[EP 037] The ACCC gets active suing businesses for unfair contract terms – Are you also in the firing line?

Two cases under the Unfair Contracts Legislation have now hit the courts in September this year. Find out what clauses the ACCC deemed unfair, what industries they’re targeting and what they’re seeking out of all this.

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Episode Highlights

01:49 Two proceedings commenced in September

02:53 Application of the Unfair Contracts Legislation

04:08 The case against JJ Richards and Sons

06:26 Clauses deemed unfair by the ACCC

12:18 The case against Servcorp

14:59 What the ACCC is seeking out of all of this

16:53 Industries targeted by the ACCC

19:23 Here’s a quick recap

20:48 Introducing “Legal on Tap”  

Joanna: Hi, it’s Joanna Oakey here and welcome back to Talking Law. Today we are talking about recent cases in the Unfair Contracts Legislation. Now we have had a number of podcast episodes before where we’ve talked about the Unfair Contracts Legislation and what it means. So if you want to check out the show notes for this podcast go to www.talkinglaw.com.au and find today’s episode and there we’ll have some links back to episodes we’ve had in the past where we talk in detail about what the Unfair Contracts Legislation is and who it applies to.

But today we’ll give a little quick recap on it. But mostly we want to talk about some actual cases that are before the courts now in order to give you a flavour for what is actually going on in a practical sense in relation to these Unfair Contracts Legislation now that it’s actually hitting the courts. In order to do this, I’ve brought back the fabulous Elizabeth Lee from Aspect Legal who heads up our Commercial and Acquisitions Division. Hi Liz, welcome back!

Liz: Thanks Joanna. Thank you for having me.

 

Two proceedings commenced in September

Joanna: Great. So what are the cases that we’re talking about today, Liz?

Liz: In September the ACCC commenced two proceedings. The first one is against JJ Richards and Sons, a waste management company that used the standard forms with its small business customers.

Joanna: Right. OK.

Liz: And the other one is a public listed company, Servcorp that provides service in virtual office space to small businesses.

Joanna: Great. OK. All right. It’s interesting that we’ve got two cases that have been brought in September so it’s obviously a busy month for the ACCC in September in bringing these first couple of cases under the Unfair Contracts Legislation so maybe just a quick recap in relation to what the Unfair Contracts Legislation relates to. And for our listeners who haven’t heard about this legislation in the past, this is new legislation that came into effect in November 2016. So we still call it fairly new from a legal perspective.

So Liz, who does this legislation apply to?

 

Application of the Unfair Contracts Legislation

Liz: It applies to business to business contracts where one of the businesses is categorized as a small business. And to qualify as a small business you have less than 20 people in your headcount and the upfront price of the contract is either less than 300,000 dollars or where the contract runs for more than a year, up to a million dollars in value.

Joanna: OK great. And so here we are talking about contracts that are a standard form contracts, so contracts where one party hasn’t had a reasonable opportunity to negotiate the terms. Maybe we’ll talk about that a little bit later on because I think that’s a really important point. Some people think of this Unfair Contracts Legislation as relating only to standard form terms, but it can also apply where a word document for example has been sent between the parties but where there is no real genuine opportunity for a party to negotiate the main component of those terms. And we’re talking here where one of the parties is a small business i.e. they employ less than 20 people and we have a contract value cap here of either 300,000 dollars or if the contract runs for more than a year up to a million dollars. Okay great.

 

The case against JJ Richards and Sons

Joanna: So maybe let’s kick it off by talking about the enforcement proceedings that have been brought against JJ Richards and Sons. As you said, they’re a waste management company. And it’s interesting because I can really see that the waste management industry certainly in the past was rife with contracts that contained really onerous provisions for the businesses that were signing them, particularly things like this automatic rollover clauses which was a regular type of clause that appears or used to appear prior to this legislation in waste management contracts. Essentially, those rollover clauses say that when the contract comes to the end of the initial term it will automatically renew for a new term unless the customer does something to stop it from renewing.

