, without any corresponding benefit to JJR Customers.
The no credit without notification clause

No credit without notification. Unless previously notified JJR shall be entitled to render charges for the service if it attends the customer’s premises and is unable to perform the service due to holiday closure, lack of access or other reason. All credit requests must be within 14 days of invoice date.

The Court The … clause allows JJ Richards to charge JJR Customers for services it has not rendered for reasons beyond the JJR Customer’s control or potentially even for reasons that are due to circumstances within JJ Richards’ control, such as failure of its equipment. ... Further, the clause puts the onus on the JJR Customer to make a credit request, even if the non-performance is in no way the fault of the JJR Customer. This causes a significant imbalance in the parties’ rights and obligations under the contract [and] goes beyond what is reasonably necessary to protect JJ Richards’ legitimate interests.
The exclusivity clause

The customer agrees to: Grant JJR exclusive rights to the removal of waste, recyclables, combustible liquids and dangerous goods from the premises specified and not engage a second party for waste, recyclables, combustible liquids and dangerous goods removal during the term of this agreement.

The Court The … clause requires JJR Customers to obtain all their waste management services from JJ Richards, even when the JJR Customer is seeking additional services to those provided by JJ Richards. … [This] causes a significant imbalance in the parties’ rights and obligations under the contract, because it limits JJR Customers’ general right to contract with whomever they want. The exclusivity clause goes beyond what is reasonably necessary to protect JJ Richards’ legitimate interests [because it] does not need to have exclusivity in relation to waste management in order to conduct its business
The credit terms clause

Credit terms 7 days The customer agrees to pay for the service subject to the credit terms and acknowledges service may be suspended if payment is not received. During the period of suspension normal charges will apply to cover expenses associated with the overdue payment including but not limited to, interest, administration, legals and equipment capital return.

The Court The … clause … allows JJ Richards to suspend services if payment is not received … [and] to continue charging the JJR Customer while services are suspended to cover costs associated with the overdue payment. This term creates a significant imbalance in the parties’ rights and obligations under the contract, because it confers no corresponding right on JJR Customers, such as the right to withhold payment for the failure to provide services or pass on associated costs that JJR Customers may incur as a result of such a failure. The short credit term of seven days and the obligation on the JJR Customer to pay “normal charges” during suspension without any limitations, irrespective of whether JJ Richards had in fact incurred any expenses, goes beyond what is reasonably necessary to protect JJ Richards’ legitimate interests.
The indemnity clause

Indemnity To the maximum extent permitted by law, the customer shall be responsible for and indemnify JJR from and in respect of all liabilities, claims, damages, actions, costs and expenses which may be incurred by JJR on a full indemnity basis (whether successful or not) as a result of or arising out of or otherwise in connection with this agreement, including any breach by the customer of any of the warranties, covenants and conditions herein.

The Court The … clause creates an unlimited indemnity in favour of JJ Richards, even where the loss incurred by JJ Richards is not the fault of the JJR Customer or could have been avoided or mitigated by JJ Richards. There is no corresponding benefit for the JJR Customer. This broad indemnity causes a significant imbalance in the parties’ rights and obligations under the contract [and] goes beyond what is reasonably necessary to protect JJ Richards’ legitimate interests.
The termination clause

No termination without final payment. Payment in full of all monies outstanding must be made before this agreement can be terminated. The equipment will not be removed until such payment is made and rental for the equipment may be charged if delays in payment of the final account occur.

The Court The … clause prevents JJR Customers from terminating their contracts with JJ Richards if they have payments outstanding and entitles JJ Richards to continue charging JJR Customers equipment rental after the termination of the contract, despite the fact that no services are provided. This causes a significant imbalance in the parties’ rights and obligations under the contract as the JJR Customer has no corresponding right and obtains no benefit from the term. JJ Richards could recover those funds through ordinary legal recovery processes. JJ Richards could also charge interest for outstanding fees. By enabling JJ Richards to continue to charge JJR Customers for equipment they no longer require or enjoy, in circumstances where JJ Richards could recoup outstanding fees through other means, this clause goes beyond what is reasonably necessary to protect JJ Richards’ legitimate interests in recovering outstanding monies.

Conclusion and recommendations

Any business which has not reviewed their standard form contract terms since the unfair contract terms laws started in November 2016 risks a double jeopardy: defending civil proceedings by the ACCC and facing demands from small business customers who want to avoid liability, especially for payment obligations.

All businesses need to check their standard clauses against the eight standard form clauses the Court declared to be unfair in the JJ Richards case. And if their clauses are similar, they need to either remove or redraft those clauses to comply with section 24 of the Australian Consumer Law when they contract with small businesses.

Small businesses may be able to rely on the unfair contract terms laws to defeat demands made under unfair automatic renewal, termination and price increase clauses in standard form contracts, if the clauses correspond with the clauses in the JJ Richards contract.