Servcorp consents to court orders that contract terms with small business unfair

Australian Competition and Consumer Commission v Servcorp Limited [2018] FCA 1044 determined that Servcorp Limited (“Servcorp”) and its subsidiaries had caused contracts with small business to be entered into which contained unfair terms. This was an action commenced by the Australian Competition and Consumer Commission (“ACCC”) against Servcorp and some of its subsidiaries.

Servcorp is a publicly listed company and a holding company of a range of companies providing office space and office support services across Australia. Servcorp, through its subsidiaries, entered into contracts with small business for the provision of office space and office services.

ACCC argued that pursuant to the Australian Consumer Law (“ACL”) contained in Schedule 2 of the Competition and Consumer Act 2010, the relevant contracts were in standard form (Section 27 ACL) and would cause detriment to the small businesses (Section 24 and 25 ACL).

The Federal Court determined that the contracts between the Servcorp subsidiaries and the small business customers contained unfair terms (Section 24 ACL) and therefore, those terms were void (Section 23 ACL) because those terms:-

  • would cause a significant imbalance in the parties’ rights and obligations;
  • were not reasonably necessary in order to protect the legitimate interests of the Servcorp subsidiaries; and
  • would cause detriment (whether financial or otherwise) to the small business customers if they were to be applied or relied upon by the Servcorp Subsidiaries.

Specific terms that were considered unfair included:-

  1. There was an automatic renewal of the small business contracts which allowed Servcorp to increase the price at its absolute discretion and without notice.
  2. Permitted Servcorp to unilaterally terminate the contract and limit the small business’s termination rights.
  3. Unreasonably limit Servcorp’s liability and/or imposing unreasonable liability on the small business.
  4. Allowed Servcorp to terminate a contract where a claimed breach may not have constituted a material breach and without giving notice to the small business or the opportunity to remedy the claimed breach.
  5. Permitted Servcorp to retain a small business’s security deposit without notice if the small business failed to request its return.

The ACL was extended with effect from 12 November 2016 to cover “standard form contracts” (Section 27 ACL) involving “small business contracts” (Section 23(4) ACL). Interestingly, the Federal Court considered contracts that although originally entered into prior to the commencement of the extended provisions of the ACL, the contracts had been renewed after that date and were therefore subject to the ACL.

Section 23(4) of the ACL states:-

“A contract is a small business contract if:

(a) the contract is for a supply of goods or services or a sale of grant of an interest in land; and

(b) at the time the contract is entered into at least one party to the contract is a business that employs fewer than 20 persons; and

(c) either of the following applies:

(i) the upfront price payable under the contract does not exceed $300,000; and

(ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.”

The final outcome of the case is that orders were consented to by the parties that Servcorp and its subsidiaries, at their own expense, would:-

  • Establish and implement a program which has the purpose of ensuring compliance with the ACL with the program terms being agreed between ACCC and the subsidiaries.
  • That Servcorp employees and agents would participate in the program.
  • Pay costs of $150,000 to the ACCC on account of costs of and incidental to the proceedings.

This is now the second case in recent times in which the ACCC has initiated and won proceedings involving the protection of small business in dealing with standard form contracts and the imbalance of power by larger organisations. See Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224.

Accordingly, small business owners may wish to consider their positions in a range of industries including franchising, shopping centre leases and supplier agreements. The imbalance in bargaining position between large or multinational organisations and small businesses has been apparent for some time but it would appear that the amendments to the ACL have merit and that the regulator is willing to act.

 

Date Published: 17 August 2018

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Member Disputes – Consider Mediation!

Wolfe v Sydney Bush Walkers Inc [2018] NSWSC 1032 (4 July 2018) is another example of a protracted dispute between members. It appears that passions can be elevated in these circumstances that are not necessarily evident in commercial disputes. The Supreme Court of New South Wales, in its opening paragraph of the decision in this case, noted:-

“1.   This case is an unhappy example of a falling out between members of a recreational club that has led, quite unnecessarily, to legal processes out of all proportion to the issues at hand.

The case evolved from a member who was writing a part of the club’s history and a claim of plagiarism together with an apology not being in an agreed form. In our experience, disputes over the writing of a club’s history are not uncommon, unfortunately.

We strongly recommend that if a member (or other) is approved to write a history of the club, then there should be a clear understanding of the terms of the engagement. Most notably, will the author or the club own the copyright in the work?

But on the point of passion overriding common sense, we saw in our article in June 2018 here in Snow v Consumer Association of South Australia Inc. [2018] SADC 49, the District Court also noting the relationship between Mr Snow and the Consumer Association of South Australia Inc. as:-

“Overall the situation is as the Magistrate rightly characterised the relationship as one that ‘waxed and waned, but eventually it had broken down’. As her Honour further observed his:

… correspondence failed to address the gravamen of the complaints against him, and focussed on form rather than substance … [which] …demonstrated a clear unwillingness to address the substance of the allegations being made.

and:

 … his preference to deal with technicalities and form as opposed to addressing the substance of the matter.

