Unfair Contract Terms – An update and refresher

If you haven’t already taken notice of unfair contract terms laws, then now is the time to do so. Unless you have had your head in the sand for a number of years, as a business you would be aware that unfair contract terms law were originally introduced with the Australian Consumer Law (ACL) in 2010 for consumer contracts and as of November 2016 these extended to cover standard form “small business contracts”.

Let’s remember what the unfair contracts law terms are

Unfair contract terms apply to:

1. Standard form contracts, being what is more commonly known as “consumer contracts”; and
2. Small business contracts, as introduced in 2016, where a party to the contract is a business employing less than 20 people and the upfront price payable under the contract does not exceed $300,000 or $1 million if the contract is for more than 12 months.

A term can be declared void by a court or tribunal if it is “unfair”. Whilst a contract may continue to an extent with term or terms being voided, if the contract then becomes nonsensical then it may be that the entire contract is deemed to be void.

The ACL (section 24(1)) has established the three limb test for unfairness, being that a term is “unfair” if it:

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

Unfair Contract Terms law being applied to a small business contract by the ACCC

In 2017, the Australian Competition and Consumer Commission (ACCC) took its first court action applying the unfair contract terms to a small business contract against JJ Richards & Sons Pty Ltd (ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224). This saw orders being made against JJ Richards & Sons, with the consent of the company, that its entire standard terms and conditions were void as they were unfair to the small businesses it supplied to. This matter was not contested by JJ Richards & Sons and eight (8) terms of their standard terms and conditions in particular were found to be unfair, being:

1. An automatic renewal clause, which gave the customer a very limited window of opportunity to terminate the contract with no notice of the automatic renewal was to be given to the customer;
2. A price variation clause which gave JJ Richards & Sons the unilateral right to change the price without giving the customer an opportunity to terminate the contract or change the scope of services;
3. An agreed time clause which put the customer at risk of non-performance of the services by JJ Richards & Sons;
4. A no credit clause which allowed JJ Richards & Sons to charge customers for services not rendered for reasons beyond the customer’s control;
5. An exclusivity clause which granted JJ Richards & Sons the exclusive right to remove waste from the customer’s premises;
6. A credit term clause which allowed JJ Richards & Sons to suspend its services whilst continuing to charge the customer if payment was not made within 7 days;
7. An indemnity clause which gave JJ Richards & Sons an unlimited indemnity without providing any benefit to the customer; and
8. A termination clause which required customers to make payment of all amounts outstanding before a contract could be terminated and allowing JJ Richards & Sons to continue charging a customer for equipment rental even after the contract had been terminated.

These clauses were found to cause a significant imbalance between JJ Richards & Sons and their customers and the Federal Court found that they were not reasonably necessary to protect JJ Richards & Sons legitimate interests.

Expanded Powers of Regulators

The ACCC and Australian Securities and Investments Commission’s (ASIC) powers were previously limited in regards to the investigations that they could make as follows:

1. Section 155 of the Competition and Consumer Act 2010 (Cth) (CCA) gave the ACCC limited powers to require someone to produce information or documents to the ACCC or appear before the ACCC to give evidence in relation to a possible contravention of the CCA; and
2. Section 13 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) gave ASIC the power to “make such investigations as it thinks expedient…where it has reason to suspect that there may have been…a contravention of the corporations legislation”.

These powers previously did not apply to the investigation of potential unfair contract terms until the recent passing of the Treasury Laws Amendment (Australian Consumer Law Review) Act 2018 (Cth). As of 26 October 2018, the ACCC and ASIC’s powers of investigations under section 155 of the CCA and section 13 of the ASIC Act have now been extended such that these regulatory bodies can now determine whether to apply to a court for a declaration that a term of a contract is “unfair”. The ACCC’s power is limited to contracts which were entered into on or after 26 October 2018, however ASIC’s powers apply to investigating a contract term irrespective of when the contract was entered into. Extension of ACCC and ASIC’s powers to investigating potential unfair contract terms means that there could be an increase in the number of investigations made.

If your standard form consumer contracts or small business contracts have not been reviewed to ensure you are compliant with the unfair contract terms laws then these documents are overdue for a review. Whilst there was already a risk that unfair contract terms could be found void, there is now the ability of the ACCC or ASIC to wield their new powers to have a, likely not so kind, review of these contracts on your behalf.