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Not fair game

Not fair game

By Rebecca Neophitou

Consumer Law 

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ACCC v JJ Richards is the first successful prosecution involving unfair terms in small business contracts. It is likely to have a significant impact on commercial practices.

Snapshot:

  • ACCC v JJ Richards is a landmark case, being the first case to test the 2016 amendments to the UCT laws applying to B2B transactions.
  • The regulator successfully argued that the standard form contract used by JJ Richards contained unfair terms and was, therefore, void.
  • The decision of the Court and the ACCC’s focus on ensuring compliance with the new law has significant ramifications for businesses and their legal advisers.

Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd (JJ Richards)1 is the ACCC’s first business to business (B2B) prosecution involving unfair contract terms in standard form contracts since the passing of the amendments to the Australian Consumer Law (ACL) in November 2016.2 It is important for three reasons:

  • the Court has shed light on the interpretation of the amendments
  • in bringing this (and a subsequent)3 prosecution the ACCC has reaffirmed its stated aim to prioritise the unfair contract terms (UCT) regime
  • the decision has sent an unmistakable message to large businesses that they must ensure that their contracts do not constitute an abuse of power.

 

Facts

The case against JJ Richards centred on claims by the ACCC that the company, a major waste management company providing recycling and collection services to business across Australia, had contravened the prohibition of UCT in its service agreements with its clients, some of which were small businesses. The company entered into some 26,000 such agreements, the vast majority of which contained standard terms. In its communication with JJ Richards, the ACCC had expressed its concerns over some of these terms, particularly those relating to automatic renewal, unilateral variation, limited liability and wide indemnities.4

Under the amendments, a term in a “small business” contract (ie, where at least one party is a business that employs fewer than 20 persons and the upfront price payable under the contract does not exceed $300,000 or $1 million if the contract has a duration of more than 12 months),5 breaches the UCT provisions of the ACL if the contract is a “standard form contract” and its terms are “unfair”. The JJ Richards’ service contracts were clearly “standard form contracts” (presented on a “take it or leave it” basis and not open to negotiation) and many of its clients were companies that employed fewer than 20 people with the upfront price payable under the contracts not exceeding the prescribed caps. Therefore, the key issue was whether the terms included in JJ Richards’ standard form B2B contracts were “unfair”.

Under s24(1) of the ACL, a term in a small business contract is unfair if it satisfies the following three criteria:

  • the term must be heavily one-sided and cause a “significant imbalance” between the parties
  • it must not be reasonably necessary to protect the legitimate interests of the business that would benefit from the term
  • it must cause detriment (financial or otherwise) to the weaker party (ordinarily the small business).
  • The Federal Court examined eight clauses in the small business contracts used by JJ Richards and declared they were “unfair” within the meaning of the ACL. The clauses under consideration:
  • bound JJ Richards’ customers to further like contracts if not cancelled within 30 days of the contract’s end date
  • permitted JJ Richards to increase its prices giving 30 days’ notice and without explanation
  • limited the company’s liability under the contract where performance of its waste management obligations were “prevented or hindered in any way”6 notwithstanding the customer was not to blame
  • allowed JJ Richards to charge a fee where the company attended customer premises and was unable to perform the service, even if non-performance was for reasons outside the customer’s control
  • granted the company exclusivity rights of its services, preventing the customer from sourcing another waste service provider in the event that additional services were required
  • enabled JJ Richards to suspend services and continue to charge customers where payment was not received within the prescribed seven day period
  • provided unlimited indemnity to the company irrespective of no fault on the customer’s part
  • prohibited customers terminating contracts where customers had payments outstanding and allowed JJ Richards to continue to charge for equipment rental following contractual termination.

Decision

The Federal Court decided that each of the terms was “unfair”. For instance, one of the terms included a broad indemnity extending liability for loss to customers for actions outside the customers’ control and including liability for loss that “could have been avoided or mitigated”7 by the company. The Court held this term was unfair because it “tilted” the parties’ rights and obligations under the contract significantly in favour of JJ Richards (no equivalent benefit was given to JJ Richards’ customers) and was not necessary to protect a legitimate interest of JJ Richards.

Importantly, in determining whether the term caused a significant imbalance in the rights and obligations of the parties, the Court considered the contract as a whole to see whether other terms “ameliorate(d) the impact of the impugned terms”.8 Moshinsky J concluded that they did not. Significantly the Court held the “overall imbalance between the parties and the risk of detriment to JJR Customers”9 was exacerbated by the cumulative effect of other impugned terms.

The automatic renewal clause was cited as an example. This clause, together with the right of JJ Richards to unilaterally vary prices, the exclusivity clause and termination clause “interact[ed] in a way that [was] even more detrimental to JJR customers”.10

The Court also concluded that the contract lacked the required degree of transparency. It reached this conclusion because of the excessive use of “legalese”, the inaccessibility of the contract to the small business customer and the fact that the impugned terms could not be distinguished from the other terms in a “densely packaged” contract.

