Legal Update – November 2020
By Katarina Klaric (Principal & Director) and Peter Divitcos (Lawyer), Stephens Lawyers & Consultants
Standard form contracts are being subjected to increased scrutiny for unfair contract terms by regulators. On-line terms and conditions are of particular concern because consumers are often given no choice but to accept onerous or unfair terms if they wish to proceed with the purchase of goods or services.
Recent enforcement proceedings undertaken by the Australian Competition and Consumer Commission (“ACCC”) in respect of unfair contract terms provide guidance as to the types of contractual terms that could be deemed to be unfair and unenforceable, resulting in significant reputation damage and financial loss to the company. Restraint of trade and non-disparagement clauses which are often included in standard form contracts to protect the business, its goodwill and reputation, may be considered to be unfair by ACCC or the court if they extend beyond what is reasonably necessary to protect the legitimate interest of the business.
Businesses using standard form contracts or involved in e-commerce should review their terms and conditions for unfair terms to minimise the risk of terms being declared unfair and unenforceable.
This update references recent enforcement activities by the ACCC and provides some strategies for risk minimisation.
UNFAIR CONTRACT TERMS
Under the Australian Consumer Law (“ACL”) and the Australian Securities and Investments Commission Act 2001 (“ASIC Act”), a term of a “consumer contract” or “small business contract” is void and therefore unenforceable, if the term is unfair and the contract is a standard form contract.[i] A contract containing an unfair term will continue to bind the parties if it is capable of operating without the unfair term[ii].
A term of a standard form contract will be unfair if:
- The term causes significant imbalance between the parties’ rights and obligations arising under the contract; and
- The term is not reasonably necessary to protect the legitimate interests of the party advantaged by the inclusion of the term (i.e. the business); and
- The term would cause detriment (whether financial or otherwise) to a party if it were to be relied upon or applied.[iii]
The ACCC or a party to the contract may seek a declaration from the court that the term is unfair and void, an injunction restraining a party from relying or enforcing the term and compensation.[iv] The Australian Securities and Investment Commission (“ASIC”) is the regulator of financial products and services. ASIC has responsibility for enforcing unfair contract terms laws in the ASIC Act in relation to financial products and services.
TYCO AUSTRALIA’S UNFAIR CONTRACT TERMS
On 4 November 2020, Tyco Australia Group Pty Ltd trading as ADT Security (“ADT”) provided court enforceable undertakings to the ACCC to remove or amend unfair contract terms in its Customer Service Agreements and to notify its customers. ADT’s business involves the supply of security services including the installation and monitoring of security and firm alarm systems.
ADT admitted that certain terms in its agreement which permitted ADT to unilaterally vary the terms of the Agreement or increase the fees payable by the customer were or were likely to be unfair within the meaning of section 24 of the ACL.[v]
ACCC ALLEGES FUJI XEROX’S CONTRACTS UNFAIR
On 22 October 2020, the ACCC commenced court proceedings against Fuji Xerox Australia Pty Limited and Fuji Xerox Finance Ltd, a related company (“Fuji Xerox”), the suppliers of printers, photocopiers, scanners, software and support and maintenance services alleging that since at least October 2018 Fuji Xerox used standard form contracts which contained contract terms which were unfair and void.[vi] The ACCC alleged that nine Fuji Xerox standard form small business contracts contain 173 unfair contract terms.[vii] The alleged unfair contract terms include:
- Fuji Xerox is able to unilaterally vary the prices paid by customers, and the terms of the contracts without notice which either alter existing, or create new, rights or obligations between the parties in favour of Fuji Xerox.[viii]
- The Fuji Xerox contracts will automatically renew unless the Fuji Xerox customer provides notice to cancel the contract.[ix]
- The Fuji Xerox contracts impose obligations from other documents that Fuji Xerox is not required to provide customers.[x]
- The Fuji Xerox contracts limit the liability of Fuji Xerox or require customers to indemnify Fuji Xerox, even in circumstances where Fuji Xerox has caused or contributed to loss or damage.[xi]
- Fuji Xerox is able to suspend or terminate the contract for minor breaches by customers.[xii]
- Fuji Xerox is able to impose or retain charges on termination of the Fuji Xerox contracts, that are not based on the loss sustained.[xiii]
- The Fuji Xerox contracts require customers to make an irrevocable offer to Fuji Xerox on signing the contract for an indefinite time, and Fuji Xerox is under no corresponding obligation.[xiv]
- The Fuji Xerox contracts contain terms which require customers to pay for equipment or services they have not or may not receive.[xv]
The terms are alleged to be unfair on the basis of at least one of the following:
- The term creates a significant imbalance in the relationship.
- The term goes beyond what is commercially necessary.
- The Fuji Xerox contracts do not provide customers with any corresponding or counterbalancing rights or protections, or provide customers with more limited rights and protections.
- The term may lead to customers suffering detriment through increased costs and/or contractual burdens, without any means of recourse under the contract.
