The recent decision of the Federal Court by the ACCC in its case against Servcorp a large serviced office provider is a timely reminder for all businesses to review their terms of trade and to remove any terms which may go beyond protection of legitimate business interests-especially in dealing with a smaller business interest. The consumer law as applies to unfair contracts was extended to cover B2B contracts in 2016.
The Court declared by consent that 12 terms in contracts used by Servcorp subsidiaries are unfair and therefore void.
The specific contract terms declared unfair included those:
- that had the effect of automatically renewing a customer’s contract;
- allowing Servcorp to increase the contract price;
- permitting Servcorp to unilaterally terminate contracts;
- unreasonably limiting Servcorp’s liability; and
- permitting Servcorp to keep a customer’s security deposit if a customer failed to request its return.
ACCC deputy chair Mick Keogh said “Businesses can no longer impose contract terms that create a significant power imbalance between parties, are not necessary to protect their legitimate interests, and which would cause significant financial detriment to a small business.”
“While penalties do not apply for unfair contract terms, the ACCC will continue to take matters to court to ensure these terms are declared void and protect businesses.”
Following the Court’s declaration, Servcorp was required to pay the ACCC’s costs and establish an unfair contract terms compliance program.
If you have any concerns about the fairness of any of the terms of any contract affecting your business interests, please contact us for advice.
The terms and conditions of a business are often the foundation of the agreement between a business and its customers for the provision of goods or services and in some instances may be the only documentary proof of the agreement.
Given the importance of a terms and conditions document, businesses must ensure that it is robust, accurate and up to date, particularly given the changes that have occurred to key pieces of legislation in recent years. A small investment in a review of terms and conditions can have a large return in the form of protecting the business’s rights and potentially recouping outstanding monies.
The commercial terms and conditions should be clear:
Including price, method of payment, delivery, and dimensions, plans and specifications. Beyond these fundamental commercial provisions, the terms and conditions should also include reference to the nature of a quotation and how such a quotation can be accepted. Even though acceptance at law may differ from the general meaning of acceptance, specifying in the terms and conditions the circumstances giving rise to acceptance will provide prima facie agreement by the parties as to when the contract is entered into. Similarly, the terms should cover the time of risk passing in goods supplied, and the granting of access to premises of the customer where services are to be provided at the customer’s location.
Many terms and conditions lack provisions that strengthen the business’s rights particularly in the instance of default of the purchaser. Notwithstanding the impact of the Personal Property Securities Act 2009 (Cth) (PPSA) (discussed below), it is useful for terms and conditions to contain a provision defining when title to goods passes and when it is retained by the supplier – again, this might be sufficient at first instance to provide protection to the supplier. Stronger protections can be found in charging clauses pursuant to which the supplier may take a mortgage over real or security interest over personal property of the customer. Such provisions should be coupled with a power of the supplier to appoint a receiver or receiver and manager in the event of default by the customer, under which the receiver has the power to do anything that either the customer or supplier can do, including to sell property of the customer to satisfy debts to the supplier. Suppliers should also seek to obtain a personal guarantee from a director of a corporate or trustee customer; this provides a strong disincentive for a customer to default as the guarantor will face the risk of bankruptcy should the debts of the customer not be paid. Another form of protection for a business, at least at first instance, is a clause under which the parties agree to limit the supplier’s liability and to define the manner in which defective goods or services are dealt with. While such clauses must expressly be subject to statutory warranties and guarantees (discussed below) they may generally serve as a first level of protection against potential claims by customers and can also expressly exclude liability for indirect or consequential loss and loss caused by the actions of the customer. The terms and conditions should also contain clauses relating to the circumstances under which the supplier is entitled to cease supply and when the agreement may be terminated so as to reduce or avoid uncertainty.
It can often be a commercial decision as to which of these protective provisions to include in terms and conditions as a supplier does not want to scare away potential customers. Alternatively, it may be the case that the provision is always included but the supplier’s actions can mitigate the effect of the provision. One example of this is the creation of a security interest under the PPSA and subsequent registration on the Personal Property Securities Register (PPSR). The elements required to give rise to a security interest that may be registered on the PPSR – attachment, the type of collateral used as security, whether the interest is a purchase money security interest (if applicable) – should always be expressed in the terms and conditions; however, a supplier may choose not to register the security interest on the PPSR to keep the customer onside. Strictly speaking, security interests should be registered on the PPSR within 20 business days of entry into the agreement in order to give the supplier protection should the customer go into liquidation within 6 months, so by not registering its security interest the supplier is risking the loss of its products or its right to claim priority over the personal property of the customer in the event of default. Unfortunately, this is a risk that a supplier who is just starting out and who has little bargaining power may be forced to take.