Liz: Yes, correct. And in that scenario the customer only realistically has one opportunity to terminate in each 12 month period. It’s not just that it automatically renews but in order to prevent it from renewing, you’ve got to give notice within a certain period of time and that the effective termination date has to coincide with when that automatic renewal period end.

Joanna: Yeah right.

Liz: So it’s really once a year that you can terminate.

Joanna: So what we’re saying here is it’s quite logistically difficult for businesses in picking up these termination dates because they have to understand the clause, they have to then diarise the termination period so they can ensure that they do the right things to ensure that they’ve terminated on time.

Liz: And also operationally, they’ve organized for someone else to step in when this contract terminates. So it’s a lot of logistics involved and the timing has got to be perfectly synchronized one time in the year.

Joanna: And we’ve seen this play out again and again in customers that have come to us with issues with rollover clauses like for example in these waste management company agreements where they have just simply missed the rollover date and now they’re captured again in the contract for a whole new term where for example they might be able to get a much better deal if they were going out to get a new supplier but they’re stuck in this contract.

 

Clauses deemed unfair by the ACCC

Joanna: OK. So Liz can you please give us a bit of an overview then of what the ACCC is alleging in relation to this waste management company JJ Richards and Sons in relation to what’s unfair?

Liz: There’s a range of clauses that ACCC has alleged to be unfair. First is the automatic renewal clause. Then there’s also the ability to unilaterally increase price(s) during the term.

Joanna: So that’s interesting isn’t it? I certainly agree that a unilateral right, so when we say that we mean one party in this case JJ Richards and not the other party has the right to modify the terms. And in this case JJ Richards is saying that they have the right to increase prices, but the other party doesn’t have the ability to stop that increase in price for example.

Liz: Yes correct. I mean there’s actually a provision in the Unfair Contract Legislation which says that the fact that a party cannot claim that the price is unfair is not an unfair term that you can allege. However the fact that one party can unilaterally increase the price that is unfair.

Joanna: OK. All right. I think that’s a really good point.

Liz: There’s also a whole heap of liability limiting provisions in the contract that the ACCC says is unfair. Where there’s a clause to the effect that JJ Richards has no liability if it fails to provide the services, if it breached its obligation to provide the services. This is fairly common in a lot of standard form contracts where businesses attempt to be absolved of liability and exclude liability completely. This is now being seen as an unfair provision because what is the customer getting if the customer is not getting some assurance that he will be obtaining the services that it has bargained for without the service provider excluding its obligation.

Joanna: And it is interesting isn’t it because when we look at these clauses on their own and shine a light on them it seems obvious that they seem unfair. However many thousands of businesses are out there signing these contracts without realizing what these terms actually mean. I think it’s great that we have the light shone on clauses like this at point so that businesses stop and step back and take perhaps a bit more time to consider what it is in these contracts that they are signing.

Liz: Yes.

Joanna: Because of course we don’t know what the courts will decide out of this case with JJ Richards and Sons yet. It’s just an action brought by the ACCC. But it’s certainly a warning for all businesses that have these types of extensive liability protection clauses in their agreements that they really need to be reviewing them because the ACCC is taking action.

Liz: Yes. So for example one of the clauses alleged to be unfair is that if small businesses fail to pay their accounts within seven days, JJ Richards will suspend the services. But on the other hand the company still has the obligation to continue to pay the fees. So it’s going to be interesting to see how the court will view such clauses because on the one hand if a service provider is providing a service and the customer is not paying on time, that service provider should have the ability to sanction, to impose a sanction such as suspension of services otherwise it could be subject to abuse by customers. Customers won’t pay and yet can still expect continuity of service, I mean is that fair on service providers? So I think it would be interesting to see where the court lands on decisions and clauses like that.

Joanna: And it will have ramifications for many organisations in terms of how they deal with these sorts of causes perhaps. So we’ll certainly be watching closely the response by the courts in relation to some of these other sorts of clauses.