- The Fuji Xerox contracts do not allow customers to reject or negotiate without penalty if a variation is not acceptable.[xvi]
RESTRAINT OF TRADE CLAUSES – BACK IN MOTION PHYSIOTHERAPY
On 18 September 2020, Back In Motion Physiotherapy Pty Ltd, a franchisor with a network of franchisees providing physiotherapy services in Australia and New Zealand, provided a court-enforceable undertaking to the ACCC not to enforce or rely upon restraint of trade clauses except as permitted in the court enforceable undertakings. [xvii]
The restraint of trade term restricts Back In Motion franchisees exiting the franchise system from offering physiotherapy services within a 10km radius of any Back In Motion franchise site throughout Australia for up to 12 months. The ACCC considered that the term could prevent former franchisees from offering physiotherapy services in metropolitan areas, including regions where former clients of the franchisee would not reside.[xviii]
The ACCC was concerned that the cascading restraint of trade term created significant uncertainty because there were 21 possible permutations of the term. Further, the contract included a term which required franchisees to pay a fee to the franchisor, equivalent to 4 times the annual royalty fee, to be released from the restraint.[xix]
The court enforceable undertaking did not prevent Back In Motion from enforcing or relying upon, “any term to the extent that it restricts for up to nine months, a former franchisee from actively soliciting a client knowing they have been a client (at any time in the previous 12 months) of a Back In Motion franchise located within 10 km of the former franchisee’s Back In Motion practice.” Back In Motion was also required to provide a corrective notice to former franchisees who were affected by the unfair restraint of trade.[xx]
The ACCC has also considered non-disparagement clauses, which intend to prevent the publication of negative or damaging reviews, to be unfair contract terms if they prevent or limit a customer from making genuine, relevant and lawful public comments about goods and services.
For more information on non-disparagement clauses being considered unfair contract terms, please see Stephens Lawyers & Consultants’ Update “Non-disparagement clauses in standard form contracts deemed to be unfair contract terms by ACCC”.
RISK MINIMISATION STRATEGIES TO AVOID UNFAIR CONTRACT TERMS
Businesses should regularly review their standard form contracts and terms and conditions for unfair terms to minimise the risk of terms being declared unfair and unenforceable.
Assessing whether a term is unfair is complex and requires consideration of the contract as a whole taking into account the relative bargaining position of the parties and any imbalances. Terms and conditions on e-commerce or on-line retail platforms present additional complexities because consumers must “click” acceptance of the terms and conditions presented, for the sales transaction to proceed payment, where there is no scope for negotiation of those terms and conditions.
Because of the complexities involved, legal advice should be sought from lawyers with expertise in consumer law to ensure contracts are lawful, expressed in plain language, legible and clear.
“ACCC Enforcement Proceedings – Unfair Contract Terms: Legal Update” is authored by Katarina Klaric (Principal & Director) and Peter Divitcos (Lawyer) on 18 November 2020.
© Copyright November 2020 — Stephens Lawyers & Consultants
Disclaimer: This update is not intended to replace obtaining legal advice.
For Further Information contact:
Katarina Klaric, Principal /Director
Peter Divitcos, Lawyer
Stephens Lawyers & Consultants
Suite 205, 546 Collins Street
Melbourne VIC 3000
Phone: 61 3 8636 9100
All Correspondence to:
PO Box 16010
Collins Street West
Melbourne VIC 8007
[i] Australian Consumer Law, section 23(1); ASIC Act section 12BF(1).
[ii] Australian Consumer Law, section 23(2); ASIC Act section 12BF(2).
[iii] Australian Consumer Law, sections 23 and 24; ASIC Act section 12BG.
[iv]Australian Consumer Law, sections 232, 236,237, 250; ASIC Act sections 12GBA, 12GD, 12GF.
[v] Undertaking to the Australian Competition and Consumer Commission given under section 87B of the Competition and Consumer Act 2010 (Cth), Tyco Australia Group Pty ltd trading as ADT Security, https://www.accc.gov.au/system/files/public-registers/undertaking/EO%20-%2087B%20Undertaking%20-%20Tyco%20Australia%20-%20Signed%20by%20Chair%20-%204%20November%202020.pdf.
[vi] Australian Competition and Consumer Commission & Anor v Fuji Xerox Australia Pty Limited ACN 000 341 819 & Anor, Federal Court of Australia, Concise Statement NSD1156/2020, https://www.accc.gov.au/system/files/ACCC%20v%20Fuji%20Xerox_Concise%20Statement.pdf, paragraphs 1 and 25. The terms were found to be unfair within the meaning of section 24 of the ACL or section 12BG of the ASIC Act and void by reason of section 23 of the ACL or 12BF of the ASIC Act.
[vii] The Australian Competition and Consumer Commission, ‘Fuji Xerox in court over alleged unfair contract terms’ 22 October 2020 https://www.accc.gov.au/media-release/fuji-xerox-in-court-over-alleged-unfair-contract-terms.
[viii] Australian Competition and Consumer Commission & Anor v Fuji Xerox Australia Pty Limited ACN 000 341 819 & Anor, Federal Court of Australia, Concise Statement NSD1156/2020, https://www.accc.gov.au/system/files/ACCC%20v%20Fuji%20Xerox_Concise%20Statement.pdf, paragraph 3
[ix] Ibid, paragraph 5.
[x] Ibid, paragraph 7.
[xi] Ibid, paragraph 9.
[xii] Ibid, paragraph 11.
[xiii] Ibid, paragraphs 13 and 14.
[xiv] Ibid, paragraphs 17 and 18.
[xv] Ibid, paragraphs 21 and 22.
[xvi] Australian Competition and Consumer Commission & Anor v Fuji Xerox Australia Pty Limited ACN 000 341 819 & Anor, Federal Court of Australia, Concise Statement NSD1156/2020, https://www.accc.gov.au/system/files/ACCC%20v%20Fuji%20Xerox_Concise%20Statement.pdf.
[xvii] Undertaking to the Australian Competition and Consumer Commission given under section 87B of the Competition and Consumer Act 2010 (Cth), Back In Motion Physiotherapy Pty Ltd ACN 109 945 388, https://www.accc.gov.au/system/files/public-registers/undertaking/EO%20%20-%20Section%2087B%20Undertaking-%20Back%20In%20Motion%20Physiotherapy%20Pty%20Ltd%20-%20signed%20by%20Chair%2018%20September%202020%20%281%29.pdf.