Unfair Contracts- Small Business- Update
Australian Consumer Law- Increasing ACCC prosecutions relating to unfair contracts
The recent Federal Court decisions in Australian Competition and Consumer Commission v Fuji Film & Business Innovation Australia Pty Ltd (2022) FCA 928 and Australian Competition and Consumer Commission v Retail Food Group Ltd (2022) FCA 691 have provided further guidance relating to the preparation and enforcement of terms and conditions contained with standard form contracts.
The Australian Consumer Law (ACL) contained within Schedule 2 of the Competition and Consumer Act 2010 (Cth) has recently been subject to amendments to:
- expand the grounds in which a consumer or small business contract may be struck down or declared void for unfairness; and
- increase penalties applicable to corporate entities where contracts are found to breach the unfair contract legislation.
Takeaways for Employers and Principals
- If you are a small business and have entered a standard form contract it may be held to be unenforceable as an unfair contract and you should seek legal advice.
- The ACCC is evidently commencing prosecutions under the Unfair Contracts Regime, therefore businesses utilising standard form contracts must be careful to not breach the provisions of the ACL, by inserting unfair terms in contracts
- Businesses relying upon standard contracts and franchise agreements must ensure during contract drafting that the terms of the ACL and franchising law are being considered
- Where a contractual term or obligation creates a significant imbalance between parties, the courts will declare these terms as null and void, and they will not be enforced
- Contracts should not contain complex legal language, but should be amended to be written in plain English
Unfair Contracts Regime
The Australian Consumer Law provides an unfair contract regime which protects consumers entering into Standard Form Contracts, from unfair terms.
Standard form contracts are generally prepared by a business and contain a generic set of terms and conditions, which are not negotiated by the parties. They are entered on a ‘take it or leave it’ basis. These include consumer contracts and small business contracts.
The unfair contract regime applies to ‘standard form’ contracts for small business (small business contracts), which were entered into on or after 12 November 2016 and where:
- It is for the supply of goods or services or the sale or grant of an interest in land
- at least one of the parties is a ‘small business’ employing fewer than 20 people (including regular casual workers); and
- the upfront price payable under the contract does not exceed $300,000.00, or $1 million if the contract is for more than 12 months.
A consumer contract is one for the supply of goods or services, for personal domestic and household use.
Under the regime, terms that may be unfair include:
- Terms that enable one party (not the other):
- to avoid or limit their obligation under the contract;
- to terminate the contract;
- to unilaterally vary the terms of the contract
- Terms that penalise one party (not the other) for breaching or terminating the contract.
Unfair Terms essentially cause a significant imbalance of the rights and obligations of the parties. These terms are not necessary to protect the interest of the person seeking to rely on them and will cause detriment to the other party if they were to be relied upon.
Part 2-3 of the ACL provides that if a court or tribunal determines that a term within a standard form contract is ‘unfair’ it will be void, and not binding upon the parties. Notably, the rest of the contract will continue to operate to the extent that it can operate without the unfair term.
Fuji Film case
The ACCC commenced proceedings against Fujifilm Business Innovation Australian Pty Ltd (Fuji), alleging that between November 2016 and December 2021, Fuji utilised 21 standard template contracts to enter contracts with small business consumers. Around 34,000 contracts were entered into between Fuji and the small business customers which were unfair within the meaning of s24 of the ACL.
The Federal Court declared that nearly 300 individual contract terms in Fuji’s printer and photocopier rental agreements and Software License and Support Services Agreements, were void and unenforceable. Stewart J declared that a term was unfair for the below reasons:
- “(1) It allows Fuji to unilaterally vary either the price charged to the customers and/or the rights and obligations between Fuji and the customer.
- (2) It provides for automatic renewal of the contract unless the customer gives notice to cancel the contract in circumstances where there is no obligation on Fuji to notify the customer that the renewal will occur.
- (3) It incorporates additional contractual terms by reference to one or more extraneous documents, which documents are difficult for the customer to locate or identify, and which Fuji can unilaterally vary with no obligation to give notice of the variation.
- (4) It limits Fuji’s liability for any delay in supplying or delivering equipment to the customer in circumstances where the customer has no right to be excused from charges payable for the period of the delay.
- (5) It provides that the customer must pay Fuji all costs and expenses Fuji incurs in exercising its rights under the contract on a full indemnity basis, in circumstances where there is no corresponding right on the part of the customer and where there is no requirement on Fuji to minimise its costs.
- (6) The customer warrants by the term that it has read each document forming part of the contract, including extraneous documents that Fuji may not have provided, and that it enters into the contract solely on the contents of the contract, thereby purporting to exclude any liability on the part of Fuji for pre-contractual representations.
- (7) It provides a significant cap, reduction or limitation on Fuji’s total liability to the customer and excludes a claim for consequential loss in circumstances where the customer’s liability has no limit.
- (8) It requires the customer to indemnify Fuji for loss or damage to the products, including all associated costs, with exclusions only for limited wear and tear and anything directly attributable to Fuji’s negligence, thereby requiring the customer to indemnify Fuji for damage caused by third parties, or accidentally or indirectly by Fuji.
- (9) It entitles Fuji to suspend the provision of services where the customer breaches any term while still requiring the customer to pay for services that are suspended.
- (10) It entitles Fuji to terminate the contract immediately on notice and for cause if the customer breaches any term with no corresponding right of the customer and no right for the customer to remedy the breach.
- (11) It provides for payments to Fuji upon Fuji exercising a right to terminate, including payments for the remaining term of the contract in circumstances where the customer receives nothing in return and forfeits any prepayments.
- (12) It provides that, at the end of the minimum contract term, the customer must either:
- stay in possession of the equipment and pay Fuji the residual value, without receiving title to the equipment; or
- (b) pay Fuji the shortfall between the residual value and market value as determined by Fuji.
- (13) It provides that, by signing and returning the contract to Fuji, the customer makes an irrevocable offer to acquire the goods and services but that Fuji is not bound until the customer has been advised that the contract has been accepted or until Fuji commences providing services – leaving the customer bound yet without the required goods or services for an indefinite period.
- (14) It provides that Fuji can invoice the customer regardless of whether the goods and services the subject of the contract have been provided.”
Fuji admitted that the terms were unfair. Fuji, by consent, agreed to send communications to each small business customer affected by the contract terms, which were now declared void. Also, Fuji was ordered to publish corrective notices on their websites and implement a compliance program within the company. The Federal Court ordered an injunction for Fuji to stop enforcing these terms in current contracts and to stop using them for 5 years in 11 types of standard form small business contracts. Importantly, these court orders only apply to contracts entered with small businesses that employ fewer than 20 employees.
If you are a small business and have entered a standard form contract it may be held to be unenforceable as an unfair contract and you should seek legal advice.
For further information, please call us on (02) 9189 5288.
Gabrielle El-Kazzi and Craig Higginbotham
21 September 2022