In Court cases on unfair contract terms, the ACCC has taken enforcement action against suppliers offering goods or services to small businesses or consumers, utilising terms and conditions on a ‘take it or leave it’ basis, containing unfair contract terms. The Court’s soon-to-be powers to impose significant monetary penalties for unfair contract terms are a timely reminder for suppliers to check their standard form contracts are compliant with the 2022 updates to the Australian Consumer Law.

In November 2016,¹ the Australian Consumer Law ² was amended to prohibit unfair provisions in ‘standard form contracts’ to supply goods or services to small businesses. A standard form contract is supplier terms and conditions offered to customers, take it or leave it, therefore not allowing for negotiation. Since then, the Australian Competition & Consumer Commission (ACCC) has won several cases in the Federal Court, invalidating unfair contract terms imposed on small business customers by larger businesses.

For a small business saddled with an unfair business-to-business contract from a supplier, the first step is to ask the supplier for changes to the agreement. If the supplier ignores this request, you should get legal advice. In some cases, it may be advisable to commence legal action against the supplier to have unfair contract terms declared void under the Australian Consumer Law and therefore not binding on the parties.

At the moment, Courts cannot do anything more than declare offending clauses void and inoperative in specific cases. The Federal Parliament is still considering the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (the proposed Bill), significantly expanding court powers, including imposing financial penalties. Under the proposed Bill, the Court can impose a fine on an individual up to $500,000 and a company for $10 million, or three times the value of the benefit the company derived from the infringement or 10% of its annual turnover, whichever is the greater amount.

You might have willingly signed or renewed an agreement with a more significant business, with or without gritted teeth. Still, its terms might breach the ‘unfair contract’ provisions of the Australian Consumer Law. Recent court decisions guide what is not acceptable in a standard form contract regardless of the industry you operate.

In recent cases brought by the ACCC, the Court ruled several suppliers’ business-to-business (B2B) contract terms unenforceable. In these cases, typically, the supplier offered the invalidated contract on a take-it-or-leave-it basis, with terms and conditions one-sided in favour of the supplier resulting in harm to the small business or other consumers. Once a contract clause is ruled unfair and thus void, the rest of the contract will continue to bind the parties to the extent that it can operate without the unfair term.

The ACCC can take enforcement action against suppliers on behalf of groups of their small business clients over unfair contract terms by going to Court and asking for the contract to be declared void. So far, the ACCC has won several such cases against suppliers without even proceeding to a court hearing because the suppliers involved settled the issues by promising to remove the unfair terms in court-enforceable undertakings.³

Generally, however, for the ACCC to act or prosecute, it must be an obvious test case that the ACCC can win and publicise as a warning to other big businesses, consistent with the ACCC Key Enforcement and Compliance Priorities 2018 subsequently. You may need to take legal action independently, so you should get timely legal advice. Under the proposed amendments in the Treasury Laws Amendment (Unfair Contract Terms Reform) Bill 2021, a Court will be able to make orders that invalidate similar unfair terms in other contracts not necessarily before the Court and make orders to remedy the damage.

The New Vibe: What types of unfair contract terms have been invalidated so far by the Courts?

So far, contract terms held to be unfair for both individual consumers and small business customers include:

A supplier right to unilaterally vary a term or condition of the contract, including price;⁴
Contract terms giving the supplier, but not the customer, the right to automatically renew the agreement;⁵
Terms too one-sided in favour of the supplier burdensomely requiring customers to accept liability or indemnify the supplier;⁶
Contract terms giving the supplier, but not the customer, the right to terminate the contract unilaterally.⁷

The proposed Bill will clarify that a contract term does not become ‘fair’ simply because the supplier allowed the small business customer to negotiate for ‘’insubstantial’ variations or could choose from a range of predetermined options.

What defences are available to a supplier facing an unfair contract claim?

Currently, under the unfair contracts regime, the value of the goods or services must be below $300,000 per year or below $1 million for a multi-year contract, calculated at the time of the agreement, including all contingency payments. (The proposed Bill will remove the contract value threshold.)

