A snapshot into unfair terms in small business contracts
4 mins reading time
As foreshadowed in our previous Insight on small business finance contracts, on 12 August 2022, the Federal Court declared that a number of provisions of the standard small business software/services and rental/lease contracts of Fujifilm (previously Fuji Xerox) are “unfair contract terms” under the unfair contract terms legislation: Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928.
Types of terms found to be unfair
This case is a useful example of what terms may be deemed unfair in the Courts of Law. Businesses will need to carefully review their standard form contracts to ensure that they do not end up copping a fine for breaching unfair contract term laws. As exemplified in this matter, the financial consequence can be significant – especially for small businesses.
The Court declared the following types of terms in Fujifilm’s standard small business contracts to be unfair.
- Automatic renewal terms
These were terms where neither party has given notice to end the contract within the specified period prior to term expiry, resulting in holding over periods terminable on 90 days’ notice. - Disproportionate termination terms
This included those that allowed Fujifilm to terminate for any breach by the customer (even if a remedy period is provided), where the customer does not have a reciprocal termination right. - Termination payment terms
This pertained to terms that required the customer to pay an early termination payout determined by Fujifilm, based on arrears, the future rental charges for the balance of the term (discounted by a discount rate), and break costs. - Liability limitation terms
This included those that allowed Fujifilm to limit its losses to those permitted under the Australian Consumer Law. - Non-reciprocal obligation terms
These terms included assignment provisions that prohibit the customer from assigning its rights without Fujifilm’s consent but allowed Fujifilm to assign its rights without the customer’s consent. - End of contract period terms
This pertained to terms applying to finance leases, where title to the equipment does not transfer to the customer after it pays the residual value for the equipment following term expiry. - Unilateral variation terms
These terms would allow Fujifilm to vary service and other charges unilaterally, even if notice is given to the customer. - Extraneous documents terms
This included those under which the customer is required to comply with other documents not set out in the contract and which can be amended without notice to the customer. - Irrevocable offer terms
These terms included those that bind the customer to an irrevocable offer for an indefinite time, in circumstances under where Fujifilm are under no corresponding obligation to accept the offer within a particular time. - Unfair payment terms
This would allow Fujifilm to invoice the customer for software licence fees irrespective of delivery by Fujifilm.
The Court’s orders included (among other things) for Fujifilm to send letters to affected customers notifying them of the terms found to be unfair under their contracts, in the form set out in the Court’s Order. The form of the letter includes for the words “without any deduction or set off” to be deleted from the specified clauses under those contracts.
Unfair Contract Terms: Implications for businesses
Arguably, a number of the “unfair” terms referred to above are commonly used in standard small business contracts – including in the equipment finance industry.
It could also be said that some of the terms appear to have been drafted to decrease the possibility of the term causing a “significant imbalance” in the parties’ rights and obligations.
This can be seen in:
- the inclusion of remedy periods for a customer breach; and
- an exclusion from the customer’s indemnity for losses caused by Fujifilm’s negligence or default.
Nevertheless, these terms were found to be unfair by the Court.
Given that the Court’s orders were made by consent with Fujifilm, there is no reference in the orders as to whether Fujifilm sought to rebut the presumption that the terms were not “reasonably necessary in order to protect [Fujifilm’s] legitimate interests”. If this were the case, and Fujifilm was able to prove otherwise, it would no longer result in the relevant term being “unfair”.
It should be noted that for small business finance contracts, perhaps a Court may take a different view on some of the provisions if the financier under such contracts is merely a passive financier which has no other major obligations to the customer. This may be relevant in relation to the supply, delivery and/or maintenance or servicing of the financed equipment, other than the provision of finance in relation to the equipment.
Next steps – review your contracts!
Given the significant impact the findings of this case may have on businesses that supply goods, services or finance to small business customers (or that are small business suppliers themselves), we recommend that businesses review their standard form contracts to make sure that they comply with the UCT laws. Please contact us if you would like your standard form contract reviewed.
The future of Unfair Contract Terms
The costs of businesses not complying with UCT laws in their standard form contracts will only become greater. In this regard, we note that following the lapsing of the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (Cth) prior to the federal election, the current government has signaled its intention to proceed with introducing legislation to impose penalties on the use of unfair terms in standard form contracts, and to increase the scope of the businesses and contracts caught by the laws.
