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Unfair Contract Terms Fairly Dealt With

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By Georgie Cape, Law Clerk, MST Lawyers and Alicia Hill, Principal, MST Lawyers

Continuing our commitment to advising and guiding those involved in the franchise industry, MST Lawyers has prepared articles about the introduction of unfair contract terms law for small business. This piece reports on the latest case judgment. Australian Competition and Consumer Commission (ACCC) v Servcorp Limited [2018] FCA 1044 (Servcorp) showcases that the enforcement and compliance of these new laws is a priority for the ACCC and further develops our understanding of what the courts are classifying as unfair contract terms.

Background

The ACCC commenced proceedings against Servcorp Limited and two of its subsidiaries (collectively Servcorp) on 21 September 2017. The ACCC sought declaratory and other relief on the basis that Servcorp’s standard form business contracts with small businesses contained numerous unfair terms.

Servcorp Limited is a large publicly listed entity that contracted to supply serviced office spaces and virtual office services (including office suites, secretarial services, IT and communications) to clients occupying office suites throughout Australia.

The ACCC alleged that various terms within these contracts constitute unfair contract terms under the relevant provisions within the Australian Consumer Law, being schedule 2 to the Competition and Consumer Act 2010 (Cth).

The ACCC claimed that the contract terms were unfair as they had the effect of:

  1. automatically renewing the client’s contract and then permitting Servcorp to increase the contract price without notice unilaterally;
  2. allowing Servcorp to end the contract unilaterally and to enforce penalties on the client;
  3. unreasonably restricting Servcorp’s liability or imposing unreasonable liability on the client;
  4. giving absolute discretion to Servcorp in deciding whether there has been a breach of contract; and
  5. allowing Servcorp to unilaterally procure the client’s property without notice.

Relevant Legislation

Section 23(1) of the ACL states that a term of a small business contract is void if the term is unfair and the contract is a standard form contract.

In ACCC v Servcorp, the contracts containing clauses subject to controversy were agreed between parties and found by the Court to meet the definition of ‘standard form business contracts’ and ‘small business contracts’ under the ACL.

For a contract term to be ‘unfair’, the following must be satisfied:

  1. It causes a significant imbalance in the parties’ rights and obligations;
  2. It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term, and
  3. It would cause detriment (financial or otherwise) to the other party.

Outcome

The Court held that 12 terms in these contracts were unfair terms and therefore, void under the ACL.

It was held that each of the relevant terms would cause a significant imbalance in the parties’ rights and obligations, were not reasonably necessary to protect the legitimate interests of Servcorp and would cause detriment (financial or otherwise) to the small business counterparties if they were applied or relied upon by Servcorp.

The Court ordered by consent that:

  1. Servcorp, at their own expense, establish and implement a compliance program to ensure the relevant provisions of the ACL would be complied with. The terms and content of the program to be agreed between ACCC and Servcorp or to be ordered by the Court. Servcorp was also required to procure its employees and agents to participate in the compliance program;
  2. Servcorp pay the ACCC’s legal costs and those incidental to the proceeding to the amount of $150,000; and
  3. The proceeding otherwise be dismissed.

Reasons for Decision

In the context of the whole agreement, the reasons as to why the Court found the contract terms to cause a significant imbalance in the parties rights and obligations included that they had the effect of:

  1. automatically renewing a customer’s contract and allowing Servcorp to then unilaterally vary the contract price at its absolute discretion and without notice;
  2. permitting Servcorp to unilaterally terminate the contract and limiting the customer’s termination rights;
  3. unreasonably limiting Servcorp’s liability or imposing unreasonable liability on the customer;
  4. allowing Servcorp to terminate a contract where an asserted breach may not be a material breach and doing so without giving notice to the customer or the opportunity to remedy the breach; and
  5. permitting Servcorp to retain a customer’s security deposit without notice if a customer failed to request its return.

The Court also held that the unfair terms were not reasonably necessary to protect the legitimate interests of Servcorp.

Practical Tips

This case demonstrates the ACCC’s readiness to examine and pursue companies that are not complying with the new unfair contract terms provisions. ACCC v Servcorp also highlights the seriousness of the consequences if these types of contracts are found to contain unfair terms.

We advise businesses that use standard form business contracts with small businesses to seek the assistance of legal professionals to review the terms within these contracts and take all steps necessary to ensure that they are compliant with the new laws.

Alternatively, if you are concerned that you have entered into a contract of this kind, we can provide an opinion on whether it contains unfair terms.

For more information, please do not hesitate to email Alicia Hill or call +61 3 8540 0200.