In the recent case of AIBI Holdings Pty Ltd (AIBI) v Virtual Technology Services Pty Ltd (VTS) [2022] FCA 696 (AIBI v VTS), the Court considered whether a contract was a standard form contract.
We set out a brief overview of the case below.
The background
AIBI, a vocational education services provider, procured services from VTS, an IT services provider, under three separate agreements. Each of the agreements were prepared by VTS and took the form of a standard set of boilerplate provisions, attached to two front pages which set out the commercial terms between the parties, including the fee structure.1
The first agreement was executed in 2016, and according to AIBI, was not negotiated.2 Despite there being no specified term in the first agreement, the parties subsequently entered into a second agreement in 2017 on the same terms and conditions, save for the inclusion of additional services. The second agreement between the parties was said to have involved ‘some negotiation’,3 but ultimately led to a dispute over whether certain services were chargeable.4 The agreed solution to the dispute was to enter into a third agreement, aimed at clarifying the pricing structure between the parties.
After the execution of the third agreement, there was further dispute on the point of pricing. This led to AIBI withholding payment, VTS suspending the services, and AIBI terminating the agreement in response to the suspension. The matter made its way to the Federal Court, where AIBI asserted, among other things, that the third agreement contained unfair contract terms, including a requirement to pay a significant termination fee. This requirement was consistent in all 3 agreements signed by the parties. One of the questions for the Court was whether the third agreement was a standard form contract, and thus subject to the UCT regime.
The determination: was it a standard form contract?
No, said the Federal Court.
The Federal Court examined each limb of section 27(2) (noting that, at this time, sub-section (ba) was not included) and found that VTS had discharged the burden of demonstrating that the third agreement was not a standard form contract. The key findings of the Court were:
- Commercial terms: While the front pages of the third agreement contained terms which were commercial in nature (which the Court accepted were not ‘standard terms’), the Court said that this would not prevent the third agreement from being a standard form contract within the meaning of the ACL if the matters in section 27(2) otherwise suggested that it was. The Court accepted that the nature of the front pages might indicate that the third agreement was not a standard form agreement, but this was only a minor indicator.5
- Bargaining strength: AIBI argued that there was unequal bargaining power between the parties because of the termination payment which was included in the first contract that AIBI signed. According to AIBI, that termination payment clause made it more difficult to walk away from the arrangements. While the Court acknowledged that there was not much of a ‘bargaining chip’ in this instance from a legal perspective, the legal realities had to be viewed in light of the practical realities.6 The practical reality was that while VTS could have refused to negotiate any subsequent agreement with AIBI on the basis that it could recoup most of the contract price in any event, it did not do so, and instead negotiated and granted a price reduction to AIBI.7 On this basis, the Court concluded that while VTS had the “upper hand” in terms of bargaining power, it was not an “overwhelming advantage”.8
- Opportunity to negotiate: The Court was satisfied that AIBI was given an effective opportunity to negotiate and in fact, was successful in doing so.9 The Court noted that there were discussions on pricing which took place prior to the preparation of the third agreement and stated that, objectively viewed, AIBI was not put in a position where it was forced to ‘accept or reject’ VTS’ terms.
- Other relevant matters: The Court noted, as an additional relevant matter that while it had concluded that VTS had an “upper hand” in bargaining power, this derived from the consensual acts taken by AIBI, namely, the entry into the two earlier contracts. The Court said that while this did not erase the inequality, it put it into a different light, commenting that “AIBI might well have been wearing the handcuffs of the second agreement when it sought to amend the arrangement, but it voluntarily put those handcuffs on”.
This case importantly identifies that a party’s failure to negotiate will not necessarily indicate a lack of opportunity to negotiate, and that while one party may have the “upper hand” in bargaining power, this will not necessarily be sufficient to show that the contract is standard form.
This case note was written by Teresa Torcasio, Partner and Zoe Vise, Associate.
1 AIBI v VTS, para 1.
2 AIBI v VTS, para 6.
3 AIBI v VTS, para 12.
4 AIBI v VTS, para 14.
5 AIBI v VTS, para 70.
6 AIBI v VTS, para 87.
7 AIBI v VTS, para 88.
8 AIBI v VTS, para 89.
9 AIBI v VTS, para 93.