PPSA ‘Laymen’s Explanation (Please a lawyer after)
Certain types of clauses should not appear in terms and conditions due to the impact of legislation. Under the Australian Consumer Law (ACL), suppliers of goods and services are taken to give certain consumer guarantees that cannot be contracted out of, including guarantees as to:
- acceptable quality
- fitness for any disclosed purpose
- due care and skill
- reasonable time for supply
Not only will any provision in terms and conditions that purports to exclude, restrict or modify such guarantees be deemed void, the supplier will have committed an offence of having made a false or misleading representation in respect of the guarantee, exposing a corporate supplier to a pecuniary penalty of up to $1,100,000 and an individual supplier to a pecuniary penalty of up to $220,000. The supplier will be equally exposed if its terms and conditions contain a provision seeking to avoid all liability for defective or damaged goods, as the ACL provides for minimum thresholds for repair or replacement of goods and supplying services again.
Other types of clauses will be impacted by legislation regardless of what is written in the terms and conditions. For example, the ACL also provides that if a supplier uses a standard form consumer or small business contract which contains an unfair term, the term will be considered void. A business’s terms and conditions will usually be considered a standard form contract as they will be prepared in advance and not be subject to negotiation. The ACL provides examples of unfair terms, which include provisions that allow one party but not the other to:
- avoid or limit performance
- terminate the contract
- vary the terms of the contract
- vary the price without giving the other party the right to terminate
- renew or not renew the contract
- assign the contract
While potentially impractical, one means of avoiding the imposition of the unfair contracts regime is to allow customers the right to negotiate terms and conditions; another is to clearly notify the customer of which terms in the contract give unilateral rights to the supplier. A more practical approach, however, is to have the terms and conditions reviewed and updated to ensure that no such unfair terms exist.
Our experienced commercial lawyers can provide you with peace of mind by reviewing and updating your business’s terms and conditions. Please don’t hesitate to contact us.
In Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd & Ors  QCA 48, a dispute had arisen between the shareholders of a company, Samgris Pty Ltd which was incorporated to undertake coal exploration in Queensland.
The minority shareholders in the company claimed that the affairs of the company had been conducted in a manner which was oppressive or unfairly prejudicial to, or unfairly discriminatory against, them as the minority and further or alternatively claimed that the company’s affairs had been conducted in a manner which was contrary to the interests of the members as a whole.
The relief sought was for an order for the winding up of the company under s461 of the Corporations Act 2001 (Cth), or, alternatively, that the majority shareholder purchase their shares at a price to be determined by the court once the court had decided that they should have that relief under s233 of the Corporations Act 2001 (Cth).
Here, the company was well and truly solvent. Its draft financial accounts for the year ended 31 December 2015 showed net assets of in excess of $18 million before having any regard to a disputed $33 million.
In the first instance, the trial judge (Bond J) held that the relationship between the appellant and the respondents, as the shareholders of the company should be characterised as a “quasi-partnership” or “a majority controlled business requiring mutual cooperation and a level of trust”. He found that the relationship between the parties had irretrievably broken down and that this had been caused by the majority shareholder’s conduct. He further held that the conduct had been oppressive and unfairly prejudicial to, or unfairly discriminatory against, the minority within the meaning of s232(e) and that the respondents had established an entitlement to a remedy also under s232(d) and ordered a winding up of the company.
He found that the company was a “quasi-partnership” and was:
“..not functioning, and cannot reasonably be expected in the future to, in the way intended and … There is no real prospect that the directors nominated by the two sides can work together sensibly to reach the necessary agreement to be able to conduct the company’s business in the future. In the circumstances of this case, in the absence of any other remedy, it would be just and equitable that Samgris should be wound up.”
In this instance, the majority shareholder appealed the decision of the trial judge, but the appeal was unanimously dismissed.
In this instance, the court of appeal also reflected that:
“the critical considerations are that not only would the valuation of the respondents’ shareholding be an extensive, expensive and time consuming process, but there is also a real uncertainty as to whether the appellant would be willing and able to pay the price which is ultimately determined.”
In the face of such uncertainty-the court could not impose a buy-out order, affirming the original decision to order a winding up.
This decision reaffirms the approach taken when a dispute between shareholders is to be characterised as a quasi- partnership and the appropriateness of a winding up order.
It further highlights that if a party involved in a shareholder dispute wishes a buy-out order to be made, then it needs to demonstrate not only the appropriate basis for such an order-but the financial capacity and willingness to meet such an order.
If you are involved in or wish to obtain advice on have any aspects of shareholder disputes, then please contact us.