The ACCC has been successful in its first court action enforcing the business to business unfair contract terms regime.
The action was taken against JJ Richards & Sons Pty Ltd (JJ Richards), one of the largest privately-owned waste management companies in Australia and concerned JJ Richard’s service agreement.
Background
From 12 November 2016, the business to consumer unfair contract terms regime set out in the Australian Consumer Law was extended to cover “standard form contracts” involving “small businesses”, as defined in the legislation (B2B UCT regime).
The effect of the extension is that a court or tribunal could declare terms in small business, standard form contracts which are entered into, renewed, move into a holdover period or varied (to the extent of the varied term) on and from 12 November 2016, to be unfair and therefore void and unenforceable.
Leading up to the introduction of the new laws, the ACCC focussed on education and awareness initiatives. As the new law came into effect, the ACCC released its report “Unfair terms in small business contracts: A review of selected industries”, which identified common terms of concern it had identified in seven industries, including waste management (B2B UCT Industry Report).
In this report, the ACCC stated “This report marks the conclusion of the ACCC’s voluntary compliance and education industry review…the ACCC will transition to a more focused enforcement approach and will now be targeting businesses that supply standard form contract to small businesses containing unfair terms”.
The ACCC action against JJ Richards
On 6 December 2016, the ACCC wrote to JJ Richards. In that correspondence, the ACCC drew JJ Richards’ attention to the B2B UCT Industry Report, informed JJ Richards that it was investigating whether terms in contracts being offered by waste management providers gave rise to concerns under the Australian Consumer Law and requested copies of relevant contracts from JJ Richards. On 15 December 2016, JJ Richards responded to the ACCC confirming its awareness of the B2B UCT regime and stating that it was reviewing its service agreements.
During the period 19 December 2016 to 31 March 2017, the ACCC made further requests of JJ Richards for relevant contracts. On 28 April 2017, the ACCC received a letter from JJ Richards stating that it could not determine which of its contracts were with small businesses. The letter enclosed a USB containing 10,071 contracts JJ Richards had entered into since 12 November 2016 in the Melbourne or Brisbane metropolitan areas.
On 6 September 2017, the ACCC announced that it had instituted proceedings in the Federal Court against JJ Richards, alleging that eight clauses in its standard form, small business contract were void under the B2B UCT regime and seeking declaratory and injunctive relief against JJ Richards. The eight terms of concern were provisions that:
- Renewed the contract for a further term unless customers cancelled the contract 30 days before the end of the term;
- Permitted JJ Richards to unilaterally increase its prices;
- Removed any liability for JJ Richards where its performance is “prevented or hindered in any way”;
- Allowed JJ Richards to charge customers for services not rendered for reasons beyond the customer’s control;
- Granted JJ Richard’s exclusive rights to remove waste from a customer’s premises;
- Allowed JJ Richards to suspend its service but continue charging the customer if payment is not made after seven days;
- Created an unlimited indemnity in favour of JJ Richards; and
- Prevented the customer terminating the contract if they have payments outstanding and entitled JJ Richards to charge customers equipment rental after termination of the contract.
The ACCC and JJ Richards reached an agreement in relation to the declarations and injunctions sought and prepared a statement of agreed facts and admissions. The agreement between the ACCC and JJ Richards formed the basis on which the Federal Court determined its declarations. On 13 October 2017, the Federal Court declared that all eight terms in JJ Richard’s standard form contracts were unfair and therefore void.
Exclusivity rights, potentially unfair
While most of the terms which were declared unfair fit within categories which have been widely discussed as potentially unfair under the B2C and B2B UCT regime, there has been little commentary about exclusivity provisions being potentially unfair.
Under clause 9(i) of JJ Richard’s service agreement, the customer agrees to:
“Grant JJR exclusive rights to the removal of waste, recyclables, combustible liquids and dangerous goods from the premises specified and not engage a second party for waste, recyclables, combustible liquids and dangerous goods removal during the term of this agreement”.
