In September 2017, the Australian Competition and Consumer Commission (ACCC) announced that it had instituted proceedings in the Federal Court against office services provider Servcorp Ltd and two of its subsidiaries (Servcorp), alleging that certain terms in Servcorp’s standard form, small business contracts were unfair under the unfair contract terms regime.
The ACCC’s action centred around three contracts which had each been entered into by one of the Servcorp subsidiaries and a business that had less than 20 employees at the time of entry into the contract. Each of the contracts had been entered into prior, however renewed after, the commencement of the business to business unfair contract terms regime (B2B UCT regime).
In respect of the proceedings, the ACCC and Servcorp reached agreement in relation to the relief sought by the ACCC and provided a proposed consent order, a statement of agreed facts and joint submissions to the court. Similarly, in the ACCC’s first successful court action under the B2B UCT regime against a waste management provider, the Federal Court declaration was made by consent of the parties.
On 13 July 2018, the Federal Court declared, by consent, that 12 terms in the contracts in question were indeed unfair and therefore void. Some key take aways from the Federal Court’s judgment are discussed in this article.
Overview of the unfair contract terms regime
The consumer unfair contract terms regime is set out in the Australian Consumer Law1 (and in the Australian Securities and Investments Commission Act 2001 with respect to contracts for financial products and services) and has been in effect since 1 July 2010. Under the regime, if a term of a standard form consumer contract is declared by a court or relevant tribunal to be unfair, it is void and unenforceable. A consumer contract is a contract for the supply of goods or services, or the sale or grant of an interest in land, to an individual for personal, domestic or household use or consumption.
The regime does not define a “standard form contract” however sets out matters which a court must take into account in determining whether a contract is standard form, including but not limited to whether one of the parties has all or most of the bargaining power in relation to the transaction, whether the contract was prepared by one party before any discussion with the other party and whether the other party was given an effective opportunity to negotiate the contract terms.
The regime was extended to cover standard form small business contracts entered into, renewed or varied on or after 12 November 2016 where:
- The contract is for a supply of goods or services, or a sale or grant of an interest in land;
- At the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
- Either of the following applies:
- the upfront price payable under the contract does not exceed $300,000; and
- the contract has a term of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
The ACCC has been active in enforcing the B2B UCT regime since its commencement, which has resulted in the acceptance of enforceable undertakings from parties in a range of industries (the authors of this article have discussed these actions in previous articles, including the following: Automatic renewal clauses increasingly vulnerable under the Australian Consumer Law, Cheese, butter and potatoes are on the menu as the ACCC focuses on unfair contract terms in the agriculture industry and “Consumers should be free to have their say” – the ACCC continues to target non-disparagement clauses in standard form, consumer contracts).
Key takeaways from the Servcorp judgment
Automatic renewal clauses continue to be one of the most common categories of unfair contract terms
Automatic renewal clauses have consistently been declared, or agreed by the business seeking to enforce the automatic renewal, to be unfair under the unfair contract terms regime. The automatic renewal clause in the contracts had the effect of automatically renewing the contract for a further term if either party did not give the required notice to terminate the contract. Further, the clause allowed the Servcorp subsidiary to unilaterally vary the price payable under the contract for the further term, without providing the customer a corresponding right to terminate at the time of the automatic renewal.
In finding that the term was unfair, the court commented that the Servcorp subsidiaries were more likely to be aware of when contracts were due for renewal than their small business customers and therefore, such customers may unknowingly find themselves locked into a new term at a higher price. These comments echo the Federal Court’s comments in the ACCC’s first Federal Court action under the B2B UCT regime, where an automatic renewal clause was also declared by consent to be unfair.
Limitations on a party’s right to sue are at risk of being unfair
A clause in the contracts required the customer to insure all goods held in the premises and provided that Servcorp will not be held responsible for loss, theft or damage of the goods howsoever caused. Another clause required the customer to indemnify the Servcorp subsidiary for theft, loss or damage howsoever caused. In determining that the clauses were unfair, the court considered that the clauses could be relied on by Servcorp even where it had caused the loss, theft or damage.
Interestingly, while there was no discussion as to whether the part of the clause requiring the customer to “insure all goods held in the premises” was unfair, the insurance requirement was drafted as part of the exclusion of liability clause (in which the exclusion of liability was found to be unfair). There was no attempt by (or indeed ability of) the court to sever the requirement from the remainder of the clause to preserve its operation, and therefore the insurance requirement was, by virtue of its inclusion in the provision, also unenforceable. Where there is any likelihood of a clause being alleged to be unfair, the clause should be drafted separately from other clauses in the contract so that if required, it can be safely severed thereby preserving the operation of other clauses that are unlikely to be vulnerable under the B2B UCT regime.