This court characterised his stance over the persistent demands for further and better particulars of the charges as a ‘rouse for delay and obfuscation’.”

In our June 2018 article, we stressed the importance of procedural fairness (or natural justice) which was also stressed in our article of February 2015 here.

However, adopting procedural fairness (natural justice) principles will not guarantee that disputes between members or between the committee/board and a member will not arise.

We do suggest that clubs and other NFPs give consideration to adopting an independent mediation process to further reduce the risk of impassioned members resorting to legal proceedings. Inevitably, resorting to legal proceedings is expensive, time consuming and frequently causes irreparable damage to previously productive relationships.

Date Published: 30 July 2018

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Disciplinary Rules must have express power to suspend or expel

Snow v Consumer Association of South Australia Inc. [2018] SADC 49 provides some interesting observations in the need for procedural fairness (also referred to as natural justice) in disciplinary procedures against members of Not-for-profit (“NFP”) Associations.

This case was a decision of the South Australian District Court delivered in May 2018 resulting from an appeal by member Mr Snow against an unfavourable (to him) decision in the Magistrates Court.

Mr Snow made extensive claims of oppressive and unreasonable conduct by the Committee of Consumer Association of South Australia Inc. within the meaning of section 61 of the Associations Incorporation Act 1985 (SA). This provision is similar to sections 68 and 69 of the Associations Incorporation Reform Act 2012 (Vic). The case also reveals that emotions can run high in NFPs.

One aspect which Mr Snow appears to have been successful was that Consumer Association of South Australia Inc. had no express rule in its Constitution to suspend or expel him “from taking part in the business of the association”. Therefore, it could not suspend or expel him.

Along with many submissions, Mr Snow sought reinstatement of his membership. The District Court in making its final orders, in Snow v Consumer Association of South Australia (No 2) [2018] SADC 65 queried:-

“The question then clearly arises whether it is appropriate to reinstate Mr Snow in the circumstances where he has shown a bent for disruption, obsessive technicality and the pursuit of his own objectives.”

The District Court also noted the relationship between Mr Snow and the Consumer Association of South Australia Inc. as:-

“Overall the situation is as the Magistrate rightly characterised the relationship as one that ‘waxed and waned, but eventually it had broken down’. As her Honour further observed his:

… correspondence failed to address the gravamen of the complaints against him, and focussed on form rather than substance … [which] …demonstrated a clear unwillingness to address the substance of the allegations being made.

and:

 … his preference to deal with technicalities and form as opposed to addressing the substance of the matter.

This court characterised his stance over the persistent demands for further and better particulars of the charges as a ‘rouse for delay and obfuscation’.”

Finally, the District Court determined:-

“Given that Mr Snow succeeded in demonstrating errors in the approach of the Magistrate and was vindicated to the extent of securing declarations of wrongful suspension and expulsion, but otherwise failed to obtain orders for reinstatement or for a rehearing of his appeal to a general meeting, there will be no order as to costs.”

Accordingly, NFPs should confirm that the provisions of Constitutions or Rules provide express powers to suspend or expel members. If such a power does not exist then such action by an NFP is likely to be oppressive or unreasonable conduct.

Even if the Constitution or Rules specifically provide for suspension or expulsion, the NFP should ensure that it conducts any disciplinary procedures in accordance with procedural fairness or natural justice. Some aspects which need to be included in ensuring procedural fairness by the Association include that the member must:-

  1. be advised of the charges against him;
  2. given reasonable notice to attend a disciplinary hearing;
  3. be given a fair and reasonable opportunity to present his side of the story and test the evidence against him;
  4. be heard by an unbiased and fair minded disciplinary board; and
  5. be advised of the decision and given the opportunity to speak on penalty.

The terms procedural fairness and natural justice are largely self-explanatory and NFPs need to ensure that a fair procedure is adopted in hearing disciplinary matters against members. Too often we see matters that are too hastily considered and become highly emotive. In one case, a matter was brought before the president of a sporting club on Friday night only for him to demand that a hearing be held the next morning (Saturday) requiring the alleged offending member to appear at 9:00am with no specific details of the allegations.

A simple approach is to simply ask oneself: if this were happening to me would I consider it to be fair?

Date Published: 29 June 2018

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To bind or not to bind? Enforceable “Offer to Purchase”

In our article in February 2018, To bind or not to bind? Immediately enforceable agreement to lease?, we noted that the Supreme Court of Victoria in Casdar Pty Ltd v Fanous [2017] VSC 616 (20 October 2017) has confirmed that merely calling an agreement a “Heads of Agreement” and having it signed does not automatically bind the  parties immediately to a legally enforceable agreement.

