Federal Court "Trashes" Unfair Contract Terms

The Federal Court has recently held that a number of terms used by JJ Richards & Sons Pty Ltd (JJ Richards) in their standard terms and conditions (T&Cs) with small businesses are unfair, and therefore void under the Australian Consumer Law (ACL).

JJ Richards has agreed to orders that the terms be declared unfair and therefore void; that it be restrained from relying on the terms in existing small business contracts and from using them in future contracts with small businesses; and that it publish a corrective notice and provide a copy of the Court’s orders to all its small business customers affected by the terms.

The decision serves as a reminder to insureds (and their insurers) to review their small business contracts. In particular, regard should be had to indemnity clauses and how those terms, either alone, or interacting with other terms in the contract, may be found to be ‘unfair’ and therefore void creating unanticipated liability exposure.

Background

On 6 September 2017, the Australian Competition & Consumer Commission (ACCC) commenced proceedings against JJ Richards, one of Australia’s largest privately owned waste management companies.

The ACCC alleged that since 12 November 2016, when the unfair contract terms regime was extended to standard form small business contracts, JJ Richards had entered into, or renewed, at least 26,000 standard form small business contracts that contained 8 unfair terms which created a significant imbalance in the rights and obligations of JJ Richards and their small business customers.

JJ Richards’ T&Cs contained the following challenged terms, which the Court termed the ‘Impugned Terms’:

• Automatic renewal – binding customers to subsequent contracts unless they cancelled the contract within 30 days before the end of the term.
• Price variation – allowing JJ Richards to unilaterally increase its prices.
• Agreed times – removing any liability for JJ Richards where its performance of the contract was prevented or hindered in any way.
• No credit without notification – allowing JJ Richards to charge customers for services not rendered even when caused by reasons beyond their customer’s control.
• Exclusivity – binding JJ Richards’ exclusive rights to remove waste from the customer’s premises.
• Credit terms – allowing JJ Richards to suspend its service but continuing to charge the customer if payment was not made within 7 days.
• Indemnity – creating an unlimited indemnity in favour of JJ Richards.
• Termination – preventing customers from terminating their contracts if they had payments outstanding and entitling JJ Richards to continue to charge customers after termination of contract

The Court was satisfied that the Impugned Terms:

• created a significant imbalance in the rights and obligations of JJ Richards and its customers;
• were not necessary to protect JJ Richards’ legitimate interests; and
• would cause JJ Richards’ small business customers detriment if relied upon.

While not an essential element in its conclusion, the Court noted that the Impugned Terms were not transparent. They were drafted in legal language, rather than in plain English, the font size of the standard terms was very small, and the terms were not distinct from other terms or bought to the customer’s attention – the T&Cs were ‘a densely packaged page of small print terms and conditions’.

Having regard to contract as a whole, the Court noted that the Impugned Terms had a combined effect which tended to exacerbate one another, increasing the overall imbalance between the parties and the risk of detriment to customers.

Comment

The Court’s decision is of significance to companies and their insurers operating across a large range of sectors, for example the transport sector, where the use of fine print standard terms and conditions is common practice.

The terms examined by the Court are fairly widespread including for example, a commonly worded indemnity clause which was examined by the Court. The clause provided:

Indemnity

"To the maximum extent permitted by law, the customer shall be responsible for and indemnify [JJ Richards] from and in respect of all liabilities, claims, damages, actions, costs and expenses which may be incurred by [JJ Richards] on a full indemnity basis (whether successful or not) as a result of or arising out of or otherwise in connection with this agreement, including any breach by the customer of any of the warranties, covenants and conditions herein."

In finding that the indemnity clause was unfair, the ACCC submitted, and the Court accepted, that the indemnity clause created an unlimited indemnity in favour of JJ Richards, even where the loss incurred by JJ Richards was not due to the fault of its customer or could have been avoided or mitigated by JJ Richards. There was no corresponding benefit for the customer, and the broad indemnity was said to cause a significant imbalance in the parties’ rights and obligations under the contract. The Court indicated that this went beyond what was reasonably necessary to protect JJ Richards’ legitimate interests."

Why this is important to your business

The Court’s decision serves as a reminder to businesses to review their standard form contracts to ensure they don’t fall foul of the unfair contract terms regime. The ACCC has indicated that it will not hesitate to take appropriate action to ensure large businesses comply with the ACL, and has taken action against serviced office provider, ‘Servcorp’, under the same legislation challenging a number of terms including terms that allow Servcorp to unilaterally determine whether the contract has been breached and which permits it to unilaterally acquire the customer’s property without any notice. Servcorp has indicated it will vigorously defend the proceedings.

If a term is declared void, the remainder of the contract continues to bind the parties. As such, where once an indemnity clause provided some comfort to insurers and their insureds, and an identifiable way to assess risk allocation, both may find themselves exposed to greater liability than anticipated, particularly in back-to-back contracts where an indemnity may be enforceable upstream, but not downstream against small-business subcontractors.