A recent decision of the Federal Court of Australia in Lobux Pty Ltd v Willshaun Pty Ltd [2022] FCA 204 provides a reminder to rethink the inclusion of ‘general charging clauses’ in businesses’ standard trading terms.
A general charging clause in an agreement gives the secured party (such as a supplier) a security interest in the grantor’s (the customer’s) assets.
Facts
In 2018, Lobux Pty Ltd (Lobux), a manufacturer, entered into an agreement (Agreement) to build and supply a vacuum tank for Willshaun Pty Ltd (Willshaun). The terms of the agreement incorporated Lobux’s standard terms and conditions of trade.
Willshaun took possession of the partly-built vacuum tank without having paid the full purchase price. Lobux commenced the proceeding seeking an order that Willshaun return the vacuum tank. Willshaun filed a cross-claim alleging that terms in the Agreement were unfair contract terms under the Australian Consumer Law.
Refresher on Australian Consumer Law unfair contract terms
Under Part 2-3 of Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2001 (Cth), a term of a ‘standard form’ ‘consumer contract’ or ‘small business contract’ is void if the term is unfair.
In determining whether a contract is in ‘standard form’, the Court will consider the relative bargaining strength of the parties, whether the terms were drafted prior to contract negotiations commencing and whether the terms are put on a ‘take it or leave it’ basis.
Relevantly, a contract will be a ‘small business contract’ if the contract is for the supply of goods with a contract value of not more than $300,000 and one of the contracting parties has fewer than 20 employees.
Finally, a term will be ‘unfair’ if 1) the term would cause a significant imbalance in the parties’ rights and obligations, 2) the term is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term and 3) reliance on the term would cause detriment to the other party. The Court will also consider the transparency of the language of the term.
Held
It was common ground between the parties that the Agreement was a standard form contract. The Agreement was found to be a ‘small business contract’ as Willshaun had fewer than 20 employees and the purchase price for the vacuum tank was less than $300,000.
The Agreement included a term that Lobux retained title to the tank pending payment in full. A further term provided that Willshaun granted a security interest in all other goods that had been or would be supplied by Lobux to Willshaun. These terms were not found to be ‘unfair’.
However, a further term (Clause 12) went further, providing that:
“… the Customer [Willshaun] charges all of its rights, title and interest (whether joint or several) in any land, realty or other assets capable of being charged, owned by the Customer either now or in the future, to secure the performance by the Customer of its obligations under these terms and conditions…
The Customer irrevocably appoints [Lobux] and each director of [Lobux] as the Customer’s true and lawful attorney/s to perform all necessary acts to give effect to the provisions of this clause 12 including, but not limited to, signing any document on the Customer’s behalf.”
Clause 12, an example of a general charging clause, was found to be an unfair contract term under the Australian Consumer Law because it created a significant imbalance in the parties’ rights and obligations, and was excessive having regard to the other valid forms of security provided by Willshaun under the Agreement. Justice Downes also found that the language of the clause was not transparent.
Ultimately however, Lobux was successful in its claim. Justice Downes found that her declaration that Clause 12 (among others) of the Agreement was unfair had no bearing on the outcome of the matter. Her Honour invited Willshaun to make submissions on what orders (if any) ought to be made in respect of the unfair contract term, which Willshaun failed to do, and no such orders were made.
Changes to unfair contract term regime
On 27 October 2022, the Federal Government passed legislation aimed at strengthening the unfair contract term regime. Notably, under the new regime:-
- The definition of ‘small business contract’ is broadened to mean a contract for the supply of goods where one of the contracting parties has either fewer than 100 employees (up from 20 under the existing regime) or a turnover of less than $10m. The $300,000 contract value threshold has been removed.
- Unfair contract terms become illegal (rather than only being void and unenforceable). Moreover, if a contracting party is found to have breached the unfair contract term provisions, significant penalties may be ordered of $500,000 for individuals and, for corporations, the greater of:
- $10,000,000;
- three times the value of the benefit received, or
- 10% of annual turnover in preceding 12 months, if the court cannot determine benefit obtained from the offence.
Take away
- Terms and conditions which might have once been regarded as legitimately taking a ‘belts and braces’ approach to protecting a businesses’ interests, might now be illegal – such as a general charging clause to secure all debt.
- Businesses should carefully review their terms and conditions to ensure they do not contain any unfair terms. Otherwise, they may face significant penalties if found to have contravened the new regime.
