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ACCC finds Unfair Terms in Office lease contract

The ACCC has investigated Servcorp’s standard contract for rent of office space and the parties have consented to orders in the Federal Court that a number of clauses in that contract create an imbalance of the parties rights unnecessary to protect the legitimate interests of Servcorp, and if they were to be enforced by Servcorp, would cause detriment to the other party. The unfair terms were declared void.

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

The ‘Unfair Terms’ sections in the Competition and Consumer Act 2010 (the “Act”) were expanded in 2016 to apply to some business-to-business contracts. To be subject to the Act, one party to the contract has to be a small business with fewer than 20 employees and the price of the contract needs to be less than $300,000 (or $1,000,000 if the contract is for more than 1 year). The unfair terms provisions apply to standard form contracts.

A term in such a contract can be void if it is unfair, meaning that it caused a significant imbalance in the parties rights under the contract, is not reasonably necessary in order to protect the legitimate interests of the party advantaged by the term, and would cause detriment to the other party if applied or relied on. The Act includes a list of examples of unfair terms (Section 25 of Schedule 2).

This is the second investigation of the ACCC which has resulted in a declaration that terms in a standard form contract are unfair and void. The ACCC has stated that it will continue to investigate contracts and seek Court orders that terms are unfair and void.

The clauses in the Servcorp standard form contract that were declared unfair and void were:

The Auto-Renewal Clause

This clause provided that if other party did not give a notice within a specified time to terminate the contract on the expiry date, the contract would automatically renew and Servcorp could increase the price in its discretion. The Court ruled that this could result in a small business being unwillingly locked into a new term at a higher price.

Price Variation

This clause allowed Servcorp to vary the price during the term of the agreement without notice. There was no limit requiring Servcorp to act reasonably or fairly. Upon a price variation, the other party could terminate the contract by giving one months’ notice. The Court ruled that this was unfair, even with the other party having a termination right – they would have to pay a higher price for at least one month, and their only remedy would be to terminate and seek the service elsewhere.

Insurance, Indemnity and Release

These clauses required the other party to insure against all loss, theft and damage, even if caused by Servcorp. The release component of the clause restricted the other party from making any claim against Servcorp for loss, theft and damage. There were no reciprocal clauses benefiting the other party. The Court thought that preventing legitimate claims went beyond protecting Servcorp’s legitimate interests. Where the other party had a legitimate claim against Servcorp, if these clauses were relied upon by Servcorp they would cause detriment to the other party.

Termination for Breach

The breach clause permitted Servcorp to terminate the agreement for any breach of the head-lease, whether material or not, without notice. The clause did not give the other party time to remedy a breach, and even if they did remedy the breach, Servcorp could still terminate the agreement. The other part may not have been given a copy of the head-lease and may not have been aware of the breach. The Court considered that being able to terminate without notice was a significant imbalance in the parties rights and obligations and was a unfair term.

Termination without reason

This clause permitted Servcorp to terminate the agreement at any time on one months’ notice without reason. There was no corresponding right in favour of the other party. These kinds of clauses are generally considered to be unfair.

Limited Time to Recover Bond

This clause required the other party to demand its bond be returned within a specified time, or it would be forfeited to Servcorp. There was no obligation on Servcorp to return the bond. The Court considered this clause gave Servcorp a right to unilaterally acquire the other parties property.

No Encouragement to Use Competitors

This clause prohibited the other party from enticing or persuading any other customer of Servcorp to move premises. It applied during the term of the agreement and for the following two years. It imposed a minimum penalty of US$15,000. This clause did not require Servcorp to prove its loss. It was also unclear how the other party could know who Servcorp’s customers were, and as such, it was unclear how the clause would be applied.  It created an imbalance in the parties rights and was not necessary to protect Servcorp’s legitimate interests.

Servcorp’s Determination

This clause allowed Servcorp to determine whether the other party had served a notice validly and when it had been served. There was no corresponding clause in benefiting the other party. Considering the importance of notices in the agreement, the Court found that this clause was unfair.

All these clauses were found by the Court to be unfair and void. The ACCC and Servcorp agreed that Servcorp would establish and implement a compliance program for any relevant employee and agent. The ACCC did not seek any punitive orders against Servcorp.

Matthew Rafferty, Partner

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