As shown by recent contract law cases under the Australian Consumer Law, a small business can have unfair contract terms voided by a Court when a contract is offered by a B2B supplier on a take-it-or-leave-it-basis, the contract provisions are too one-sided in favour of the supplier, and resulted in harm to the small business complainant.
For a small business complainant faced with an unfair contract from a supplier, a first step may be to ask the supplier for changes to the business-to-business contract. If the supplier ignores a small business’s request for removal of the unfair contract terms, the small business complainant should obtain legal advice on possibly going to a Court or Tribunal to rule the unfair contract terms void and unenforceable under the Australian Consumer Law.1
In some cases, the Australian Competition and Consumer Commission (ACCC) may decide to take enforcement action against the supplier on behalf of a group of disgruntled small businesses. So far, the ACCC has succeeded in a number of Court cases against suppliers under this unfair contracts regime, without going to a final Court hearing. In these cases, the supplier gave formal undertakings to remove the unfair contract provisions affecting a group of small business complainants.
What types of Defence are available to a supplier facing an unfair contract claim?
The value of the goods or services in question must be below the statutory contract thresholds for challengeable unfair contracts, i.e. below $300,000 per annum or below $1 million for a multi-year contract, calculated as at the time the agreement was entered into and inclusive of all contingency payments.
In assessing the merits of the supplier’s defence to such a claim by a small business or a group of them, the Court or Tribunal considers factors including whether or not:
- the supplier’s one-sided terms and conditions can be justified as reasonably necessary to protect the supplier’s position,
- the terms and conditions are not ‘unfair’ to small business in the circumstances as a whole, and
- the terms and conditions do not create a significant imbalance in the rights and obligations of the parties.
Since the extension of protections under the Australian Consumer Law1 to small businesses on 12 November 20162 against ‘unfair’ provisions in ‘standard form contracts’ relating to supply of goods or services, the ACCC has succeeded in a number of cases in the Federal Court of Australia, to invalidate unfair contract terms for small business customers.
What are the types of unfair contract terms that have been invalidated so far by the Courts?
So far, unfair contract terms invalidated some in cases by individual consumers and others behalf of small business customers include:
- the supplier’s right to unilaterally vary a term or condition of the contract, including price;3
- a contract term which gives the supplier (but not the customer) the right to automatically renew the contract;4
- contract terms under which the customer is required to have a liability or give an indemnity to the supplier which are very onerous to the customer and too one-sided in favour of the supplier;5
- a contract term which gives the supplier but not the customer the right to terminate the contract.6
Unfair contract terms: Recent Cases
ACCC v JJ Richards & Sons Pty Ltd
On 13 October 2017 the Federal Court of Australia made orders against JJ Richards & Sons (with the company’s consent) declaring its standard terms and conditions as void due to being unfair to the small businesses it supplied.7
The court order cancelled about 2600 contracts issued by JJ Richards for its supply of waste services, and directed JJ Richards to enter into a compliance program of removing the unfair contract terms from all contracts with small business customers. These unfair terms were of the type set out at paragraphs 1 to 4 above. The contract also included clauses allowing JJ Richards to charge customers for services not supplied for reasons beyond the customer’s control, and for JJ Richards to have exclusive rights to remove waste from the customer’s premises.
JJ Richards’ ‘Service Agreement’ was a two-page contract applying to all its customers, with the client’s details inserted on the front and the Terms and Conditions printed on the back.
This was the first court action by the ACCC to enforce the new prohibitions in the Australian Consumer Law against unfair terms contained in a small business contract, issued as a ‘standard form contract’. The company did not contest the ACCC’s case, and the case proceeded on the basis of an agreed statement of facts. Therefore, the Federal Court has not yet fully considered this unfair contracts regime in relation to small business complainants.
ACCC v Servcorp Ltd
On 13 July 2018, the Federal Court declared void (again by consent) some terms of the standard form contracts used by Servcorp Parramatta and Servcorp Melourne 18 Pty Ltd (Servcorp) because they contained unfair terms.8 These unfair terms were of the type set out at paragraphs 2, 3 and 4 above. There was also a contract term that Servcorp could keep a customer’s security deposit if the customer forgot to ask for its return.
ACCC v Mitolo Group Pty Ltd
On 26 June 2018, the ACCC started legal action against Motolo Group Pty Ltd (Mitolo) seeking Court declarations that Mitolo’s contracts with potato farmers included unfair terms, including of the type set out at paragraph 1 above. This may become the first unfair contracts case to be tested in the Federal Court in the context of the supplier’s alleged contraventions of a mandatory industry code under the Competition and Consumer Act 2010. This case involves the Horticulture Code of Conduct.
The role of the ACCC: 2018 and beyond
What can a small business do about a supplier who offers unfair terms in take-it-all-leave-it contract? Ask the ACCC for help? Ask your lawyer to prepare a Letter of Demand to the supplier?
Under the Australian Consumer Law, the ACCC does not presently have the power to ask a Court to impose a penalty on a supplier offering a take-it-or-leave-it service agreement to small businesses containing unfair contract provisions. This means it is not illegal necessarily for a B2B supplier to have unfair contract terms. Rather, such terms and conditions become void and unenforceable under the Australian Consumer Law, once challenged successfully in a Court or the supplier gives the Court enforceable undertakings to remove the unfair contract provisions.