A clause in the contracts also prevented the customer from suing Servcorp’s landlord under the head lease of the premises. The court held that such a clause was unfair because it purported to limit the customer’s right to sue the landlord in circumstances where the customer has a legitimate claim against the landlord and because there was no reciprocal clause imposing any limitation on the Servcorp parties or the landlord to sue the customer.
Including a reciprocal clause stating that the landlord would not sue the customer would have little effect, given that the landlord was not a party to the contract, while including a reciprocal clause stating that Servcorp would not sue the customer would constrain it from enforcing a legitimate claim under the contract. The offending clause is an example of where a party may be better off deleting the clause entirely than attempting to balance the effect of the clause.
A unilateral price variation clause could still be unfair even if the other party has a right to terminate in response to the price variation
A clause in the contracts allowed Servcorp to vary the charges for services paid under the contracts and was silent as to whether it was required to give notice of any variations. In finding that the clause was unfair, the court commented that there was no requirement for Servcorp to provide any notice to the customer or to act fairly, reasonably or consult with the customer. Even though the customer was permitted to terminate the contract by giving one month’s notice, this corresponding right was not enough to prevent the unilateral price variation being declared unfair.
It must be remembered that unfairness is determined by the clause in the contract, rather than the conduct of the parties. Even if Servcorp did typically give notice of price variations or act reasonably before making price variations, such conduct was not expressed to be a requirement in the clause. Further, although this issue was not discussed, the authors speculate that the corresponding termination right may not have been sufficient to “save” the clause from being declared unfair, because while the customer was required to give one month’s notice of termination, Servcorp was not required to give any notice of a price variation, giving rise to a potential scenario where the customer would still suffer detriment due to the price increase applying for at least one month, while serving out the required notice period for termination of the contract.
Caution should be exercised when a party has a right to unilaterally make a determination which could otherwise be made objectively
A clause in one of the contracts allowed the Servcorp subsidiary to determine the time at which a notice had been validly served by the customer. In addition to the typical notice requirements, the clause provided that a notice would only be deemed served once “a confirmation of termination letter is received by the Client in return”. Such a clause is an example of the need to exercise caution when giving one party a right to unilaterally make a determination which could otherwise be made objectively.
Rights for dealing with a party’s breach of contract must be proportionate to the breach
Clause 12(c) in the contracts required the customer to comply with all laws required under the head lease between Servcorp and the landlord and any regulations or procedures issued or required by the landlord. Clause 12(d) in the contracts permitted Servcorp to immediately terminate the contract if the customer breached clause 12(c).
Interestingly, the ACCC did not allege that clause 12(c) was an unfair contract term, despite the court commenting that had the customer not sought details of its obligations under clause 12(c), it would not be aware of them. In finding that the immediate termination right in clause 12(d) was unfair, the court discussed that such a clause allowed Servcorp to terminate in circumstances where the breach may not be a material breach, the customer may not have been notified or aware of the breach, the customer may not have been given an opportunity to remedy the breach or indeed, may have already remedied the breach.
Where the unfair contract terms regime applies, it is recommended that in most cases, the contract requires the party allegedly in breach of the contract to be served a breach notice and given an opportunity to cure the breach within a reasonable period, before the other party can proceed to termination. This procedure does not prevent a party from also preserving rights to immediately terminate the contract in special circumstances, provided that the party can demonstrate that they require such a right to protect their legitimate interests.
Termination for convenience rights are at risk of being unfair if they are not mutual and/or do not provide for compensation to be paid
A clause in the contracts permitted Servcorp to terminate the contract by giving one month’s written notice to the customer at any time without cause and without the requirement to pay compensation to the customer. In contrast, the customer had limited termination rights under each contract and did not have a corresponding right to terminate for convenience. In considering these differing rights, the court determined that they gave rise to a significant imbalance in the parties’ rights and obligations.
When including a termination for convenience right in a contract that is subject to the unfair contract terms regime, the particular circumstances of the likely transaction must be considered. It may not be sufficient to simply make the termination for convenience right mutual without the requirement to pay compensation, if in reality, the consumer or small business party would suffer the most detriment if the contract were terminated and was not likely to ever exercise its termination for convenience right.
