When is a contract term unfair?

Since the new unfair contracts rules protecting small businesses came into effect almost a year ago, businesses have been working to adjust their contract terms.

influence legal contracts unfairWe now have new guidance on unfair contract terms from a recent consent decision in the waste management industry.

The ACCC took action against a large waste management company, JJ Richards, and obtained consent orders in the Federal Court. This action was part of a broader ACCC initiative to review small business contracts.

The Federal Court declared that as many as 8 terms in the company’s standard form contracts for small business were unfair. The problem areas were:

  • an auto-renewal clause, meaning that small business customers would have their contracts rolled over unless they cancelled within 30 days before the end of the term;
  • exclusivity;
  • unilateral price increases;
  • a term excluding the company’s liability where its performance was prevented or hindered in any way;
  • the company could charge for services that were not provided even when this was outside the customer’s control;
  • the company could suspend for non-payment, but continue to charge the customer;
  • an unlimited indemnity;
  • customers could not terminate if they had outstanding payments and the company could continue charging equipment rental after termination.

You can see from this list that some of these terms are obviously excessive, while others, like the auto-renewal clause, are very common in business customer contracts, so it’s important to get the specifics right.

The Court noted that each of the terms was unfair but they also interacted in a way that increased the overall imbalance between the parties.

So, in reviewing your contract terms, it’s important to look at the overall effect as well as taking the details of each clause separately, to judge whether the terms are compliant with the unfair contract rules.

We can expect further guidance from another upcoming ACCC action in the office services area.

If you would like assistance to review your standard contracts, contact us.

Here is our earlier article specifically for franchisors on updating contracts for the new rules.

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