In our previous posts about the UCT regime, we have explored some of the clauses listed in the grey list in section 25 of the ACL, which are the most typical UCTs.
In this post, we look at other types of clause which businesses should be mindful. Despite not appearing in the grey list of clauses under section 25 of the ACL (as unpacked in our previous blog post here), there are other types of clause that the Courts have found to constitute unfair contract terms.
This will be the first of two posts exploring non-grey list clauses to keep an eye out for, starting with automatic renewal clauses, exclusive dealing clauses and non-disparagement clauses.
Automatic renewal clauses
Automatic renewal is a type of term that most people will be familiar with. Businesses often use these clauses when there is an automatic payment arrangement with a customer e.g, a monthly direct debit for a month to month contract. The automatic renewal clause operates just as the name suggests – it renews a contract automatically unless a party communicates its wish to terminate the contract.
On the one hand, this has the benefit of ensuring a good or service is continuously provided and there is no lapse in supply which could have serious consequences, such as with insurance coverage. On the other hand, such a clause can run the risk of consumers and small businesses paying for goods and services they do not need, and perhaps even at a higher price than initially agreed if the clause provides for an automatic price increase on renewal.
An automatic renewal clause was considered in ACCC v Employsure Pty Ltd [2020] FCA 1409, and was ultimately not found to be unfair because customers had the right to give notice if they did not wish the contract to renew, with the notice period reflecting the term of the contract itself. Employsure also had a contractual obligation to give customers written notice of automatic renewal.
Further, the price increase on renewal, which effectively allowed for a CPI increase, did not create a unilateral right for Employsure to increase or otherwise vary fees. The Court considered that ‘Employsure bore the risk that the costs could prove to be greater than anticipated and its client bore the risk that it would not use Employsure’s services and products as much as it had anticipated.’[1]
This outcome can be contrasted to the case of ACCC v Chrisco Hampers Australia Limited [2015] FCA 1204. The essential issue was whether there was a power imbalance in the parties’ rights and obligations under the contract. Customers paid Chrisco for Christmas hampers by regular automatic instalments. However, after an order had been paid for, Chrisco continued to make deductions from customers’ bank accounts or credit cards which could be applied against future orders. There was no discount on any future order and whilst these pre-payments could be fully refunded, there was no interest provided on the refund. In other words, the customer received no substantial benefit for the money which was deducted.[2] The Court found that by continuing to make debits, Chrisco was not providing ‘any substantial corresponding right to the customer’ and the clause was unfair.[3]
In Chrisco, there was a form of notice provided – the clause said that, ‘We will write to you to confirm your HeadStart Plan payments prior to commencing Direct Debits’. However, the notice was found to be not effective – it was notice of confirmation of the direct debit and not a request by Chrisco to withdraw the money from the consumer’s account.[4]
In its 2016 report on Unfair terms in small business contracts, the ACCC indicated that automatic renewal clauses will likely be of concern to it when:
- they have not been adequately disclosed;
- notice is not provided when a contract is about to automatically renew;
- the cut-off date for cancelling an automatic renewal can be changed; or
- there are large early termination fees for terminating a contract after it has been automatically renewed.
To reduce the risk of automatic renewal clauses being found unfair, businesses should consider the effect of the clause, including:
- ensuring it is clearly disclosed,
- providing counterparties with a corresponding right or benefit,
- providing advance notice of the renewal in a timely manner that enables counterparties to meaningfully decide whether to renew or make alternative arrangements, and
- allowing for counterparties to terminate easily if they do not wish to renew.
Exclusive dealing
Exclusive dealing occurs where one party to a contract imposes conditions which limit the other party’s ability to deal with other businesses. Whilst section 47 of the CCA prohibits exclusive dealing where it has the purpose, effect or likely effect of substantially lessening competition, it is important to be mindful that conduct below this threshold might still fall foul of the UCT regime.
Exclusive dealing clauses may cause a significant imbalance in the parties’ rights and obligations under the contract and constitute an unfair term if they limit the customer’s right to contract with whoever they want. These clauses could be more likely to be deemed permissible if the contract in question also provides a corresponding benefit to the customer (for example, if they receive a discount for agreeing to the exclusivity clause).
Exclusive dealing clauses have been found to be UCTs, for example in ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224. In that case, the exclusivity clause was considered to be unfair because it required customers to obtain all their waste management services from JJ Richards. This prevented customers from obtaining services from any alternative supplier, even when the customer was seeking services additional to those provided by JJ Richards.[5]
Non-disparagement clauses
Non-disparagement clauses can require a customer to act in the bests interests of the company, not defame the company or forbid the publishing or sharing of negative reviews about the company. These clauses can be problematic if they prevent consumers from sharing their honest opinions about the products or services they received, or if they are otherwise not necessary to protect the legitimate interests of the business.
The case of ACCC v Smart Corporation Pty Ltd (No 3) [2021] FCA 347 concerned a business that provided rental vehicles to consumers. One clause that was declared void was a non-disparagement clause which required consumers to act at all times in the rental company’s best interests. The ACCC submitted that if a customer published an honestly held negative opinion which the company considered denigrated it, the business could allege the hirer was in breach of the agreement. The Court found that the non-disparagement clause was unfair because it operated entirely in the business’s favour, and was exacerbated by the inclusion of an indemnity for breach of contract and right to deduct from the security bond. There was also nothing to suggest that a clause of this kind was necessary to protect the legitimate interests of the business in what was a short-term transaction, not one which required an ongoing relationship. The fact that the clause only applied during the term of the hire and was transparent did not alter the Court’s conclusion that it was unfair.[6]
The Court did observe that a prohibition on misleading or deceptive reviews could be reasonable, but this clause clearly went further than that. The Court also stated, ‘It is possible to defame and denigrate someone by expressing views which are not only genuinely and honestly held, but are also true.’[7]
Ultimately, as the expanded UCT regime comes into play, businesses should be mindful not only of the more typical UCTs in the grey list in section 25, but of all clauses which could create a significant imbalance between contracting parties and which might extend beyond what is reasonably necessary to protect a business’ legitimate interests.
Stay tuned for post 2 on the topic of ‘non-grey list’ clauses.
[1] ACCC v Employsure Pty Ltd [2020] FCA 1409 at [448] and [451].
[2] ACCC v Chrisco Hampers Australia Limited [2015] FCA 1204 at [4].
[3] ACCC v Chrisco Hampers Australia Limited [2015] FCA 1204 at [53].
[4] ACCC v Employsure Pty Ltd [2020] FCA 1409 at [86]-[87].
[5] ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224 at [35].
[6] ACCC v Smart Corporation Pty Ltd (No 3) [2021] FCA 347 at [125].
[7] ACCC v Smart Corporation Pty Ltd (No 3) [2021] FCA 347 at [125].
Image credit: Last Minute Christmas Ideas by Harvey Norman / Flickr / Remixed to B&W and resized / CC BY 2.0
