In November 2016,1 the Australian Consumer Law2 was amended to prohibit unfair provisions in ‘standard form contracts’ for the supply of goods or services to small businesses. Since then, the Australian Competition & Consumer Commission (ACCC) has won several cases in the Federal Court, where unfair contract terms imposed on small business customers by bigger businesses have been invalidated. We look at the examples up to 2019 and the lessons from them.
You might have signed a contract with a bigger business, with or without gritted teeth, but its terms may go against the ‘unfair contract’ provisions of the Australian Consumer Law. In these recent cases brought by the ACCC, business-to-business (B2B) contracts were offered by a supplier on a take-it-or-leave-it-basis, or the contract terms were one-sided in favour of the supplier, resulting in harm to the small businesses complaining, and were thus held to be unenforceable.
For a small business saddled with an unfair business-to-business contract from a supplier, the first step is to ask the supplier for changes to the contract. If the supplier ignores this request, you should get legal advice. In some cases, it may be advisable to commence legal action against the supplier to have unfair contract terms declared void and unenforceable under the Australian Consumer Law.2
The ACCC can take enforcement action against suppliers on behalf of a group of small business clients over unfair contract terms by going to Court and asking for the contract to be declared void. So far, the ACCC has won several cases against suppliers this way without even proceeding to a court hearing, because the suppliers involved settled the cases by promising to remove the unfair contract terms. 3 Generally, however, for the ACCC to act or litigate, 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. You may need to take legal action independently. You should get legal advice.
The New Vibe: what types of unfair contract terms have been invalidated so far by the Courts?
So far, contract terms held to be unfair, for both individual consumers and small business customers, include:
- A supplier right to unilaterally vary a term or condition of the contract, including price;4
- Contract terms giving the supplier, but not the customer, the right to automatically renew the contract;5
- Contract terms where customers are required to accept liability or give an indemnity to the supplier in circumstances where that is burdensome for the customer and too one-sided in favour of the supplier;6
- Contract terms which give the supplier, but not the customer, the right to unilaterally terminate the contract.7
What defences are available to a supplier facing an unfair contract claim?
For these parts of the Australian Consumer Law, the value of the goods or services in question must be below $300,000 per year or below $1 million for a multi-year contract, calculated at the time of the contract and including all contingency payments.
In assessing the supplier’s case, the Court or Tribunal considers factors including whether:
- 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 the small business in all the circumstances; and
- the terms and conditions do not create a significant imbalance in the rights and obligations of the parties.
ACCC v JJ Richards & Sons Pty Ltd
In October 2017 the Federal Court of Australia made orders against JJ Richards & Sons, with the company’s consent, declaring its standard contract terms and conditions to be void because they were unfair to the small businesses it supplied with waste removal services.8
The Court’s orders cancelled about 2,600 contracts issued by JJ Richards for waste removal services and directed it to implement a ‘compliance program’ of removing the unfair terms from all its contracts with small business customers. These unfair terms were of the type set out in points 1 to 4 above. The contracts also included clauses allowing JJ Richards to charge customers for services not supplied, even for reasons beyond customers’ control, and giving JJ Richards exclusive rights to remove waste from customers’ premises.
JJ Richards’ ‘Service Agreement’ was a two-page contract applying to all its customers, with client 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 small business ‘standard form contracts.’ The case was settled before hearing, so the Federal Court did not need to consider this new unfair contract regime for small businesses fully.
ACCC v Servcorp Ltd
Then, in July 2018, the Federal Court declared void, again by consent, some terms of standard form contracts used by Servcorp Parramatta and Servcorp Melbourne 18 Pty Ltd because they contained unfair terms9 of the types in points 2-4 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, which was found to be unfair. Servcorp was forced to remove unfair terms from its contracts, implement a ‘compliance program,’ and pay costs.
ACCC v Mitolo Group Pty Ltd
In June 2018, the ACCC started legal action against potato wholesaler Mitolo Group Pty Ltd over its contracts with potato farmers, which included unfair terms of the type at point 1 above. This was also the first unfair contract case to be tested in the Federal Court in the context of Mitolo’s alleged infringements of a mandatory industry code, the Horticulture Code of Conduct, under the Competition and Consumer Act 2010. The Federal Court held in 2019 that Mitolo had breached the Code and the unfair contract provisions of the Australian Consumer Law and fined it $240,000 and $50,000 costs.10
ACCC v Ashley & Martin Pty Ltd
In September 2019,11 the Federal Court found that hair-loss giant Ashley & Martin breached the unfair contracts provisions of the Australian Consumer Law with one-year consumer contracts which included terms of the type at point 4 above, which allowed only a two-day cooling-off period in which to get independent medical advice as to whether treatment would be safe. Where clients received medical advice that the treatment would not be appropriate for them and cancelled more than two days later, Ashley & Martin were refusing to refund the payment for the balance of the contract. Where clients developed side-effects to the treatment, they took the same stance.
The ACCC argued successfully that this was unfair because it meant that only Ashley & Martin could terminate the contract and not the client. The contract should have included a longer cooling-off period to get medical advice and the opportunity to exit the contract if side-effects emerged. Fair’s fair – losing your hair is unfair enough already!
You have to take action yourself!
Before you get too warm and fuzzy about the happy justice of the new vibe, remember that inspectors do not enforce the unfair contracts rules. The more savvy bigger companies will get lots of legal advice to make sure their contracts with consumers and small businesses comply with the rules. If you are offered a contract with unfair terms, you may have to take it to your lawyers and perhaps the ACCC before something will be done. It is not illegal to offer unfair terms, but they might be ruled to be unenforceable if the other party goes to Court.