In finding that the term was unfair, the Federal Court noted that the exclusivity clause required customers to obtain all waste management services from JJ Richards, even where the customer was seeking additional services to those provided by JJ Richards and that restricting customers from seeking additional services “causes a significant imbalance in the parties’ rights and obligations under the contract, because it limits… [customer’s] general right to contract with whomever they want”.
Though JJ Richards did not attempt to argue that any of the eight terms in question were reasonably necessary to protect its legitimate interests, the Federal Court found that the exclusivity clause was not reasonably necessary because “JJ Richards does not need to have exclusivity in relation to waste management in order to conduct its business”.
In consideration of this declaration, businesses are recommended to review their exclusivity provisions and consider whether they are reasonably necessary or whether other terms (for example, minimum volume provisions or a defined schedule of services) are more appropriate to protect the business’s legitimate interests.
Arguably, if a business has agreed on a certain price with a customer on the basis that it has the right to exclusively service that customer, it is reasonably necessary to include exclusivity provisions in the contract to protect that business’s legitimate interest. Such an argument was not raised in this case and is therefore untested.
Businesses should also consider that an exclusivity provision may exacerbate the “unfairness” of other terms. For example, a term allowing one party to suspend its services for any reason is likely to cause more detriment to the other party if the other party is also bound by an exclusivity provision, preventing that party from obtaining the suspended services from another supplier.
Consequences of terms being declared unfair
Neither the B2C UCT regime nor the B2B UCT regime prohibits the mere inclusion of the unfair contract terms in standard form contracts. A term is only unenforceable if declared by a court or tribunal to be unfair. While many businesses captured under the B2B UCT regime have proactively reviewed and amended their standard form contracts to address the B2B UCT regime, others have continued to use their standard form contracts without amendment despite having potentially unfair terms in their contracts. The ACCC’s action against JJ Richards demonstrates the risk associated with this approach.
JJ Richards had entered into some 26,000 contracts since the B2B UCT regime, many of which will be caught by the B2B UCT regime. As a result of the ACCC action, it has consented to orders restraining it from relying on the unfair terms and from including the unfair terms in its standard form, small business contracts for five years from the date of the orders. The inability to rely on certain terms in thousands of existing contracts, in the absence of substitute terms, may present commercial, operational and legal challenges to JJ Richards going forward.
Further, JJ Richards was ordered to:
- Publish corrective notices on its website, customer portal and any other URL used by it to market and supply waste management services;
- Provide a copy of the Federal Court order to each small business counterparty to a standard form contract entered into or renewed after 12 November 2016; and
- Implement and maintain for three years, a compliance program to minimise the risk of future use, application or reliance on unfair contract terms in standard form, small business contracts, which must be undertaken by each employee of JJ Richards or other person involved in JJ Richards’ business who deal or who may deal with Australian customers.
Three key takeaways for businesses
- Businesses entering into standard form contracts with small businesses, particularly those entering into a high volume of contracts, should not delay in reviewing and amending their standard form contracts. As we approach one year since the new laws took effect and as the ACCC continues its enforcement actions, a “head in the sand” approach is not likely to be viewed upon favourably;
- Businesses requiring that their customers acquire goods or services exclusively from them are recommended to review these exclusivity provisions, particularly where customers could obtain additional goods and services from competitors without affecting the first business’s legitimate interests; and
- When initially approached by the ACCC, JJ Richards struggled to identify which of its standard form contracts were covered by the B2B UCT regime, because it could not identify which customers had less than 20 employees at the time of entering into the standard form contracts. The inability to identify the relevant contracts may also cause challenges now that JJ Richards must provide a copy of the Federal Court order to each affected counterparty. The inability to identify whether a counterparty has less than 20 employees is a practical problem faced by many businesses. Businesses should consider whether they use the same standard form contracts for all parties, whether the B2B UCT regime applies or not, or other methods to identify a counterparty’s employee count prior to entering into a contract.
This client alert was written by Teresa Torcasio, Partner and Marian Ngo, Associate in our Melbourne office.