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Keeping contracts out of the trash: Recent matters involving new Unfair Terms rules

As was noted in an earlier Property Newsletter, the Australian Consumer Law (ACL) protections against unfair terms in standard form contracts was expanded last year to not only cover consumers but also small businesses with fewer than 20 employees. The first indication of how the ACCC would enforce these new rules occurred when the consumer watchdog took Sensis (owner of Yellow Pages and White Pages) to task over its standard contract for business customers. However the first real victim of the new rules was waste management company JJ Richards who had a number of terms in their standard contract declared void by the Federal Court.

The changes to the ACL do not change the existing unfair terms rules, which continue to allow a Court to declare a term in a standard form contract void where it is unfair, that is it creates an imbalance in rights that is not reasonably necessary to protect legitimate interests. The change was simply to extend that restriction to small businesses as well as consumers for certain kinds of contracts.

The ACCC took formal action against Sensis earlier this year due to standard contracts for businesses wishing to list on the White Pages and Yellow Pages. Problematic aspects with the contract included an automatic renewal of the 12-month minimum contracts at expiry unless the customer cancelled beforehand as well as a term allowing Sensis to terminate contracts without any particular cause (a so-called “termination for convenience” clause).

Sensis was able to appease the ACCC in this instance by providing a court-enforceable undertaking to amend their terms. Specifically, Sensis agreed to provide greater transparency regarding automatic renewals, including reminding customers that when an automatic renewal was about to commence. They also qualified their right to termination to circumstances in which Sensis is “acting reasonably” in order to protect their legitimate interests.

Waste management company JJ Richards did not fare so well with their standard form contracts, with the Federal Court declaring on 19 October 2017 that eight terms in their standard contract were unfair and therefore void. The ACCC took action against JJ Richards due to a number of clauses in their contract which they said had the effect of:

  1. binding customers to automatically renewing contracts;
  2. allowing JJ Richards to unilaterally increase its prices;
  3. removing liability for JJ Richards due to any hindrance;
  4. allowing JJ Richards to charge customers for services not rendered even where the circumstances were not within the customers’ control;
  5. granting exclusive waste removal rights;
  6. allowing JJ Richards to suspend its service but continue to charge customers where payment is not received after seven days;
  7. providing an unlimited indemnity in favour of JJ Richards; and
  8. preventing customers from terminating contracts where there are outstanding amounts owed.

In the declaration, Moshinsky J noted that the combined effect of these multiple unfair terms together enhanced the overall determinant to customers. While it was not a critical factor in the decision, he further noted an overall lack of transparency in these various terms.

The new unfair terms rules are of significance to a number of sectors that rely heavily on precedent contracts such as in retail and commercial leasing. While the ACCC underwent much consultation with businesses prior to the introduction of the new rules, it is cases such as with Sensis and JJ Richards that will provide some clear indication of how to keep standard form contracts out of the bin.

A common issue raised by the ACCC in these cases and in their consultations regards terms that provide either unilateral power to do something, interpret something or avoid liability. In a similar vein, overly broad indemnity clauses without suitable carve-outs have been raised. Interestingly, automatic renewals were the one term to appear in both the Sensis and JJ Richards matters.

When trying to determine if you have a clause that might be deemed unfair, it is best to consider the legislation’s definition of unfair, namely the imbalance of rights not reasonably necessary to protect legitimate interests. It is interesting to note Sensis incorporated this very language in their termination clause as part of their undertaking. Providing some sort of restraint, compromise or exclusion to a right granted to you by a term in your contract may be enough to save it from the ACL. After all, your business will be better protected by an appropriately restrained clause than one which is void.

Alex Collie, Lawyer
Paul Carroll, Partner

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