In assessing the supplier’s case, the Court or Tribunal considers factors including whether:

the supplier’s one-sided terms and conditions are reasonably necessary to protect the supplier’s position;
the terms and conditions are not unfair to the small business in all the circumstances; and
the terms and conditions do not create a significant imbalance in the rights and obligations of the parties.

Under the proposed Bill, the Court will not necessarily regard the mere existence of pre-contract negotiations and ‘tick a ‘box’ option for customers of suppliers as fair negotiation or ability to vary the contract. If the Bill passes, suppliers should review all their terms and conditions for unfair terms.

The Unfair Contract Cases

ACCC v JJ Richards & Sons Pty Ltd

In October 2017, the Federal Court of Australia made orders against JJ Richards & Sons, with the company’s consent, declaring its standard contract terms and conditions to be void because they were unfair to the small businesses it supplied with waste removal services.⁸

The Court’s orders cancelled about 2,600 contracts issued by JJ Richards for waste removal services and directed it to implement a ‘compliance program’ of removing the unfair terms from all its contracts with small business customers. These unfair terms were points 1 to 4 above. The agreements also included clauses allowing JJ Richards to charge customers for services not supplied, even for reasons beyond customers’ control, and giving JJ Richards exclusive rights to remove waste from customers’ premises.

JJ Richards’ ‘Service Agreement’ was a two-page contract applying to all its customers, with client details inserted on the front and the Terms and Conditions printed on the back.

This court action by the ACCC was the first to enforce the new prohibitions in the Australian Consumer Law against unfair terms contained in small business ‘standard form ‘contracts’. The parties settled the case before the hearing, so the Federal Court did not need to consider this new unfair contract regime for small businesses comprehensively.

ACCC v Servcorp Ltd

Then, in July 2018, the Federal Court declared void, again by consent, some terms of standard form contracts used by Servcorp Parramatta and Servcorp Melbourne 18 Pty Ltd because they contained unfair terms⁹ of the types in points 2-4 above. There was also a contract term that Servcorp could keep a customer’s security deposit if they forgot to ask for its return, which the Court found unfair. The Court forced Servcorp to remove unfair terms from its contracts, implement a ‘compliance program,’ and pay costs.

ACCC v Mitolo Group Pty Ltd

In June 2018, the ACCC started legal action against potato wholesaler Mitolo Group Pty Ltd over its contracts with potato farmers, which included unfair terms of the type at point 1 above. This unfair contract case was the first to be tested in the Federal Court in the context of Mitolo’s alleged infringements of a mandatory industry code, the Horticulture Code of Conduct, under the Competition and Consumer Act 2010. The Federal Court held in 2019 that Mitolo had breached the Code and the unfair contract provisions of the Australian Consumer Law and fined it $240,000 and $50,000 costs.¹⁰

ACCC v Ashley & Martin Pty Ltd

In September 2019,¹¹ the Federal Court found that hair-loss giant Ashley & Martin breached the unfair contracts provisions of the Australian Consumer Law with one-year consumer contracts, which included terms of the type at point 4 above. They allowed customers only a two-day cooling-off period to get independent medical advice on whether treatment would be safe. Where clients received medical advice that the treatment would not be appropriate for them and cancelled more than two days later, Ashley & Martin refused to refund the payment for the balance of the contract. Where clients developed side-effects to the treatment, they took the same stance.

The ACCC argued that this was unfair because only Ashley & Martin could terminate the contract and not the client. Fair’s fair – losing your hair is unfair enough already! The contract should have included a more extended cooling-off period to get medical advice and the opportunity to exit the contract if side effects emerged.

Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited

On 28 May 2020 in the Federal Court,¹⁷ ASIC proved that the bank’s standard form lending contracts with small business borrowers contained unfair contract terms within the meaning of section 12BG (1) of the Australian Securities and Investments Act 2001 (Cth). (This unfair contract terms regime is similar to the Australian Consumer Law.) In addition to points (1), (3), and (4) above, the unfair contract terms include:

Indemnity clauses which made the customer liable for costs incurred by the bank not caused by the customer,
An event of default clauses with detrimental consequences to the customer disproportionate to the default and not permitting the borrower to remedy defaults capable of remedy,
conclusive evidence clauses whereby the bank’s issuance of the certificate imposed a burden on the customer to prove things that the bank was the best place to provide information. The customer was disadvantaged if the certificate was incorrect and they did not have access to bank information to disprove it.

ACCC v Chrisco Hampers Australia Limited

This contract included a clause allowing for the agreement’s automatic renewal, i.e., a contract provision of the type at point 2 above. The HeadStart Plan term allowed Chrisco Hampers Australia Limited (Chrisco) to continue to take payments from consumers after they had fully paid for their existing lay-by order for Christmas hampers and other items unless consumers expressly opted out.

On 21 July 2020, Chrisco provided a court-enforceable undertaking to the ACCC in which it acknowledged that its HeadStart Plan included an unfair contract term. Chrisco undertook to increase the transparency of the HeadStart Plan term by consumers opting-in to a HeadStart Plan and confirming their participation from year to year.

Chrisco also admitted that it made false or misleading representations to consumers in its promotions about the plan.

Previously, the Federal Court held that the 2014 HeadStart term was an unfair term within the meaning of s 24 of the ACL.¹⁶ Unless a consumer opted out or sought a refund, the HeadStart contract clause involved a significant detriment to the consumer, without any significant corresponding benefit. The HeadStart Plan was a savings plan requiring consumers to save interest-free, with Chrisco, towards purchasing Chrisco’s goods in 2015, generally priced above retail prices the consumers might not decide to buy.

ACCC v Smart Corporation Pty Ltd

On 28 May 2020, the Federal Court voided the vehicle rental contract terms of Smart Corporation Pty Ltd trading as Australian 4WD Hire. They were “unfair contract terms” for allowing the supplier to deduct the entirety of the consumer’s security bond for trivial breaches that did not cause loss or damage to a hired vehicle.¹⁸

The company had also engaged in unconscionable conduct and made false and misleading representations about insurance cover. The company was fined $870,000 for the unfair contract terms and other breaches of the Australian Consumer Law. Also, the Court disqualified the two company directors for three years from managing a company and fined $179,000 and $174,000, respectively. As shown by this case, the Court will hold company directors personally responsible in addition to the company itself for multiple simultaneous breaches of the Australian Consumer Law.

Consumer Protection Right Up to the Grave

In cases brought by the ACCC, two funeral companies voluntarily entered into court-enforceable undertakings to remove unfair terms from their standard form contracts. The unfair contract terms included late payment fees, excessive interest-rate charges, and unilateral rights to increase prices without a matching right to terminate the agreement. Bowra & O’Dea Pty Ltd and Parkside Funerals have agreed to eliminate all the unfair terms and return the money they received under them.¹⁹

Please Hold’s Contracts Put on Hold

A UK-based company, Please Hold (UK) Limited, provides phone-queue management and audio content to Australian small businesses. On 11 November 2021, the company accepted enforceable undertakings to eliminate unfair terms in its standard form contracts and repay payments made under them. Unfair terms included automatic rollover of two and three-year contracts unless the customer provided six ‘weeks’ notice of termination.

A Learning Experience for an Education Provider

On 30 November 2021, Educational software company Compass Matin Pty Ltd, and its contract manager EduCollect Pty Ltd, the supplier of CAMI and iTutor software for school-aged children, admitted to false and misleading advertising and sales procedures, as well as unfair contract terms like requiring six months of payments upon termination of the contract. The company has agreed to eliminate the unfair terms and return payments made under them.

You have to take action yourself!

Remember that inspectors do not enforce the unfair contract’s rules before you get too warm and fuzzy about the happy justice of the new vibe. The more savvy, more prominent companies will get lots of legal advice to make sure their contracts with consumers and small businesses comply with the rules. If someone offers you a contract with unfair terms, you may have to take it to your lawyers and perhaps the ACCC before something is done. It is not illegal to offer unfair terms, but a Court might rule them unenforceable if the other party litigates.