Legal help with unfair contract terms
If you are a small business facing significant financial detriment due to an unfair ‘standard form’ supply contract, do not delay. Contact a lawyer and get legal advice on whether the Australian Consumer Law possibly applies. Your lawyer can write a Letter of Demand to the supplier, setting out your concerns, and explaining the consequences to a supplier of refusing to remove unfair contract terms. If that doesn’t work, you will need further legal advice on your options.
Some helpful Tribunal judgements have declared void a supplier company’s standard terms for being unfair.12 Tribunal proceedings are typically less complicated than in the Federal Court, and the same legal principles would apply to cases brought by small businesses as applying to these consumer case judgements.
What types of contracts are affected by the changes to the ACL?
The Australian Consumer Law (“ACL“) covers a ‘small business contract,’ which is a ‘standard form contract’ for the supply of goods or services or the sale or grant of an interest in land.
The UCT regime covers financial and insurance contracts too
Financial services and financial product contracts are covered by mirror provisions in the Australian Securities and Investment Commission Act 2001 (Cth) (“ASIC Act“) applying to “a contract that is a financial product” or “a contract for the supply, or possible supply, of financial services.” 13
From 5 April 2021, insurance contracts will also be covered by the unfair contract terms regime, due to changes to the Insurance Contracts Act 1984 (Cth) and the ASIC Act. 14
The ACC has enjoyed similar success in cases brought under the unfair contract terms (“UCT”) regime in the ASIC Act. On 19 April 2016, the Federal Court declared that several terms in Europcar Australia’s 2013 standard rental agreement to be unfair, and therefore void. Europcar was also ordered to pay a penalty of $100,000 for making false or misleading representations about consumers’ liability in the event of vehicle damage.15
What is a small business contract?
It’s a contract for the supply of goods or services or the sale or grant of an interest in land where:
- at least one party to the contract is a small business, i.e., the business has fewer than 20 employees; and
- the upfront price payable does not exceed $300,000 on a contract for less than 12 months, or the upfront price does not exceed $1 million for a contract longer than 12 months.
Some franchise agreements may fall under the definition of a ‘small business contract’ for the unfair contracts regime, as discussed further in our blog post on the application of the ACL to franchises.
Excluded are insurance contracts entered into before 5 April 2021 and shipping contracts, company constitutions, and managed investment schemes under the Corporations Act 2001.
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 under the contract; and
- it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged; and
- it would cause detriment, financial or otherwise, to a party if it were to be applied or relied on.
Things relevant to determining whether a contract term is unfair include:
- assessment 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.
It is not necessary to show that the challenged term is not ‘in ‘good faith,’ but showing that bad faith is involved could assist with the provision being found to be unfair.
What is a standard form contract?
Some signs that a contract is a ‘standard form contract’ include that:
- the contract was offered on a ‘take it or leave it’ basis;
- the contract was prepared by one party before any discussions occurred between the parties;
- one party was not given an adequate opportunity to negotiate the terms of the contract;
- the contract does not take into account the specific characteristics of the particular transaction or a contract party; or
- one of the parties has most of the bargaining power in the deal.
None of that affects the rights of the supplier to stipulate the upfront price payable under the contract, or the goods and services offered.
Effect of having an unfair contract term
The unfair contract term will not be binding, but the rest of the contract will continue to apply to the extent possible. Currently, there are no penalties for breaching unfair contract terms laws.
Only a court or tribunal can decide if contract terms are unfair. So, if the other party to the contract refuses to remove unfair terms, you will need to get legal advice and possibly bring an action in either a Tribunal or Court, depending on the situation.
Currently, there are no penalties for breaching unfair contract terms laws. On 28 March 2019, the Federal Government issued a press release announcing possible further changes to these laws, including making unfair contract terms illegal and attaching civil penalties to breaches. As at the date of this article, the proposed changes are still the subject of ongoing community consultation by Treasury.
Compensation for unfair contract terms
You can sometimes win compensation for losses resulting from unfair terms, so if you think you have signed a contract like that or are considering signing one, talk to us about your next step. Your initial discussion with us is free, with no-obligation.
- Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth);
- Part 2-3 of the Australian Consumer Law contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth);
- For instance, the undertaking given to the Federal Court by Cardtronics Australasia Pty Ltd on 26 March 2018, and by Wisdom Properties Group Pty Ltd on 5 June 2018, to remove the offending unfair contract provision;
- ACCC v JJ Richards, ACCC v Servcorp Limited, ACCC v ByteCard Pty Limited (NetSpeed Internet Communications) Unreported decision, 30 July 2013, ACCC v Mitolo Group Pty Ltd;
- 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, ACCC v Ashley & Martin Pty Ltd;
- 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;
- Australian Competition and Consumer Commission v Mitolo Group Pty Ltd  FCA 1257; 138 ACSR 143 (2 August 2019);
- Australian Competition and Consumer Commission v Ashley & Martin Pty Ltd  FCA 1436 (4 September 2019);
- For instance, Qamaruddin v Kolak Living Pty Limited (Civil Dispute)  ACAT 45 (16 June 2017), Bass Coast Resort Pty Ltd v Success Resources Australia Pty Ltd (Civil Claims)  VCAT 1217 (9 August 2017), and Accrue Membership Pty Ltd v Suntana (Civil Claims)  VCAT 1403 (14 September 2018) 13;
- Set out in Subdivision BA, Division 2 of Part 2 of the Australian Securities and Investment Commission Act 2001 (Cth) commencing 1 July 2010;
- See Schedule 1 of the Treasury Laws Amendment (Hayne Royal Commission Response – Protecting Consumers (2019 Measures) Act 2020 enacted 17 February 2020;
- ACCC v CLA Trading Pty Ltd  FCA 377 (19 April 2016).