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Are non-disparagement clauses used in standard business contracts always unfair terms?

Businesses insert non-disparagement clauses into their standard business contracts to protect against customer comments which may damage their reputation.

A typical non-disparagement clause takes this form:

The parties agree that they will not, in connection with the [work, products, etc.], make or publish any adverse, disparaging or other comments that are intended to, or have the effect of, bringing another party into disrepute.

The prohibition is on publishing disparaging comments which these days, are posts on social media, especially review and news platforms.

Businesses use non-disparagement clauses to force customers to remove their posts, knowing that social media administrators rarely remove disparaging posts if the business makes the request. Guided by the US First Amendment: “Congress shall make no law … abridging the freedom of speech, or of the press”, in the interests of free speech, social media administrators only remove posts if they are particularly offensive, that is, if they are ‘harassment’ or ‘hate speech’.

Non-disparagement clauses are often used in settlement deeds for legal claims and legal proceedings. In this article we examine four instances where they were used in standard business contracts.

The Australian Consumer Law gives the ACCC power over non-disparagement clauses

Since July 2010, the Australian Competition and Consumer Commission (ACCC) has had the power under ss 23 and 24 of the Australian Consumer Law (ACL) to declare non-disparagement clauses used in standard business contracts to be void if they are unfair terms.

The ACCC has tested its power 4 times to date. It has been successful every time. The ACCC has obtained enforceable undertakings from 2 companies not to use non-disparagement clauses and had the Court declare non-disparagement clauses void in 2 proceedings. This is a summary:

Undertaking by 101 Residential Pty Ltd

The facts were that between October 2014 and August 2017, 101 Residential, a home building company, included a non-disparagement clause in an annexure to its standard form building contract. By that clause, 101 Residential prohibited consumers from publishing or disseminating unapproved information or material disparaging or harmful to its business interests, such as online posts, blogs, comments and reviews, without its prior written consent.

The clause provided that if the consumer was in breach, 101 Residential was appointed the consumer’s attorney to remove the offending information or material; or it could suspend the work on the consumer’s building site; or could terminate the building contract.

The ACCC considered the clause to be an unfair term. That is, the clause failed all three tests under s 24(1) of the ACL:

“24 (1) A term of a consumer contract or small business contract is unfair if:

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

101 Residential undertook that for 3 years it would not include a non-disparagement clause in its building contracts which prevented or prohibited or imposed sanctions upon consumers for publishing or disseminating genuine feedback and/or information relating to its building services.

See s87B Undertaking – 101 Residential Pty Ltd – signed 15 December 2017.

Undertaking by Wisdom Properties Group Pty Ltd

The facts were that since July 2010, Wisdom, a residential building company, included non-disparagement clauses in at least 3,000 of its standard form building contracts. The clauses allowed Wisdom to control any public statements made by customers about the services provided by Wisdom under the contract.

The clauses provided for suspension and termination of the building contract and an unlimited indemnity against the customer.

The ACCC considered the clauses to be an unfair terms for the same reasons as in 101 Residential.

Wisdom undertook that for 3 years it would not include non-disparagement clauses in its building contracts which: prevented customers from making any public statements about their experiences with Wisdom or Wisdom’s performance; or required Wisdom’s consent before a customer could make a public statement; or provided that Wisdom could determine the time and wording of public statements; or provided Wisdom with an unlimited indemnity against a customer for loss arising from any public statement.

See Section 87B Undertaking - Wisdom Properties Group Pty Ltd - signed 5 June 2018

ACCC proceedings against Mitolo Group

The Mitolo Group is Australia’s largest fresh potato wholesaler and packer. The Mitolo Group included non-disparagement terms in contracts by which it bought potatoes from growers. They had the effect of:

  1. preventing the grower from raising with or disclosing to third parties legitimate issues or concerns that may have indirectly had a negative effect on the reputation of the Mitolo Group’ business or Licensed Varieties of seed potatoes, including where that may have been justified;
     
  2. limiting the steps that a grower could take and evidence it could adduce in seeking to enforce its contractual rights against the Mitolo Group; and
     
  3. exacerbating detriment caused by other unfair terms by limiting the growers’ ability to challenge the validity of those terms insofar as that may have had a negative effect on the reputation of the Licensed Varieties or the Mitolo Group’s business.

The Court declared the terms were unfair terms and were void. See Australian Competition and Consumer Commission v Mitolo Group Pty Ltd [2019] FCA 1257 (2 August 2019) (Federal Court of Australia, Murphy J)

ACCC proceedings against Smart Corporation (A4WD)

The facts were that A4WD, a hirer of 4-wheel drive vehicles, included a non-disparagement clause in its standard form hire contract.

One version of the non-disparagement clause was that the hirers 'warranted' that they:

will at all times act in the best interests of the Company's business and interests and will not defame or denigrate the Company or its employees, agents or servants following the return of the Vehicle, including but not limited to leaving misleading, deceptive or defamatory reviews on any website or other form of online forum.

The Court was satisfied that the clause was an unfair term under all three paragraphs of 24(1):

  1. “The Non-Disparagement Clause was entirely in A4WD's favour, and imposed on hirers obligations they would not have in its absence. Taking into account the contract as a whole, nothing in it counterbalanced or ameliorated this. Rather, there was a general indemnity for breach of contract as well as a right to deduct from the security bond, which exacerbated the imbalance.” (i.e. created a significant imbalance - see paragraph (a))
     
  2. “There is nothing to suggest that a clause of this kind was necessary to protect the legitimate interests of A4WD in what was, after all, likely to be a short term transaction rather than an ongoing relationship calling for duties to act in the interests of the other party. To require a hirer as a party to that kind of transaction to act in the best interests of the company is extraordinary.” (i.e. not reasonably necessary to protect legitimate interests - see paragraph (b))
     
  3. "It could also cause financial detriment because if the term was breached, the hirer could be liable to indemnify A4WD or pay damages.” (i.e. caused detriment - see paragraph (c))

The Court made these comments on the drafting of the clause, which could assist in the drafting of a clause which complies with s 24(1):

“While a prohibition on misleading or deceptive reviews could be reasonable, the prohibition went further than that. It is possible to defame and denigrate someone by expressing views which are not only genuinely and honestly held, but are also true.”

“The fact that from May 2019 the obligation to act in A4WD's best interests only applied during the term of the hire reduced the significant imbalance, but did not eliminate it. The term still exceeded what was reasonably necessary to protect the company's legitimate interests.”

The Court declared the clause was an unfair term and was void. See Australian Competition and Consumer Commission v Smart Corporation Pty Ltd (No 3) [2021] FCA 347 (15 April 2021) (Federal Court of Australia, Jackson J).

Conclusions

Non-disparagement clauses used in standard business contracts are not always unfair terms. But the bar is set high.

As these undertakings and court rulings demonstrate, most non-disparagement clauses in standard business contracts are likely to fail the three tests of: (a) create a significant imbalance in parties’ rights, (b) not reasonably necessary to protect legitimate interests, and (c) cause detriment if applied, set out in s 24(1) of the Australian Consumer Law.

If used, non-disparagement clauses must be carefully drafted so as to satisfy at least one of the three tests.

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