Servcorp falls foul of new business-to-business unfair contract term laws

The ACCC has had another Federal Court victory with the new business-to-business unfair contract laws. The ACCC v Servcorp Limited^[1] serves as a timely reminder that:

• the ACCC is on the lookout for clear cases which it can run to get its message out; and
• you should seek legal advice in the preparation or negotiation of standard form contracts, to ensure they are enforceable and compliant.

What sort of business was involved?

The respondent was Servcorp Limited and two of its related entities (Servcorp), who supplied serviced office spaces and virtual office services, office suites, secretarial services, IT and communications services to customers.

This makes plain how the new laws work: necessarily, Servcorp had customers or tenants who were businesses, including many which were small businesses.

What sort of contracts did Servcorp use and what were the offending terms?

Servcorp provided service contracts to customers, including small business customers.

Terms which were declared unfair included those which had the effect of:

• automatically renewing a customer's contract, unless the customer had opted out, and allowing Servcorp to then unilaterally increase the contract price;
• permitting Servcorp to unilaterally terminate contracts;
• unreasonably limiting Servcorp's liability or imposing unreasonable liability on the customer; and
• permitting Servcorp to keep a customer's security deposit if a customer failed to request its return.

Servcorp was required to pay the ACCC's costs of $150,000 and implement a program to ensure compliance.

So, generally speaking, what are the implications of this decision?

1. You should tread carefully when preparing or signing standard form contracts, particularly if the contract's value is under $300,000.
2. The ACCC are on the lookout for unfair terms, and are seeking to make an example of businesses which seek to enforce unfair contract terms.
3. Imbalance of bargaining power both in negotiations and in the agreement is a strong signal that terms could be considered void if challenged.
4. If you are providing, or receiving, a standard form contract, ensure you receive legal advice first!

Remind me, what are the unfair contract terms which apply to small businesses?

The Australian Consumer Law (ACL),^[2] from 12 November 2016, applies unfair contract rules to any 'standard form contracts' involving 'small businesses'.

This means if an agreement is a 'small business contract' and the contract is a 'standard form contract', then any clause which is found to be unfair is deemed to be void and is not enforceable.

A contract will be a small business contract if:

1. at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons
2. either of the following applies:
   1. the upfront price payable under the contract does not exceed $300,000; or
   2. the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1 million.

A contract is presumed to be a standard form contract unless proven otherwise. The court will take into account factors such as:

1. whether there was unequal bargaining power between the parties;
2. whether the contract was pre-prepared by one of the parties prior to negotiations (often the supplier);
3. whether it was an "all or nothing" form of negotiation;
4. whether there was an opportunity to negotiate the terms of the contract; or
5. whether the terms of the contract are tailored to the characteristics of the other party or the particular transaction.

When is a term unfair?

Under the ACL, a term of a small business contract is unfair if:

1. it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

What happens if a term is unfair?

If a court finds a term to be unfair, then the court may grant one of the following remedies:

1. an injunction;
2. an order to provide redress to non-party small businesses; and / or
3. any other orders the court thinks appropriate.

If you continue to assert that a term is legitimate, or seek to enforce or rely on it when it has been declared unfair by a court, you could be found to be engaging in false or misleading conduct, which carries pecuniary penalties of up to $1.1m for corporations and $220 000 for individuals for each infringement.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

[1] [2018] FCA 1044.

[2] Being Schedule 2 of the Competition and Consumer Act 2010 (Cth).