Beware the Unfair – lessons to be learnt from JJ Richards?

The protections afforded to consumers under the “unfair contract terms” regime by the Australian Consumer Law and the ASIC Act 2001 has been extended to cover small businesses for over a year now.
 
However, the recent prosecution brought by the ACCC against waste management company JJ Richards & Sons Pty Ltd (JJ Richards) provides some insight into the type or nature of terms that are liable to fall foul of the legislative regime and thereby declared void.  
 
The operation of these legislative provisions with respect to small businesses may have a great impact for insurers that provide cover relating to the contractual liabilities of their insureds.

Since 12 November 2016, both the Australian Consumer Law and the Australian Securities Investment Commission Act 2001 have included provisions to protect not just consumers, but also small businesses, from unfair contract terms in standard form contracts.
 
We reported on these provisions on 10 November 2016.  
 
The key takeaways are that:

1. small business contracts renewed or entered into after 12 November 2016 that are ‘standard form contracts’ are subject to the unfair contract terms regime;
2. a term may be unfair if:

 

1. it would cause a significant imbalance in the parties’ rights and obligations under the contract;
2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause detriment to a party if it were to be applied or relied on;

 

3. whether or not a term is unfair will also be affected by how transparent the term is (for instance, whether the term is expressed in legal jargon or plain English); and
4. if a term is found to be unfair, the term will be considered void and, therefore, unenforceable.

 
ACCC v JJ Richards

In October 2017, the Federal Court of Australia determined (with the consent of JJ Richards) that eight of the terms in JJ Richard’s small business standard form contracts were unfair contract terms. The eight terms (“Unfair Terms”) were as follows:

1. a term that bound JJ Richards’ customers to subsequent contracts, unless the customer cancelled the contract within 30 days before the end of the initial or any subsequent term;
2. a term that allowed JJ Richards to unilaterally (without consultation with the customer) increase the price of its services for any reason;
3. a term that absolved JJ Richards of liability where performance of its services was prevented or hindered, even if the customer was not at fault, and even if JJ Richards was better placed to manage or mitigate the risk of the prevention or hindrance occurring;
4. a term that allowed JJ Richards to charge customers for services it had not rendered for reasons beyond the customer’s control (or even for reasons within JJ Richards’ control, such as equipment failure);
5. a term that required JJ Richards customers to obtain all of their waste management services from JJ Richards, even if the customer sought additional services to those provided by JJ Richards;
6. a term that allowed JJ Richards to suspend provision of its services but continue charging the customer if the customer did not pay their account within 7 days;
7. a term that created an unlimited indemnity in favour of JJ Richards, even where the loss incurred by JJ Richards was not the fault of the customer or could have been avoided or mitigated by JJ Richards;
8. a term that prevented JJ Richards customers from terminating their contracts with JJ Richards if they had payments outstanding, whilst simultaneously entitling JJ Richards to continue charging their customers equipment rental after the termination of the contract, despite the fact no services were provided.

What is clear from the above is that terms that, for instance, penalise a small business customer for matters that our outside their control, blatantly advantage one party over another or impose unilateral obligations, for no legitimate commercial reason, are at risk of being found to be ‘unfair’ and therefore rendered void (that is, not binding) as a result.
 
How can unfair standard form contract terms affect insurers?
 
The extension of the ‘unfair standard form’ contracts provisions to contracts entered into by small business customers may have an impact for insurers who insure both:

1. small businesses that routinely enter into standard form contracts with other parties; or
2. any entity that imposes standard form contracts on its small business or consumer customers.

 
For instance, where an insurer is providing cover which relates to an insured’s contractual liabilities to third parties, the ability for any provisions of a standard form contract to be relied upon may be a crucial issue.
 
It is prudent for insurers to keep this in mind when deciding what risks it will cover, and where contractual liability claims arise, consider the potential application of the ‘unfair standard form contract’ provisions in the conduct of any subrogated recovery or defence on behalf of its insureds.

Post by Susannah Fricke & Justin Ho