What trends are emerging from unfair contract term actions brought by the ACCC?

The unfair contract terms (UCT) provisions of the Australian Consumer Law (ACL) have been in force since 2010 for consumer contracts and a little over 12 months for small business contracts. In that time, the ACCC has notched-up an impressive success rate in actions challenging unfair contract terms in a variety of standard form contracts. While the UCT provisions are not limited to particular ‘categories’ of terms, it is becoming clear that certain terms are a particular enforcement priority for the ACCC.

Since the introduction of the UCT provisions of the ACL in 2010, and the extension of those terms to small business contracts in November last year, the ACCC has commenced eight proceedings against businesses challenging unfair contract terms used in their standard form contracts.[1]

The ACCC has enjoyed success in six of these proceedings, with two currently before the courts.[2] The fact that orders have been made by consent in two of the decisions[3] indicates that some businesses may not have considered whether their contracts are subject to the UCT provisions or are hesitant to take steps to address the risks.

The consequence of a term being found to be unfair is that it becomes void and unenforceable.[4] This, coupled with the affected terms being used across potentially hundreds or even thousands of customer contracts, amplifies the importance of reviewing standard form contracts for unfair terms.

We’ve identified four common types of contract term that have been the subject of successful challenges by the ACCC across multiple decisions.[5] Other than the terms in Servcorp (which is yet to be decided), each of the terms discussed below were found to be unfair contract terms and therefore void and unenforceable. Whilst of course, this was in their particular context, those contexts may be found in many other businesses’ arrangements and contracts.

Unilateral variation terms

Terms that give one party a right to unilaterally vary the terms (including pricing terms) of a standard form contract are potentially unfair and void.[6]

In a speech given at the start of the year ACCC Chairman, Rod Sims, noted that such terms were “amazingly widespread” in business-to-business standard form contracts. [7] It is unsurprising then that the ACCC has taken action to challenge ‘unconstrained’ unilateral variation terms in the following decisions:

In ACCC v Bytecard Pty Ltd, the term in question allowed Bytecard to unilaterally vary the amount payable under its internet service provider contracts without prior notice to the customer, nor an opportunity for the customer to negotiate the variation or terminate the contract.

In ACCC v JJ Richards & Sons Pty Ltd, a price variation term in JJ Richards’ standard form waste management contracts with small businesses purported to give it a right to unilaterally increase the price of its waste management services for any reason.

In the recently commenced Federal Court proceedings of ACCC v Servcorp Limited, the ACCC claims that a unilateral variation term gave Servcorp a right to vary charges for the serviced office space and virtual office services that it supplied to its small business customers in contravention of the UCT provisions.

In a press release about Servcorp, the ACCC stated that it had:[8]

“received complaints from a number of small businesses that Servcorp had automatically renewed their contracts and then substantially increased their office rents after they were locked into a further term”

With respect to the unilateral price variation terms of the type in Servcorp and JJ Richards, it should be noted that a term that sets the upfront price payable under the contract is not subject to the UCT provisions.[9] However, a term that allows one party to vary the upfront price payable under a contract is of a kind that may be unfair (and therefore, void).[10]

Automatic renewal terms

Terms that give one party (but not the other) a right to renew or not renew a standard form contract are potentially unfair and void.[11] These are often referred to as ‘automatic renewal terms’.

Automatic renewal terms are terms that cause a contract to continue to renew automatically without the need for any consent or agreement, usually to the advantage of the supplier of the relevant goods or services. They may require inconvenient or onerous steps to be taken by a party to avoid the automatic renewal or may dispense with any obligation to remind customers about the opt‑out period.