Court orders

Under the UCT regime there are no penalties for breach. However, the court orders (by consent) were significant, requiring JJ Richards not to apply or rely on the relevant terms, and to post a corrective notice on its website, forward a copy of the orders to each client that had signed the standard form agreement and implement an ACL compliance program for three years.

Commentary

Although JJ Richards did not contest the case, the decision provides useful insight on the interpretation of unfair terms in B2B contracts. What is evident is that the UCT laws governing B2B transactions are based on those in standard business to consumer (B2C) contracts (where a number of disputes have reached the courts). The three pronged test for unfairness and the matters the court considers in making an assessment on whether a term in a B2C standard contract is unfair (including the extent to which the term is transparent) were applied by the Court in JJ Richards, albeit in a small business context. Importantly, the Court recognised that assessing whether a term is unfair can involve considering a term on its own or its effect together with other contractual terms. The ACCC’s forthcoming prosecution against Servcorp should offer additional guidance on the types of terms in small business contracts considered unfair, particularly if Servcorp continues to “vigorously defend”11 itself.

The case also reaffirms the ACCC’s commitment to make the UCT regime a key priority.12 By instigating legal action against JJ Richards, the regulator signalled a more proactive stance in ensuring compliance by businesses with the B2B UCT provisions.

The decision signifies the need for careful drafting and review of terms in standard form business contracts to ensure adherence to the new law, protection of the parties' “legitimate interests” and avoidance of potential action by the regulator.

The starting point for businesses is to inform themselves of terms identified as problematic by the ACCC13 and declared by the Court as “unfair”. Terms incorporated into relevant B2B contracts must be drafted in a way that strikes an appropriate balance in respect of the rights and obligations of the parties. Clauses providing for automatic renewal, allowing unilateral variation of terms, granting exclusivity, providing wide indemnities and others of the same nature as those listed in s25 of the ACL should be reviewed.14

The decision also sends a clear message to companies that it would be prudent for them to assess whether the terms in their contracts are transparent. This requires considering the language, presentation and accessibility of the terms. Additionally, considering whether terms alone and in conjunction with other terms may be unfair is essential. This is a particular must in relation to indemnity clauses in order to avoid unexpected liability.

Although the declaration was by consent, the decision has significant commercial implications. For businesses, the incorporation of terms into their contracts that are most advantageous to their operations yet still competitive in the market and attractive to small business clients is essential. So too is ensuring the types of terms included in their standard form business contracts do not violate the UCT laws. This prevents or at the very least minimises possible prosecution by the watchdog. Ultimately security to businesses against damage to reputation and financial standing will be curbed.

 

Rebecca Neophitou holds a BA, LLB, LLM and Dip Ed from Monash University. She is a scholarly teaching fellow in the Department of Business Law and Taxation at the Monash Business School, Monash University.

 

1. [2017] FCA 1224.

2. On 12 November 2016 the ACL extended UCT provisions to certain small B2B contracts. Protection from UCT had previously only applied to consumer transactions.

3. Australian Competition and Consumer Commission, “ACCC takes action against Servcorp for alleged Unfair Contract Terms”, Media Release, 15 September 2017, www.accc.gov.au/media-release/accc-takes-action-against-servcorp-for-alleged-unfair-contract-terms.

4. The ACCC wrote to JJ Richards and referred the company to its report titled, “Unfair terms in small business contracts: A review of selected industries”, November 2016, www.accc.gov.au/system/files/B2B%20UCT%20-%20Final%20-%20Unfair%20terms%20in%20small%20business%20contracts%20%20A%20review%20of%20selected%20industries_0pdf.

5. Competition and Consumer Act 2010 (Cth), Schedule 2, s23(4).

6. Note 1 above, at [13] and [25].

7. Note 1 above, at [56(g)].

8. Note 1 above, at [63].

9. Note 1 above, at [63].

10. Note 1 above, at [56(a)] and [61].

11. Cara Waters, “Court rubbishes JJ Richards small business contracts”, The Sydney Morning Herald (online), 19 October 2017, www.smh.com.au/business/small-business/court-rubbishes-jj-richards-small-business-contracts-20171019-gz3uld.html.

12. See Australian Competition and Consumer Commission, “2017 ACCC Compliance and Enforcement Policy” (February 2017): www.accc.gov.au/system/files/ACCC%20Compliance%20and%20Enforcement%20Policy%202017.pdf and Australian Competition and Consumer Commission, “Small business in focus – 1 January to 3 June 2017” (July 2017), www.accc.gov.au/system/files/1233_Small%20business%20in%20focus%20%2314_D11.pdf.

13. Note 4 above, p2 and pp5-24.

14. Section 25 lists examples of potentially unfair terms in consumer and small business contracts.


Disclaimer: Views expressed by commentators are not necessarily endorsed by the Law Institute of Victoria Ltd (LIV). No responsibility is accepted by the LIV for the accuracy of information contained in the comments and the LIV expressly disclaims any liability for, with respect to or arising from any such views.

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