Legal help with unfair contract terms

If you are a small business facing significant financial detriment due to an unfair ‘standard form’ supply contract, do not delay. Contact a lawyer and get legal advice on whether the Australian Consumer Law possibly applies. Your lawyer can write a Letter of Demand to the supplier, setting out your concerns and explaining the consequences to a supplier of refusing to remove unfair contract terms. If that doesn’t work, you will need further legal advice on your options.

Some helpful Tribunal judgements have declared void a supplier company’s standard terms because they are unfair.¹² Tribunal proceedings are typically less complicated than in the Federal Court. The same legal principles apply to small business cases as these consumer case judgements.

What types of contracts are affected by the changes to the ACL?

The Australian Consumer Law (ACL) covers a ‘small business contract,’ which is a ‘standard form contract’ for the supply of goods or services or the sale or grant of an interest in land.

The Unfair Contract Terms regime covers financial and insurance contracts too

Financial services and financial product contracts are covered by mirror provisions in the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) applying to “a contract that is a financial product” or “a contract for the supply, or possible supply, of financial services.” ¹³

From 5 April 2021, insurance contracts will also be covered by the unfair contract terms regime due to changes to the Insurance Contracts Act 1984 (Cth) and the ASIC Act.¹⁴

The Australian Securities and Investment Commission (ASIC) has enjoyed similar success in cases brought under the ASIC Act’s unfair contract terms (UCT) regime. On 19 April 2016, the Federal Court declared several terms in CLA Trading Pty Ltd, trading as Europcar Australia Australia’s 2013 standard rental agreement unjust and void. The Court also ordered Europcar to pay a penalty of $100,000 for making false or misleading representations about consumers’ liability in the event of vehicle damage.¹⁵ On 28 May 2020, ASIC also succeeded in its case against Bendigo and Adelaide Bank Limited.

What is a small business contract?

Under the Australian Consumer Law unfair contracts regime, a ‘small business contract’ is a contract for the supply of goods or services or the sale or grant of an interest in land where:

at least one party to the contract is a small business, i.e., the firm has fewer than 20 employees; and
The upfront price payable does not exceed $300,000 on a contract for less than 12 months, or the upfront price does not exceed $1 million for a contract longer than 12 months.

Some franchise agreements may fall under the definition of a ‘small business contract’ for the unfair contracts regime, as discussed further in our blog post on the application of the ACL to franchises.

Excluded are insurance contracts entered into before 5 April 2021, shipping contracts, company constitutions, and managed investment schemes under the Corporations Act 2001.

Under the proposed Bill, there would be no cap on the value of the contract under consideration. The Bill will also increase the number of businesses covered, from the current limit of fewer than 20 employees to less than 100 employees and an annual turnover of less than $10 million.

What is an ‘unfair term’?

A term of a small business contract is unfair if:

it would cause a significant imbalance in the parties’ rights and obligations under the contract; and
it is not reasonably necessary to protect the legitimate interests of the party advantaged; and
if it were to be applied or relied on, the term would cause detriment, financial or otherwise, to a party.

Things relevant to determining whether a contract term is an unfair include:

assessment of the contract as a whole, i.e., not just that provision in isolation; and
The extent to which the term is transparent, i.e., expressed in reasonably plain language, legible, presented clearly, and readily available to any party affected.

It is not necessary to show that the challenged term is not ‘in ‘good faith,’ but offering that involved bad faith could assist with a Court finding the provision unfair. As described above, the proposed Bill would significantly tighten the protection of the small business customers of larger suppliers.

What is a standard form contract?

Some signs that a contract is a ‘standard form contract’ include that:

One party offered the contract on a ‘take it or leave it’ basis;
the contract was prepared by one party before any discussions occurred between the parties;
one party was not given an adequate opportunity to negotiate the terms of the contract;
the contract does not take into account the specific characteristics of the particular transaction or a contracting party; or
one of the parties has most of the bargaining power in the deal.