Liz: Yeah.

Joanna: What else did the ACCC take issue with in JJ Richards’ clauses?

Liz: So there were exclusivity rights that JJ Richards imposed. Small businesses couldn’t obtain waste management services from another provider. So that’s now being tested. There is also an unlimited indemnity for loss in favour of JJ Richards in relation to the contract even if the small business didn’t cause the loss. So that’s probably taken the concept too far in favour of JJ Richards. I think some clause you can see that the risk and liability has been sort of drawn too much in favour of the one party. So those sort of one sided indemnity clauses, they’re being scrutinized.

Joanna: I think that’s really interesting because if you say to anyone “Okay, I want you to give me unlimited liability where I’m providing the services but you’re providing unlimited protection to me in case something goes wrong.” Everyone would say “Well there’s no way! I’m not signing that”.

Liz: Yes. That’s right. That’s right.

Joanna: The reality is businesses do because they don’t understand. These indemnity clauses often look so complicated on the surface. People just don’t understand what they’re signing. I think that’s the issue at the end of the day.

Liz: And at the last provision that ACCC took issue with relates to the ability of small business to terminate the contract. There was a provision in there which said that the small business couldn’t terminate the contract if it owed any money to JJ Richards so the ACCC took issue with that type of clause.

 

The case against Servcorp

Joanna: OK. All right. Well look, this is fascinating. There’s so many clauses here obviously that the ACCC has picked up on and clearly some of these clauses seem fairly obviously unfair but it will be interesting to see how the court deals with it. So we’ll follow that along and certainly report back on it. But maybe now we should talk a little bit about the second proceedings that were commenced recently in September against Servcorp. So what did the ACCC say about in these proceedings about Servcorp’s contract.

Liz: Yeah. So very similar to JJ Richards. There was an automatic renewal clause. There was a unilateral right to increase a contract price. You can start to see a pattern. Servcorp could unilaterally terminate the contract and impose penalty type consequences on the small business if Servcorp was to terminate the contract. And I assume it was terminating for breach but that’s still you know that the agency did take issue with the fact that there was a penalty type provision.

Joanna: And just for our listeners who don’t know but penalty clauses are void under the law. So you’re not allowed to have a clause in a contract that operates as a penalty. So sometimes those sorts of clauses are clauses which impose excessive fees that relate to a breach for example. So that may be deemed to be a penalty clause that should be void.

Liz: Yeah. And again Servcorp’s liability under the contract is very limited. Again if Servcorp’s providing a service, why isn’t it taking on the risk should it provide poor service or fail to provide service that it promised. Again that’s a common theme that the ACCC is focused on. And in that case there were a number of unilateral provisions that favoured Servcorp that the court thought was unfair.

Joanna: OK. All right. Well look this is very interesting. I guess for our listeners who don’t know who Servcorp is, in order to help this make a little bit more sense for you, Servcorp supplies serviced office space and virtual office services. So by nature the businesses that they deal with are often small businesses and businesses who perhaps don’t have access to legal advice that larger businesses or more established businesses have.

I think it’s great that the ACCC is shining a light on these types of contracts where businesses may be just signing these contracts without taking advantage of using legal advice to help them understand what it is that they’re signing at the time that they’re signing it.

Liz: Yes.

 

What the ACCC is seeking out of all of this

Joanna: Maybe we should talk about what the ACCC is seeking out of all of this. What are they asking the courts to say?

Liz: So besides the declarations that these terms are unfair the consequence of which is that these terms will be void if the ACCC succeeds meaning that they won’t have any force or effect in the contract. Besides that the agency is also seeking injunctions so injunctions against the companies from entering into similar standard form contracts with its future customers.

The ACCC is also seeking publication orders. I don’t know. Corrective advertising or it might be apologies. I’m not sure what it is. And also ACCC can seek compliance orders against the company. So companies to engage a certain set of conduct in order to remedy.

Joanna: And obviously it’s not cheap for an organisation to defend itself against an action by the ACCC. So obviously there’s all of that at play as well.