However, the Supreme Court of Victoria in Verrocchi v Messinis [2016] VSC 490 is an example of where a document headed “Offer to Purchase Melbourne City Pharmacy” was held to be binding for the purchase of a pharmacy. The case is an interesting contrast to the Casdar case.

The details provided in the current case is a not uncommon means of proceeding in the retail pharmacy industry. Notably, the front page of the document included a description of the business and the business premises, together with the names of the Vendor and his Solicitor and Agent and the name of the Purchaser and his Solicitor. Also, on the front page of the document it was stated “status of this Offer: this Offer is intended to be legally binding upon the Vendor and the Purchaser”.

The Offer document noted details such as the purchase price ($1.4m), settlement date and payment details. However, there was a condition precedent to settlement which provided:-

Conditions Precedent to Settlement:

This Offer is subject to:

  1. The Purchaser completing due diligence investigations into the Business to its satisfaction within 5 days of receipt of all requested information (Inquiry Period). The Purchaser agrees to submit the complete request for information in writing no later than 3 business days after acceptance of this offer; and [sic]

Formal Contract of Sale:

Upon acceptance of this Offer, the Purchaser and Vendor agree that they will as soon as practicable negotiate and execute a formal Contract of Sale of Business prepared by the Vendor’s lawyers. The Contract of Sale will contain all of the general terms and conditions as those usually included in a Victorian Standard Contract for Sale of Business (with any state-specific legislative references updated to reflect those of the State in which the Business is situated) plus further conditions precedent and special conditions relating to the sale of the Business as set out in principle below:

1. Issue to the Purchaser on Settlement Date of a new Medicare Pharmaceutical Benefits Scheme (“PBS”) Approval Number by Medicare Australia for use in conduct of the Business, contemporaneously with the cancellation of the Vendor’s current PBS Approval Number – this will be a condition precedent; and

2. All necessary approvals being granted to the Purchaser by the Pharmacy Council or Authority in the State in which the Business is situated to enable the Purchaser to conduct the Business at the Premises from the Settlement Date – this will be a condition precedent;

3. The Landlord of the Business Premises consenting to the transfer of the existing Business Premises Lease to the Purchaser – this will be a condition precedent;

4. A valuation of stock being carried out at the close of business after the last trading day prior to the Settlement Date by a reputable independent stocktaker (“Independent Stocktaker”) in accordance with stock valuation procedures and terms as per standard industry practice (eg. all stock with an expiry date of less than three (3) months to be excluded) with the Independent Stocktaker’s costs to be shared equally between the Vendor and the Purchaser noting that if the stock valuation exceeds the maximum stock value the Independent Stocktaker will determine which stock is to be excluded where the Vendor and Purchaser cannot so agree;

5. Transfer to the Purchaser at Settlement of:

a. all records, computer files, software and passwords, telephone and facsimile numbers, email addresses, websites, security alarm codes and all other usual services currently used or connected to the business;

b. all fixtures, fittings and equipment owned by the Vendor and used in the Business;

c. any applicable banner group or similar franchise agreement relating to the Business Premises;

6. Termination by the Vendor of all of its employees on the Settlement Date and re-employment of current employees as selected by the Purchaser. The Vendor must allow adjustments to the Purchase Price for the tax-affected monetary value of annual leave and long service leave of those employees transferring to their present entitlements at Settlement to the Purchaser;

7. The Vendor and Purchaser agreeing that the sale of the Business constitutes the sale of a “going concern” for GST purposes.”

There were various exchanges between the Vendor and the Purchaser in relation to progressing the sale.

The Court stated:-

“24 The issue for determination is whether the plaintiffs [Purchaser] have established that the parties intended, by the execution of the alleged contract, to enter into a legally binding agreement for the sale of the pharmacy business. The defendant [Vendor] accepted that the parties had expressly stated that the alleged contract was ‘intended to be legally binding upon the Vendor and the Purchaser’ but contended that what was in fact intended to be binding was an agreement to negotiate a formal contract of sale of business.”

In other words, the Defendant was looking to argue that it was not bound by the agreement and therefore not required to sell the pharmacy business.

The Plaintiff, in short, argued that a sufficiently certain agreement had been concluded with essential details and therefore was binding on both parties.

To the extent that there was an unusual feature in this case that the Defendant conceded that by the execution of the alleged contract, the parties did intend to enter into a legally binding contract. The Court noted “this concession is not surprising because the terms of the document state that “This Offer is intended to be legally binding upon the Vendor and the Purchaser; and each party signed the contract as “executed as an agreement””.

