B2B Focus: ACCC tests small business protections in new unfair contracts regime

This article first appeared on 25 September 2017 and was updated on 25 October 2017.

Amendments to the unfair contracts regime have been brought into fresh focus this month, with the ACCC commencing its first two enforcement actions under the amended legislation.

Changes to the Australian Consumer Law, which came into effect on 12 November 2016, extended unfair contract term protections to “small business contracts”. As a consequence, protections from unfair contract terms in standard form contracts which were once reserved for consumers are now afforded to small businesses.

The amended regime covers standard form contracts in a business to business context where one of the businesses employs less than 20 people and the up-front price payable is up to $300,000 or, if the contract runs for more than a year, up to $1 million.

The laws apply to standard form small business contracts entered into or renewed on or after 12 November 2016. Under the unfair contract laws, terms that are found to be unfair are void. Two business to business enforcement actions have commenced under the new regime. One of these proceedings has now been determined with the respondent consenting to declarations that terms in its standard form contracts were unfair.

Federal Court action concerning alleged unfair terms in waste management contracts

On 6 September 2017, the ACCC commenced its first enforcement proceeding concerning the business to business unfair contract laws. The Federal Court proceeding was against JJ Richards & Sons Pty Ltd, one of the largest privately-owned waste management companies in Australia. The ACCC alleged that terms in JJ Richards’ standard form contract with small businesses were unfair and should be declared void because they went beyond what was reasonably necessary to protect JJ Richards’ legitimate interests. In October, the Federal Court declared by consent that eight terms in JJ Richards’ standard form contracts with small businesses were unfair and so void under the ACL.

The terms that were found to be unfair include terms which:

• provide that the contract term automatically renews unless the small business terminates within the last 30 days of the existing term;

• allow JJ Richards to unilaterally increase its prices during the contract term;

• remove any liability for JJ Richards for breach if it fails to provide its services within agreed times;

• provide that the small business must apply for credit where JJ Richards fails to provide services;

• grant JJ Richards exclusive rights preventing small businesses from obtaining waste management services from a third party during the contract term, even if JJ Richards fails to provide the services;

• require the small business to pay accounts within 7 days, failing which JJ Richards may suspend the services but continue to charge fees;

• require the small business to grant an unlimited indemnity for loss in favour of JJ Richards even if the small business did not cause the loss; and

• prevent the small business from terminating if monies are owed to JJ Richards, and entitles JJ Richards to continue charging for equipment rental after termination even though services are no longer being provided.

In addition to declaratory relief, JJ Richards consented to orders restraining it from relying on the unfair terms in existing small business contracts and from using the terms in future contracts with small businesses. JJ Richards also consented to orders that it publish a corrective notice and provide a copy of the Court’s orders to all its small business customers which are parties to an affected contract.

Federal Court action concerning alleged unfair terms in serviced and virtual office contracts

On 15 September 2017, the ACCC commenced a Federal Court proceeding against Servcorp Ltd and two of its subsidiaries concerning Servcorp’s standard form contracts with small businesses. Servcorp is a large, publicly listed company which supplies serviced office space and virtual office services. The ACCC alleges that terms in Servcorp’s standard form contracts with small businesses are unfair and should be declared void.

The contract terms which the ACCC alleges are unfair include terms that the ACCC contends:

• automatically renew a small business’ contract and allow Servcorp to unilaterally increase the contract price after the renewal and without prior notice to the customer;

• permit Servcorp to unilaterally terminate the contract and to impose penalty-type consequences on the small business;

• unreasonably limit Servcorp’s liability or which impose unreasonable liability on the small business;

• permit Servcorp to unilaterally determine whether the contract has been breached; and

• permit Servcorp to unilaterally acquire the small business’ property without any notice.

The ACCC seeks declarations that these terms are unfair and void, injunctions, publication orders, compliance program orders and costs.

Are you at risk under the new unfair contracts regime?

Before the amendments to the ACL came into effect, the ACCC conducted a review of selected industries and identified some areas of particular concern. These included:

• Advertising services – standard form contracts offered to small businesses often contain a term allowing the publisher a right to remove advertisements for any reason. Such terms may be broader than reasonably necessary.

• Telecommunications providers – standard form contracts may contain provision for early termination charges where the charge is more than is reasonably necessary to protect the telco’s legitimate interests.

• Retail leasing industry – standard form leases often provide the landlord with a right to recover unlimited costs from a tenant and with a right to unilaterally vary shopping centre rules without notice to the tenant.

• Waste management industry – as can be seen from the ACCC’s action against JJ Richards, standard form contracts with waste management businesses often include terms providing for automatic renewal without the customer’s consent and without providing reasonable notice.

• Franchising – standard form franchise agreements may contain terms allowing the franchisor to unilaterally vary operations manuals or to require payment of liquidated damages for breaches irrespective of the franchisor’s genuine estimate of its losses arising from the breach.

• Independent contracting - independent subcontracting is common in areas such as design, engineering, architecture, information technology and surveying. Independent subcontracting agreements may contain terms which allow traders to limit their liability and require the contractor to indemnify the trader for loss or damage even in circumstances where the trader contributed to the loss.

• Agriculture – the ACCC singled out the agricultural industry as an area of particular focus for the new laws due to the significant power imbalance that can exist between farmers and businesses the businesses that they deal with such as buyers, processors and agents.

The recent enforcement proceedings place on notice all businesses that use standard form contracts (and particularly those which operate in these identified areas) to take steps to ensure that they are compliant with the unfair contract provisions in the ACL.

Contract terms which are found to be unfair will be declared void, exposing businesses to the risk of claims from small business customers for compensation for loss or damage.