The ACCC is on a winning streak in the unfair contract terms arena.

Following on from its victory last year over JJ Richards,1 the ACCC has brought successful proceedings in the Federal Court against two entities in the Servcorp Group (Servcorp) under those same unfair contract term provisions in the Australian Consumer Law (ACL).2

The Federal Court declared by consent that a number of terms in Servcorp’s standard form contracts were unfair and therefore void. Servcorp has agreed to undertake a compliance program and pay $150,000 of the ACCC’s legal costs.

So what did Servcorp do wrong? And, more importantly, how can you avoid ending up on the wrong side of the court, when dealing with small businesses?

What did Servcorp do wrong?

Servcorp is an office space and virtual office services provider. The Federal Court found by consent that 12 of the terms in the standard form contracts used by Servcorpwere unfair. Accordingly, the Federal Court held that these terms could not be enforced against Servcorp’s clients.

These problematic terms included the following:

  • Automatic renewal and unilateral price increase: Servcorp’s standard form contract would automatically renew if a client failed to give notice to terminate the contract prior to the end of the existing term. Servcorp could then unilaterally vary the price payable under the contract for the next term in its absolute discretion. What’s more, Servcorp was not required to give the client any notice of the price variation – nor was the counterparty given a corresponding right to terminate the contract at the commencement of the new term. This meant that the client would automatically be locked into a further term with no opportunity to avoid the price hike by terminating the contract.
  • Limitation of liability: Servcorp’s standard form contract provided that it could not be held responsible for any loss or theft of, or damage to, their client’s property howsoever caused – except in cases of gross negligence or wilful misconduct. Further, the clause could even be relied upon where Servcorp may have caused the loss or damage to the client’s property.
  • Liquidated damages: Servcorp could demand a penalty of US$15,000 from their client if that client persuaded any other client to leave Servcorp and move to a competitor. This applied regardless of whether Servcorp had suffered any loss or damage and Servcorp could seek further amounts by way of damages.

In each situation, the Federal Court considered:

  • whether Servcorp’s client had been granted a corresponding benefit under the contract; and
  • whether the clause was unfair in the context of the contract as a whole.

As there was no corresponding benefit in relation to each of these clauses for Servcorp’s client and Servcorp’s rights went far beyond what was necessary to protect its reasonable interests, the above clauses were found to be unfair and in breach of the ACL.

What does this mean for you? 

Since 16 November 2016, the scope of the unfair contract terms regime (Regime) has included small business contracts which are standard form. Accordingly, if you have standard form contracts that you regularly use in dealings with small businesses, you too may be caught by the Regime.

To avoid ending up in Servcorp’s shoes, we strongly recommend that you take the time to review those standard form contracts to ensure that they are fully compliant with the ACL.

This is because wherever a contract is caught by the Regime, any unfair terms in that contract can be declared void and unenforceable by the Federal Court. There are currently no pecuniary penalties simply for having an unfair term in a contract subject to the Regime. However, if you seek to apply that unfair term against a small business, you may find yourself the subject of costly and time-consuming ACCC investigations and court proceedings.

So, what is an unfair term?

Based on the ACCC’s recent activity in this space, there are certain terms which appear to be an enforcement priority for the regulator. These include clauses around:

  • automatic renewal;
  • unilateral rights for variation;
  • termination clauses; and
  • limitation of liability and indemnities.

If you have these types of term in your standard form contracts with small businesses (or indeed any other heavily one-sided term), then you must be able to justify their scope having regard to your reasonable commercial interests.

You should not keep overly-protective terms in your contract simply because you have always had the bargaining power to keep them there. If you have an overly-protective term in your contract and it turns out to be unfair, not only will it be void and therefore unable to be relied upon – it may even lead to bigger problems for you with the regulator.

The wrap up

It has been almost 2 years since the Regime was extended to cover small B2B contracts, and the ACCC has clearly moved into an enforcement phase.

Our key takeaway from the case is that companies dealing with small businesses in Australia need to rethink their approach to how they prepare and enforce standard form contracts.

The days of aggressively drafted, broad-sweeping clauses that seek to strip counterparties of almost all their legal rights are over – at least when it comes to small business contracts. Businesses must be prepared to accept a lot more responsibility and potential risk when dealing with small businesses.