A party’s responsibilities under a contract should be allocated reasonably
A clause in the contracts required the customer to demand the refund of the customer’s security deposit within 360 days after the termination of the contract; otherwise the security deposit would be forfeited to the Servcorp subsidiary. In finding that the clause was unfair, the court commented that there was no obligation imposed on Servcorp to return the security deposit to the customer or notify them of forfeiture, which in effect, permitted it to unilaterally acquire the customer’s property.
When setting out certain procedures in a contract caught by the unfair contract terms regime, it would be prudent to consider on a practical basis, which party should be responsible for certain matters. Imposing one sided obligations on another party where arguably they have less control of the matter may result in those obligations being declared unfair.
The threshold tests for determining whether a term is unfair are much lower than for determining whether a term constitutes a penalty
Clause 21(a) of the contracts stated that the customer would be in material breach of the contract if during the term of the contract or within two years of the end of the contract, they enticed or persuaded other clients receiving the services of Servcorp “or any Affiliate of such client” to leave the offices to move to other offices not operated by Servcorp or Servcorp’s affiliates.
Clause 21(b) of the contracts required the customer to pay Servcorp US $15,000 “as a penalty” if they were in material breach of clause 21(a) and clause 21(c) of the contracts provided that payment of such penalty would not preclude Servcorp from demanding further payment for damages.
In finding that clauses 21(b) and 21(c) of the contracts were unfair, the court discussed that the customer would be unlikely to know whether an entity is a client of one of the 25 offices managed by the Servcorp subsidiaries or whether an entity is an affiliate of such a client. The court further commented that the US$15,000 penalty applied regardless of whether Servcorp suffers any loss or damage and that the clauses generally lacked transparency as to the way they would be applied.
If the unfair contract terms regime did not apply, an alternative argument would be that the requirement to pay US$15,000 for a material breach of the contract constituted a penalty, which is unenforceable under common law.
To be a penalty, the test is whether the sum payable as a consequence of a breach of contract (the alleged penalty) is “exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract“2. In identifying the interest of the party seeking to enforce the sum, the majority of the High Court in Paciocco v Australia and New Zealand Banking Group Limited  HCA 28 determined that the relevant question was not what the party seeking to enforce the sum could recover in an action for breach of contract, but rather, whether the sum (the alleged penalty) was “out of all proportion” to the broad range of legitimate commercial interests the party was seeking to protect.
While the test for whether a sum is a penalty at common law involves an assessment of whether there is an imbalance between the sum and the legitimate interests of the party seeking to enforce the sum, the sum must be “out of all proportion” to the party’s legitimate interests. In contrast, under the unfair contract terms regime, the imposition of the sum must be reasonably necessary (and no more) to protect the party’s legitimate interest. Further, under the unfair contract terms regime, the alleged penalty could be found unfair for other reasons which do not relate to the amount payable, such as whether the other party could reasonably avoid breaching the term which triggers the payment or how transparently the term is drafted.
Judicial guidance on when a contract is “standard form” remains limited
To date, there has been little case law on the determination of whether a contract is standard form under the regime. For example, the extent of negotiation required before a contract is no longer considered standard form or whether genuinely inviting a party to negotiate a contract is sufficient to avoid the regime. While it is obvious when a contract has not been subject to negotiation at all and when a contract has been prepared for a unique transaction and heavily negotiated, the grey area between the two extremes remains untested.
Because the parties provided a statement of agreed facts, the Federal Court judgment in this case does not provide the certainty that interested onlookers may have been hoping for. For the purposes of the proceedings, Servcorp did not dispute that the contracts were standard form contracts, agreeing that:
- The relevant Servcorp subsidiary had most of the bargaining power in the transaction;
- The terms and conditions on which the contracts were based were prepared prior to any discussions between the parties; and
- The contracts were presented to the customer without inviting the customer to negotiate the terms, other than the terms defining the main subject matter of the contract, being the length of the contract term, the location of the office space and the upfront price payable.
Given that it has now been almost two years since the B2B UCT regime has been in effect and in that time, there have been two Federal Court decisions and various enforceable undertakings accepted by the ACCC which shed further light on the types of terms which are at risk of being declared unfair, it would be prudent for all businesses to take the opportunity to review their standard form contracts, either for the first time or again in light of recent developments.
This article was written by Teresa Torcasio, Partner and Marian Ngo, Senior Associate.
1 Schedule 2 of the Competition and Consumer Act 2010 (Cth)
2 Paciocco v Australia and New Zealand Banking Group Limited  HCA 28 at 270
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