The ACCC can consider acting on complaints made by a group of small businesses suffering similar types of significant financial detriment under ‘unfair’ contract provisions of a supplier – usually a big business. For the ACCC to act in litigation, it must be an obvious test case which the ACCC can “win” and publicise as a warning to other big businesses, consistent with the ACCC Key Enforcement and Compliance Priorities for 2018.
Legal help in determining whether a contract term is unfair
If you are a small business facing significant financial detriment due to unfair standard form supply contract, do not delay taking action. Contact a lawyer and ask for legal advice on whether the Australian Consumer Law possibly applies to your situation. You can ask your lawyer to write the Letter of Demand to the supplier, setting out your concerns and explaining the consequences to a supplier refusing to remove unfair contract terms.
Not all cases against a business supplier for unfair standard form contract provisions will be taken up by the ACCC, and the ACCC would suggest you seek the advice of your own lawyer.
Already, a number of consumers have taken court action themselves, using the unfair contracts regime to successfully obtain court orders voiding the supplier company’s standard terms. 9 Usually, these court actions have been in front of a Tribunal, which is typically less complex than the procedures in the Federal Court. (Usually, ACCC litigation is in the Federal Court). The legal principles arising from these consumer cases would apply to cases brought by a small business.
So it may be time to talk to your business lawyer for initial legal advice on your situation. With this in mind, below is our summary of the main points of these laws for challenging an unfair contract.
What types of contracts are affected by the changes?
A ‘small business contract’ which is a ‘standard form contract’ containing a provision shown to be ‘unfair’, in relation to the supply of goods or services or the sale or grant of interest in land.
Financial services and financial products involving small businesses are covered by mirror provisions contained in the Australian Securities and Investment Commission Act 2001 (Cth).
What is a small business contract?
A contract for the supply of goods or services or the sale or grant of interest in land where:
- at least one party to the contract was a small business (i.e. the business that had fewer than 20 persons); and
- the upfront price did not exceed $300,000 on a contract less than 12 months duration; or the upfront price payable does not exceed $1 million for a contract longer than 12 months duration.
Some franchise agreements may fall within the definition of a ‘small business contract’ with protections under the unfair contracts regime, as discussed further in our separate Blog post on the application of Australian Consumer Law to franchises.
Exclusions are: shipping contracts, company constitutions, managed investment schemes under the Corporations Act 2001, and insurance contracts.
What is an ‘unfair term’ ?
A term of a 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.
Things relevant to determining whether a term of a contract is ‘unfair’ include:
- the form of the contract as a whole (i.e. not just that provision in isolation); and
- the extent to which the term is transparent (i.e. expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term).
It is not necessary to show that the challenged term is not in ‘good faith’, but showing bad faith is involved could result in the term being ‘unfair’.
What is a standard form contract?
Some indications a contract is a ‘standard form contract’ include that:
- the form of the contract was offered on a “take it or leave it” basis;
- the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
- one party was not given an effective opportunity to negotiate the terms of the contract;
- the contract does not take into account the specific characteristics of the particular transaction, or of a contract party;
- one of the parties has most of the bargaining power relating to the transaction.
The above do not affect the rights of the supplier to stipulate the upfront price payable under the contract, plus the goods and services offered.
Effect of having an unfair contract term
The ‘unfair’ contract provision will not be binding on the parties to the contract but the rest of the contract will continue to apply, to the extent it is capable of doing so.
Only a court or tribunal can decide if the contract provision is ‘unfair’. So it would involve an application to a court or tribunal, if the other party to the contract refuses to remove the ‘unfair’ term.
Unfair Contract Terms and the ACCC’s educational role
The ACCC has published much information on the extension of the unfair contracts regime to small business, including tips on how to determine if a contract provision is ‘unfair’, and a webinar hosted jointly with ASIC on 16 March 2016. The ACCC has also published a report on the results of its review of unfair contracts in industries that heavily rely on issuing its own ‘standard form’ contract to all customers without negotiation of its terms with the customer.
Compensation for an unfair contract term
If you think you are in a contract with “unfair” terms, talk to us about your next step, including possibly seeking compensation for losses resulting from the “unfair” term.
- Part 2-3 of the Australian Consumer Law contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth);
- Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth);
- ACCC v JJ Richards, ACCC v Servcorp Limited, ACCC v ByteCard Pty Limited (NetSpeed Internet Communications) Unreported decision, 30 July 2013;
- ACCC v JJ Richards, ACCC v Servcorp, Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited (No 2)  FCA 144, Edelman J, 1 March 2016;
- ACCC v JJ Richards, ACCC v Servcorp, Australian Competition and Consumer Commission v CLA Trading Pty Ltd  FCA 377 (19 April 2016) Gilmour J;
- ACCC v JJ Richards, ACCC v ByteCard Pty Limited;
- Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd  FCA 1224 (13 October 2017) Moshinsky J;
- Australian Competition and Consumer Commission v Servcorp Limited  FCA (13 July 2018) Markovic J;
- For instance, Qamaruddin v Kolak Living Pty Limited (Civil Dispute)  ACAT 45.