In ACCC v Chrisco Hampers Australia Limited, Chrisco provided a service whereby Christmas hampers could be paid for by instalments over time. Chrisco’s self-titled ‘Head Start Plan’ formed part of its standard form customer contract. The terms of the plan allowed Chrisco to continue making deductions from each customer’s bank account after the hamper ordered for the previous year had been paid off, unless the customer “opted out” of the plan by ticking a box. This automatic renewal term was found to be unfair. The terms establishing the plan were also found to suffer from defects in transparency which contributed to the Court’s finding that the term was unfair.[12]

In ACCC v JJ Richards & Sons Pty Ltd, JJ Richard’s waste management contracts included a term that the contract would be automatically renewed for further periods of a specified number of years unless terminated within 30 days prior to the end of the initial term or any renewed term. The Court found that the significant imbalance arising from the operation of this clause was exacerbated by the operation of other unfair terms, such as the price variation, exclusivity and termination clauses.

The Court also found that the unfair terms in JJ Richards’ contracts were not transparent because they weren’t drafted in plain English. The terms were also not readily accessible to customers because they were, in the Court’s view, a “densely packed page of small print terms and conditions”.

In ACCC v Servcorp Limited, the ACCC alleges that Servcorp’s standard form contract includes terms that are intended to automatically renew a customer’s contract in contravention of the UCT provisions. As at the date of this publication, this matter is yet to be heard by the Federal Court. The ACCC is seeking declarations that this automatic renewal term and other terms in Servcorp’s contracts are unfair and void, as well as injunctions, publication orders, compliance program orders and costs.

Liability and indemnity terms

Liability and indemnity terms are an important risk management tool. However, taking them too far can render such terms void altogether, as the following decisions demonstrate.

In ACCC v CLA Trading, CLA’s rental car contract included unfair terms that imposed liability on its customers to make a payment to CLA (up to the Damage Liability Fee of $3,650) for loss or damage caused to the rental vehicle, regardless of whether the customer was at fault or had caused the loss or damage.

In ACCC v JJ Richards, JJ Richards’ standard form waste contracts included an unlimited indemnity in favour of JJ Richards for any loss, damage or claims it incurred in connection with the contract. Even where the loss incurred by JJ Richards was not caused by the customer, or could have been avoided or mitigated by JJ Richards, the indemnity terms applied.

The ACCC is also challenging unusually broad and onerous liability and indemnity terms in its Federal Court action against Servcorp Limited.

Businesses should also keep in mind that, where a customer is a ‘consumer’ (as defined under the ACL, and which can include a business), terms which purport to limit liability can be void if they are not drafted in a manner permitted by the ACL, even where the relevant contract is not a standard form contract subject to the UCT provisions.[13]

Termination terms

Terms that give one party (but not the other) a right to terminate a standard form contract are potentially unfair and void.[14]

In ACCC v Bytecard, Bytecard’s internet service provider contracts included a term that gave it a right to terminate the contract at any time without cause or reason and without giving any compensation to the customer. Conversely, the customer’s rights to terminate the contract arose only in limited circumstances.

In ACCC v JJ Richards, JJ Richards’ waste management contracts included a term that prevented its customers from terminating the contract if there were outstanding amounts owing. Compounding this, the term also stated that equipment provided by JJ Richards would not be removed until full payment of all outstanding monies was made by the customer, as well as a right for JJ Richards to charge rental fees for that equipment where there was a delay in payment of the customer’s final account.

What good is a term if it isn’t enforceable?

The ACCC has made clear its commitment to investigate and take action to challenge unfair contract terms in standard form consumer and small business contracts.[15]

Some businesses will naturally be hesitant to move away from standard terms they are familiar with or which they have used over a long a period of time. Such hesitation may be costly because the UCT provisions have changed the drafting game.

Drafting standard form contract terms now requires much greater care and thought. A strong understanding of the legitimate interests of the business that each term is designed to protect is essential, as is an awareness of what can impact on the transparency of contract terms.

Recent decisions also reveal that it is important to consider the interaction between, or cumulative effect of, related contract terms. Many of these cases demonstrate that examining a single term in isolation is not appropriate – you need to consider how they operate with other provisions of the contract as a whole.

Applying care and thought in drafting the terms of standard form contracts is worthwhile. After all, what good is a term to a business if it is void and unenforceable?