None of that affects the supplier’s rights to stipulate the upfront price payable under the contract or the goods and services offered.

Effect of having an unfair contract term

The unfair contract term will not be binding, but the rest of the contract will continue to apply to the extent possible. Currently, there are no penalties for breaching unfair contract terms laws.

Only a Court or Tribunal can decide if contract terms are unfair. So, suppose the other party to the contract refuses to remove unfair terms. In that case, you will need to get legal advice and possibly bring an action in either a Tribunal or Court, depending on the situation.

Currently, there are no penalties for breaching unfair contract terms laws. However, the proposed Bill includes the power for Courts to order money penalties for breaches.

Compensation for unfair contract terms

You can sometimes win compensation for losses resulting from unfair terms, so if you think you have signed a contract like that or are considering signing one, talk to us about your next step. Your initial discussion with us is free, with no obligation.

References:

Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth);
Part 2-3 of the Australian Consumer Law contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth);
For instance, the undertaking given to the Federal Court by Cardtronics Australasia Pty Ltd on 26 March 2018, and by Wisdom Properties Group Pty Ltd on 5 June 2018, to remove the offending unfair contract provision;
ACCC v JJ Richards, ACCC v Servcorp Limited, ACCC v ByteCard Pty Limited (NetSpeed Internet Communications), Unreported decision, 30 July 2013, ACCC v Mitolo Group Pty Ltd, ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716 (28 May 2020);
ACCC v JJ Richards, ACCC v Servcorp, Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited (No 2) [2016] FCA 144, Edelman J, 1 March 2016;
ACCC v JJ Richards, ACCC v Servcorp, Australian Competition and Consumer Commission v CLA Trading Pty Ltd [2016] FCA 377 (19 April 2016), Gilmour J, ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716 (28 May 2020) ACCC v Smart Corporation Pty Ltd (No 3) [2021] FCA 347 (15 April 2021);
ACCC v JJ Richards, ACCC v ByteCard Pty Limited, ACCC v Ashley & Martin Pty Ltd, ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716 (28 May 2020);
Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 (13 October 2017), Moshinsky J;
Australian Competition and Consumer Commission v Servcorp Limited [2018] FCA (13 July 2018), Markovic J;
Australian Competition and Consumer Commission v Mitolo Group Pty Ltd [2019] FCA 1257, 138 ACSR 143 (2 August 2019);
Australian Competition and Consumer Commission v Ashley & Martin Pty Ltd [2019] FCA 1436 (4 September 2019);
For instance, Qamaruddin v Kolak Living Pty Limited (Civil Dispute) [2017] ACAT 45 (16 June 2017), Bass Coast Resort Pty Ltd v Success Resources Australia Pty Ltd (Civil Claims) [2017] VCAT 1217 (9 August 2017), and Accrue Membership Pty Ltd v Suntana (Civil Claims) [2018] VCAT 1403 (14 September 2018) 13;
Set out in Subdivision BA, Division 2 of Part 2 of the Australian Securities and Investment Commission Act 2001 (Cth) commencing 1 July 2010;
See Schedule 1 of the Treasury Laws Amendment (Hayne Royal Commission Response – Protecting Consumers (2019 Measures) Act 2020 enacted 17 February 2020;
ACCC v CLA Trading Pty Ltd [2016] FCA 377 (19 April 2016);
ACCC v Chrisco Hampers Australia Limited [2015] FCA 1204, Edelman J, 10 November 2015; Chrisco’s court-enforceable undertaking dated 21 July 2020;
Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716 (28 May 2020);
ACCC v Smart Corporation Pty Ltd (No 3) [2021] FCA 347 (15 April 2021);
Gerren Pty Ltd trading as Parkside Funerals on 17 December 2021, and Bowra & O’Dea Pty Ltd on 10 January 2022.

How to challenge unfair contract terms under Australian Consumer Law