On 16 October 2017 the Federal Court declared that the eight terms in JJ Richards & Son’s standard form contracts challenged by the ACCC were unfair and therefore void (the Impugned Terms).  As the first prosecution of its kind to test the extension of the unfair contracts regime to standard form small business contracts, it was hoped the case against Australia’s largest privately-owned waste management company would offer important insight into how the courts will apply the unfair contract term provisions in a B2B context (see our previous Insight on the ACCC’s decision to commence proceedings here).

However, as JJ Richards did not defend the proceedings and the orders were made by consent, the case provides only limited judicial guidance on when contractual terms may be considered unfair.  Attention will now shift to the ACCC’s second case against Servcorp alleging numerous terms in its standard agreements with small businesses are unfair.

Key Messages

• The Federal Court found that each of the Impugned Terms in JJ Richards’ standard form contract was unfair, and that taken together the terms also tended to “exacerbate each other”.  This interplay was found to increase the overall imbalance between the parties and the risk of detriment to JJ Richard’s small business customers.
• Businesses should review and consider revising any terms in their contracts that are drafted broadly to ensure they do not go beyond what is reasonable and justified to protect their “legitimate interests”.  Broadly drafted terms will provide little room to defend allegations of unfairness.
• The circumstances leading to the ACCC’s decision to commence proceedings against JJ Richards, as revealed in the judgment, make clear the ACCC is taking a tough and pro-active approach to enforcing compliance in the B2B context.
• The ACCC swiftly followed its case against JJ Richards with a second court action against Servcorp alleging terms in its contracts with small business were unfair.  Attention will now shift to this case, which will hopefully provide further guidance on how the courts will apply the test for unfairness in the small business context.

Background

Since the regime was extended to small business contracts in November last year, JJ Richards entered into, or renewed, at least 26,000 contracts for the provision of waste management services in Australia. 

The ACCC first wrote to JJ Richards on 6 December 2016 informing the company it was investigating whether terms in contracts offered by waste management providers gave rise to concerns under the ACL and requesting copies of JJ Richards’ standard form contracts.  The ACCC also drew the company’s attention to the report it published in the previous month highlighting the outcome of its review of standard form contracts in seven industries of concern, including the waste management sector.  JJ Richards responded by informing the ACCC it was in the process of reviewing its contracts and, once completed, would be open to providing the ACCC with copies of these. 

Whether JJ Richards took the ACCC’s concerns seriously is debatable, give that over the next three months, the ACCC continued to make further requests for JJ Richard’s contracts, which were not met.  It was only after the ACCC notified JJ Richards of its intention to seek preliminary discovery of its standard form contracts that JJ Richards provided the ACCC with copies of the contracts sought. 

The Impugned Terms

The eight terms alleged by the ACCC as being unfair were:

• automatically renewing the agreement for a further period unless the customers cancelled the contract within 30 days of the end of the term;
• the ability to unilaterally increase prices for any reason;
• excluding liability where JJ Richard’s performance is “prevented or hindered in any way”;
• charging customers for services not rendered for reasons beyond the customer’s control;
• giving JJ Richards’ exclusive rights to remove waste from a customer’s premises;
• the ability for JJ Richards to suspend its service but continue to charge the customer if payment is not made after seven days;
• giving an unlimited indemnity in favour of JJ Richards; and
• preventing customers from terminating their contracts if they have payments outstanding and entitling JJ Richards to continue charging customers equipment rental after termination

Consistent with the agreed position of the parties, the Court was satisfied that:

• each of the Impugned Terms created a significant imbalance between JJ Richards’ and its customers’ respective rights and obligations;
• the Impugned Terms were not reasonably necessary to protect JJ Richards’ legitimate interests; and
• the Impugned Terms would cause detriment if relied on by JJ Richards.

The Court referred to and accepted the ACCC’s submissions as to why each of the Impugned Terms created a significant imbalance in the rights and obligations of the parties.  Of particular interest were the ACCC’s submissions on the following two terms.

Automatic Renewal Clause

This clause provided for the initial term of the agreement to be automatically renewed for a further period unless terminated by written notice within 30 days before the end of the initial or any renewed term.

The ACCC submitted, and the Court agreed, that the limited period of time within which a customer can terminate the contract before they are automatically bound for a further term (which in most cases was of equal duration to the initial term) and the fact that JJ Richards was not required to provide notice to customers of the impending expiry and automatic renewal, may result in customers inadvertently missing the opportunity to terminate the contract and therefore be bound to JJ Richards for extensive periods.  This was said to create a significant imbalance as, due to the limited resources and competing demands of small businesses, JJ Richards was likely to be more aware of when customers’ contracts are coming up for renewal than customers.  This imbalance was also exacerbated by the operation of other Impugned Terms, in particular, the exclusivity clause and the right to unilaterally vary prices.

Exclusivity Clause

This clause granted JJ Richards exclusive rights to remove waste, recyclables, combustible liquids and dangerous goods from customers’ premises.

The Court accepted the ACCC’s submission that the clause created a significant imbalance in the parties’ rights and obligations under the contract because it limited customers’ general right to contract with whomever they want.  Although JJ Richards did not seek to rebut the presumption that the term was not reasonably necessary to protect its legitimate interests, the Court was satisfied that the clause went beyond what is reasonably necessary as JJ Richards did not need exclusivity in order to its conduct its business. 

This position adopted by the ACCC is potentially significant as it suggests that unless exclusivity clauses could be said to be necessary (as opposed to desirable) for the operation of the business, they could be unfair. 

Orders

The Court ordered that JJ Richards:

• be restrained from applying or relying on any Impugned Term contained in existing standard form contracts with small businesses;
• be restrained from entering into further standard form contracts with small businesses that contain these Impugned Terms for a period of five years;
• publish on the home page of its website, on its customer portal and any other URL used by the company to market and supply waste management services, a corrective notice; and
• provide a copy of the orders to all small business customers who entered into or renewed a standard form contract with JJ Richards after 12 November 2016 where they employed 20 or more persons; and
• establish and implement an ACL Compliance Program to be undertaken by each employee or other person involved in the company’s business who deals with Australian customers.  The Compliance Program is to be maintained and continued for a period of 3 years.

Proceedings against Servcorp

Soon after taking action against JJ Richards, the ACCC instituted proceedings against Servcorp, a supplier of office space and virtual office services, alleging a number of terms in Servcorp’s standard form agreements with small businesses are unfair and therefore void. 

The terms challenged as unfair include:

• automatically renewing a customer’s contract and allowing Servcorp to unilaterally increase the contract price after the renewal and without prior notice to the customer;
• permitting Servcorp to unilaterally terminate the contract and to impose penalty-type consequences on the customer;
• unreasonably limiting Servcorp’s liability or which impose unreasonable liability on the customer;
• permitting Servcorp to unilaterally determine whether the contract has been breached; and
• permitting Servcorp to unilaterally acquire the customer’s property without any notice.

We will be following this matter closely and will provide updates as it progresses through the Courts.