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A snapshot into unfair terms in small business contracts
As foreshadowed in our previous Insight on small business finance contracts, on 12 August 2022, the Federal Court declared that a number of provisions of the standard small business software/services and rental/lease contracts of Fujifilm (previously Fuji Xerox) are “unfair contract terms” under the unfair contract terms legislation: Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928.
Types of terms found to be unfair
This case is a useful example of what terms may be deemed unfair in the Courts of Law. Businesses will need to carefully review their standard form contracts to ensure that they do not end up copping a fine for breaching unfair contract term laws. As exemplified in this matter, the financial consequence can be significant – especially for small businesses.
The Court declared the following types of terms in Fujifilm’s standard small business contracts to be unfair.
- Automatic renewal terms
These were terms where neither party has given notice to end the contract within the specified period prior to term expiry, resulting in holding over periods terminable on 90 days’ notice. - Disproportionate termination terms
This included those that allowed Fujifilm to terminate for any breach by the customer (even if a remedy period is provided), where the customer does not have a reciprocal termination right. - Termination payment terms
This pertained to terms that required the customer to pay an early termination payout determined by Fujifilm, based on arrears, the future rental charges for the balance of the term (discounted by a discount rate), and break costs. - Liability limitation terms
This included those that allowed Fujifilm to limit its losses to those permitted under the Australian Consumer Law. - Non-reciprocal obligation terms
These terms included assignment provisions that prohibit the customer from assigning its rights without Fujifilm’s consent but allowed Fujifilm to assign its rights without the customer’s consent. - End of contract period terms
This pertained to terms applying to finance leases, where title to the equipment does not transfer to the customer after it pays the residual value for the equipment following term expiry. - Unilateral variation terms
These terms would allow Fujifilm to vary service and other charges unilaterally, even if notice is given to the customer. - Extraneous documents terms
This included those under which the customer is required to comply with other documents not set out in the contract and which can be amended without notice to the customer. - Irrevocable offer terms
These terms included those that bind the customer to an irrevocable offer for an indefinite time, in circumstances under where Fujifilm are under no corresponding obligation to accept the offer within a particular time. - Unfair payment terms
This would allow Fujifilm to invoice the customer for software licence fees irrespective of delivery by Fujifilm.
The Court’s orders included (among other things) for Fujifilm to send letters to affected customers notifying them of the terms found to be unfair under their contracts, in the form set out in the Court’s Order. The form of the letter includes for the words “without any deduction or set off” to be deleted from the specified clauses under those contracts.
Unfair Contract Terms: Implications for businesses
Arguably, a number of the “unfair” terms referred to above are commonly used in standard small business contracts – including in the equipment finance industry.
It could also be said that some of the terms appear to have been drafted to decrease the possibility of the term causing a “significant imbalance” in the parties’ rights and obligations.
This can be seen in:
- the inclusion of remedy periods for a customer breach; and
- an exclusion from the customer’s indemnity for losses caused by Fujifilm’s negligence or default.
Nevertheless, these terms were found to be unfair by the Court.
Given that the Court’s orders were made by consent with Fujifilm, there is no reference in the orders as to whether Fujifilm sought to rebut the presumption that the terms were not “reasonably necessary in order to protect [Fujifilm’s] legitimate interests”. If this were the case, and Fujifilm was able to prove otherwise, it would no longer result in the relevant term being “unfair”.
It should be noted that for small business finance contracts, perhaps a Court may take a different view on some of the provisions if the financier under such contracts is merely a passive financier which has no other major obligations to the customer. This may be relevant in relation to the supply, delivery and/or maintenance or servicing of the financed equipment, other than the provision of finance in relation to the equipment.
Next steps – review your contracts!
Given the significant impact the findings of this case may have on businesses that supply goods, services or finance to small business customers (or that are small business suppliers themselves), we recommend that businesses review their standard form contracts to make sure that they comply with the UCT laws. Please contact us if you would like your standard form contract reviewed.
The future of Unfair Contract Terms
The costs of businesses not complying with UCT laws in their standard form contracts will only become greater. In this regard, we note that following the lapsing of the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (Cth) prior to the federal election, the current government has signaled its intention to proceed with introducing legislation to impose penalties on the use of unfair terms in standard form contracts, and to increase the scope of the businesses and contracts caught by the laws.