Freedom of (Fair) Contract

Corporate & Commercial 20 August 2018

In late 2016, amendments to the Competition and Consumer Act 2010 (Cth) (the Act) extended the unfair contract regime from consumer contracts to certain business contracts.

The unfair business contract regime applies to business contracts:

  1. which are in standard form (essentially, offered on a take it or leave it basis);
  2. under which at least one contract party is a business which employs less than 20 staff; and
  3. where the upfront price payable does not exceed $300,000 or, if the contract has a duration of more than 12 months, $1,000,000.

The Australian Competition and Consumer Commission (the ACCC) has been active in regulating the use of unfair contract terms.  This action has involved large companies including Uber, Fairfax Media, Lendlease, Sensis and Jetts Fitness.  A wide range of business contracts have come under scrutiny, including:

  1. franchise agreements;
  2. commercial leases;
  3. waste management agreements; and
  4. advertising agreements.

Recently, the Federal Court of Australia declared by consent that 12 terms in standard business contracts utilised by subsidiaries of Servcorp Limited (ASX: SRV) (Servcorp) were unfair and therefore void and unenforceable[1].  This declaration was the culmination of legal action commenced by the ACCC in 2017.

Servcorp provides serviced office spaces, virtual office products and IT services to businesses in Australia.  In doing so it employs a variety of standard form business contracts.  Servcorp’s business clients can enter into such contracts online.

The Court declared that the following terms were unfair:

  1. Automatic Renewal

The contract[2] would be automatically renewed (for a duration equal to the initial duration) if the client did not give written notice to Servcorp, within a limited time frame, that it did not wish to renew the contract.

  1. Unreasonable Exclusion of Liability

Servcorp was immune from liability in relation to loss and damage suffered by the client in connection with the services, even where Servcorp was responsible or partly responsible for such loss and damage (excluding gross negligence or wilful misconduct).

Further, the client was prohibited from making a claim against third parties which were involved with the provision of the services.

Finally, Servcorp was immune from liability in relation to the client’s goods, even where Servcorp was responsible or partly responsible for the loss or damage.

  1. Unilateral rights to set prices and fee amounts

Servcorp had the right to increase the service charges at any time without notice to the client.  Additionally, Servcorp had the right to charge the client a service fee upon contract renewal with the amount determined by Servcorp in its absolute discretion.

  1. Unreasonable deeming provisions

In relation to notices served by the client on Servcorp, the date of service was deemed to be the date at which a confirmation letter was received by the client in response.

Additionally, if the client did not demand the refund of a security deposit within 360 days from the end of the contract, it was deemed to be forfeited in favour of Servcorp.

  1. Unreasonable termination rights

Servcorp had the right to terminate the contract without cause and at short notice.

Additionally, Servcorp had the right to terminate the contract immediately upon certain non-serious breaches.

  1. Unreasonable indemnity obligations

The client was required to indemnify (keep harmless) Servcorp from the actions of third parties which were not in its immediate control, including in relation to criminal conduct.

Further, the client was required to indemnify Servcorp in relation to any loss and damage Servcorp suffers in connection to loss and damage suffered by the client.

  1. Unreasonable liquidated damages provisions

The contract provided a restriction on the client encouraging competition with Servcorp’s business for 2 years following the end of the contract.  If the client was found to have breached this provision, the client was obligated to pay Servcorp the amount of $15,000 USD by way of liquidated damages.

While there are a number of indicia the Court will consider in determining whether or not a term of a business contract is unfair, Moshinsky J’s observations in proceedings involving the provider of waste management services[3] confirm that a term is less likely to be considered unfair if there is a meaningful relationship between the term and the protection of a party, and that relationship is foreseeable at the time the contract is entered into.  In the Servcorp proceedings, the offending terms went much further than the reasonable protection of Servcorp’s legitimate interests.

It is clear from the Servcorp proceedings that contract managers and drafters can no longer adopt a cover all approach in relation to standard form business contracts.  Provisions which are included for the advantage of one party but not the other should be considered closely to ensure that the protection they afford goes no further than is reasonable in the circumstances.  For businesses which utilise standard form business contracts, it is prudent to review such documentation to ensure it remains fully enforceable and will not be the subject of prosecution.

[1] Australian Competition and Consumer Commission v Servcorp Limited [2018] FCA 1044

[2] For the purposes of this article, all references to “the contract” are references to one or more of the standard form contracts the subject of the Servcorp proceedings.

[3] Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 at [31]

If you require advice or further information in relation to any of the matters discussed in this article, please contact our Corporate & Commercial team on 03 5273 5263.

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