I guess for our listeners there’s two elements that you should be really thinking clearly about now. If you are a small business, are there contract that you are signing that have clauses in them that really would be deemed to be unfair? Have you entered into a contract with an organisation who is trying to enforce a clause that is actually unfair? So maybe you’ve got some rights now to resist the application of those clauses by way of this new legislation and on the flip side if you deal with any businesses that might be deemed to be small business, do you have elements of your contract with them that might be deemed under this legislation to be unfair itself?

 

Industries targeted by the ACCC

Joanna: And Liz I know the ACCC has highlighted a number of industries that they are actually targeting in this area. Maybe we can talk about some of those industries just so that businesses can be aware of in particular sorts of contracts that might often have these unfair terms. Although it can happen in any industry at all. But these are just some examples of what the ACCC are particularly looking at or focusing on at the moment.

Liz: Yes so the ACCC has come out and said that they will be focusing on the advertising services industry, the telecommunications providers industry, retail leasing industry, and I think that Servcorp is well it’s not exactly retail leasing. It is in the leasing space and I think that just as a general comment the leasing space is rife with very one sided contracts in favour of landlords. So I think that there will be a big change in leasing documentation that we see over the coming years depending on how strong the ACCC enforces against those people in that industry. It said that it would target the waste management industry and it has now against JJ Richards. That’s just the test case. Franchising industry – again that’s another area very similar to leasing where contracts are very one sided in favour of the franchisor. There will be some movement there I think with the agreements that are being entered into.

Joanna: Absolutely.

Liz: Independent contractors – again it typically is in the independent contracting space, independent contractors tend to be asked to take on a lot of risk and liability and I think that there’s going to be a shift in the risk profile there for independent contractors. And lastly in the agricultural industry probably too there’s a big imbalance of power between farmers and large businesses such as your Woollies and Coles.

Joanna: Absolutely. OK. Well look that’s a really useful list and I think it’s a really good discussion today because as I said in the past we’ve talked about the Unfair Contracts Legislation and the focus. But you know it really brings it home once we have some cases that we talk about once the ACCC has started to get active in using the legislation against organisations that haven’t taken the time to go and review their terms and get them shipshape following commencement of the legislation.

 

Here’s a quick recap

Joanna: So just as a recap, today we talked about recent cases that relate to the Unfair Contracts Legislation. If you’d like more information about this topic, head over to our website at talkinglaw.com.au for a free download of the transcript of this episode if you’d like to read through it in more detail.

There you’ll also find details of how to contact our lawyers at Aspect Legal like Liz if you would like help with any of the items we covered today. Certainly, if you haven’t had good terms and conditions reviewed since the commencement of the new Unfair Contract Legislation, now is the time absolutely to get your house in order. If you are signing terms with other organisations and you’re concerned that there might be provisions that are unfair then get legal advice. Make sure you understand what you’re signing before you sign it. Because as Liz and I spoke about today often some of these clauses that organisations sign are amazingly one sided. But organisations just often don’t realize if they don’t see these agreements often enough. They just don’t understand how one sided the agreements are that they’re being asked to sign. Thank you Liz, that was awesome.

Liz: Okay, cool.

 

Introducing “Legal on Tap”

Joanna: And if you’re an owner or manager of a business you might also be interested in Aspect Legal’s innovative “Legal on Tap” membership which is the first of its kind in Australia.

This membership provides a business with access to a team of lawyers to answer questions as they come up in the business, access resources to help build the foundations of the business to avoid risk, and also provides a range of other ways to help with the growth of the business. All of this for a ridiculously low monthly price.

So if you want to have a lawyer on tap for your business, check out our website at aspectlegal.com.au. And that ends our episode today on the latest action by the ACCC in relation to unfair contracts. I hope you found it useful and are able to take action items to implement in your organisation today. So thank you once again you’ve been listening to Joanna Oakey and Liz Lee on Talking Law. See you next time.