The facts of this case provide an interesting contrast to the Casdar case but are remarkably consistent with such agreements in the sale of pharmacy businesses. It may also be not uncommon that it is suggested to Vendors that “they can get out of the contract” because it is subject to “formal contract”.

The lesson for all Vendors and Purchasers is quite simply the greater the detail in an agreement that is headed “Offer to Purchase”, “Heads of Agreement”, “Terms Sheet” or some other such description, the more likely that it is to be binding. Extreme caution should be exercised in these circumstances and the advice of a selling agent should not necessarily be relied upon. These sales are typically of a significant scale and of considerable importance.

 

Date Published: 26 April 2018

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To bind or not to bind? Immediately enforceable Agreement to Lease

The Supreme Court of Victoria in Casdar Pty Ltd v Fanous [2017] VSC 616 (20 October 2017) has confirmed that merely calling an agreement a “Heads of Agreement” and having it signed does not automatically bind the  parties immediately to a legally enforceable agreement.

The same principles of determining whether an agreement is binding on a party apply to other documents variously called “Memorandum of Understanding”, “Offers to Purchase”, “Summary of Terms”, “Terms Sheet” and other expressions.

This case was an appeal from a Victorian Civil and Administrative Tribunal (“VCAT”) decision in Casdar Pty Ltd v Fanous (Building and Property) [2017] VCAT 1464 (12 September 2017). In Victoria, an appeal from VCAT, must first receive leave (or “consent”) from the Supreme Court and if received then be heard. [see our Article An appeal from VCAT to the Victorian Supreme Court is not automatic]

In short, in the Supreme Court, Croft J decided:-

“……leave to appeal is refused, but if leave had been granted, the appeal would be dismissed with costs.”

Casdar Pty Ltd as Lessor (“Casdar”) and Mr Jospeh Fanous as Lessee (“Fanous”) signed a Heads of Agreement on 29 July 2015 (“HoA”). The HoA provided, amongst other things, for an Agreement to Lease a commercial shop for the purpose of an Egyptian style restaurant and included the following:-

SPECIAL CONDITIONS TO THE AGREEMENT FOR LEASE

  1. The shop already has a planning permit in place for a restaurant. The Lessee should apply immediately for any approval from Council after signing hereof.
  2. The Lessor, its associates, and subsidiaries covenant that the Permitted Use shall be sole and exclusive to the Lessee at 51-53 Heatherton Road Endeavour Hills (Centre) and within 5 km of the Centre.
  3. Agreement for Lease and Lease subject to lessee’s lawyer’s final approval within 7 days after the Lessor provides the Heads of Agreement Lessee [sic].
  4. The Lessor is responsible for and agrees to pay all costs for the completion and installation of Fittings & Fixture to the facility including:

…”

After signing the HoA by both Casdar and Fanous, Fanous obtained financial approval, paid the first month’s rent on or about 28 August 2015, collected the keys but never took possession.

Casdar commenced building works in anticipation of occupation by Fanous.

However, despite commencing negotiations for a formal lease on or about 4 August 2015, negotiations broke down. Unsurprisingly, Casdar asserted that the HoA was an immediately concluded and binding agreement. Arguing, amongst other things, that no Lessor would commence building works without a binding commitment from a Lessee.

In response, Fanous argued that the HoA was subject to a formal lease and as no such lease had been concluded the HoA was not binding. In any event, Fanous argued that the building works by Casdar were only general in nature.

Accordingly, the Court had to determine whether the HoA was an agreement to lease by which the parties intended to be immediately bound.

The Court concluded that the parties did not intend the HoA to be immediately binding. The Court observed that the expression “Heads of Agreement” was not, of itself, determinative of the issue. The Court referred to the leading High Court Authority of Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 (30 November 1954) and reconfirmed that the most important factor was the intention of the parties.

In order to ascertain the intention of the parties “regard must be had to any written agreement between the parties and the pre and post contractual conduct of the parties” on the basis of what a reasonable person would conclude from all the dealings between the parties.

The Court observed that the requirements of the Retail Leases Act (Vic) were not satisfied. A Lessor is required to provide certain information including a disclosure statement to the Lessee before entering into a binding lease. The Court considered this to be indicative that no immediately binding contract was concluded upon signing the HoA.

Further, the actual words of the HoA supported the view that no immediately binding agreement had been concluded. Finally, the Court accepted that the works undertaken by the Lessor were general in nature.

General implications

It is trite, yet important to state, that if you intend an agreement to be immediately binding then it should clearly say so. On the other hand, if you intend not to be bound by such a document, you should clearly say so. Always be mindful that a third party who benefits from the transaction (such as a commission agent) may be encouraging you to sign for reasons contrary to your caution and prudence.

Date Published: 8 February 2018

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