In November 2016, the Australian Consumer Law (ACL) introduced new protections for small business. These prevent (often larger) businesses from trying to rely on unfair contract terms.
The Federal Court recently decided the first court case on this legislation. The case involved waste management giant, JJ Richards1.
This case confirmed that many large businesses have not made their contracts fairer. In fact, the court said several common clauses were void and unenforceable. We see these types of clauses regularly in The Fold’s Contract Review Service.
You can challenge unfair terms
Small businesses are now in a much stronger position to challenge these terms. You can ask for them to be removed or re-drafted for a fairer outcome.
Some of the contract terms that the court struck out for being unfair include:
- Unlimited indemnity: This clause indemnified JJ Richards in every situation – even if the customer had no control, had not caused or contributed to the loss or where JJ Richards could have mitigated its own loss.
- Automatic renewal: The customer could only end the contract by opting out 30 days before the contract ended. If they didn’t, the contract automatically continued. JJ Richards didn’t even have to notify the customer that the contract end date was approaching.
- Unilateral price changes: JJ Richards could increase its prices without the customer’s agreement.
Exclusivity: JJ Richards had exclusive rights. This meant the customer could not use another waste management provider. - Penalties for late payment and inability to perform service: JJ Richards could stop servicing the customer if they didn’t receive payment within 7 days. They could also continue to charge the customer even if they weren’t actually able to provide the services.
- No termination if payments outstanding: A customer could not end the contract if they owed JJ Richards money, even if they were disputing the amount owed.
While each individual clause protects the legitimate business interests of JJ Richards, collectively the court said they were unfair and in breach of the law. They created a power imbalance between JJ Richards and their customers.
Indemnity clauses will be fairer
It’s very common for one party to transfer all their legal liability to another in a contract. Following this case, indemnity clauses are now fair game. They may be attacked by the ACCC if they are one-sided and unfair.
The best way to achieve a fairer outcome is to use common sense when negotiating indemnity clauses. This may include:
- Apportioning liability fairly: You should only be liable for the loss that you are to blame for. This is fair and means you can access your liability insurance to fund the indemnity claim. You can then focus on risk management and take active steps to mitigate your loss.
- Limiting liability: Cap your financial liability and exposure. This is particularly helpful if one party is much smaller and has limited financial resources. You can negotiate risk allocation and decide how much you really need to recover from one another to protect your business.
- Looking at what insurance will cover: Insurance generally does not cover:
- Fines, penalties, exemplary or aggravated damages, excessive legal costs or consequential losses. These are all beyond your control.
- Liability that you have agreed to accept. This includes a one-sided indemnity clause.
So, what can you do now?
Indemnity clauses are not going to disappear anytime soon. But it’s unlikely that one-sided indemnity clauses will survive for much longer.
If you’re a large business, avoid seeing the ACCC in court by reviewing your standard contract terms and finding a position that is reasonable and fair. This should take into account the financial resources and insurance policies of the businesses you’re contracting with. It should also consider what level of protection your business really needs.
If you’re a small business, you now have the power to negotiate fairer contract terms from the outset.
By Lydia Carstensen