Would your contract hold up in Court?
Legislation relating to unfair contract terms for small businesses has, to date, generally been untested. However, a recent case against waste management solutions company, JJ Richards and Sons, shows these laws have real ‘teeth’, with eight terms of a contract being deemed unfair and unenforceable.
This case is a good example of the importance of applying a litmus test to standard form small business contracts as to whether the contract creates an imbalance of power between the parties.
Australian Consumer Law (ACL) has for many years provided consumers with protection against unfair contract terms. In late 2016, this protection was extended to cover standard form small business contracts.
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 employs fewer than 20 people; and
the price payable under the contract is less than $300,000 or $1,000,000 where the contract is for a term over 12 months.
In simple terms, a ‘standard form contract’ is one that has been prepared by one party and where the other party has little or no ability to negotiate the terms.
The ACL provides that a term could be ‘unfair’ if it creates an imbalance of power between the parties or if it would cause significant financial detriment to a party if relied upon.
JJ Richards Case
The case against JJ Richards is the first case to bring to the forefront the risk of noncompliance with the unfair contract terms regime.
The Court considered unfair and therefore void terms in the JJ Richards’ contracts which:
Bound customers to an extended term or new contract unless they cancelled the contract within 30 days before the end of the term
Allowed JJ Richards to increase its prices without the consent of the other party
Removed liability for JJ Richards where its performance is prevented in any way
Allowed JJ Richards to charge customers for services not actually provided, even when caused by reasons beyond the customer’s control
Granted JJ Richards sole rights to remove waste from all of the customer’s premises
Allowed JJ Richards to suspend its service but continue to charge the customer if payment is not made after seven days
Created an unlimited indemnity (right of recovery) in favour of JJ Richards
Prevented customers from terminating their contracts if they have payments outstanding and entitling JJ Richards to continue charging customers equipment rental after termination of the contract.
The Court said the terms of the contracts increased the overall imbalance between the parties and the risk of detriment to JJ Richards’ customers.
JJ Richards agreed not to rely on the unfair terms or to apply the terms in future standard form contracts.
Recommendation
Businesses cannot just put their heads in the sand – they need to be taking action to review and update their standard form contracts to be certain they do not create an imbalance between the parties to the contract or risk the same fate as JJ Richards.
We can assist businesses in reviewing their contracts to ensure their interests are protected to the maximum extent the law permits. If you have any queries or would like our assistance, please contact one of our lawyers.