The Federal Court has recently given meaning to the phrase “standard form contracts”

What is a “standard form contract” for the purposes of the unfair contract provisions of the Australian Consumer Law?

The unfair contract terms provisions of the Australian Consumer Law (ACL) provide that a “small business contract” or a “consumer contract” that constitutes a “standard form contract” must not contain unfair terms. However, the phrase “standard form contract” is not defined in the ACL. Further, until the 2022 Federal Court decision of AIBI Holdings Pty Ltd v Virtual Technology Services Pty Ltd [2022] FCA 696 (the AIBI Case), the phrase had not been considered in detail by the Courts.

Under the ACL, if a party to legal proceedings alleges that a contract is a standard form contract, section 27(1) of the ACL sets out a rebuttable presumption that this is the case. The onus of proving otherwise is therefore on the other party to the proceedings.

Section 27(2) of the ACL requires a Court to take the following matters into account when determining whether a contract is a standard form contract. The Court can also take account of other matters that it considers relevant.

  • Whether one of the parties has all or most of the bargaining power relating to the transaction.
  • Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties.
  • Whether another party was, in effect, required to either accept or reject the terms of the contract.
  • Whether another party was given an effective opportunity to negotiate the terms of the contract.
  • Whether the terms of the contract take into account the specific characteristics of another party or a particular transaction.

Collectively, these mandatory considerations reflect the expectation that a standard form contract has been prepared by one party for repeat use and is presented to the other on a “take it or leave it” basis.

However, while there are some categories of contracts that are clearly identifiable as standard form contracts, there are others that are less obvious.

Whether a particular contract is a standard form contract is a question of fact to be assessed in the light of the content and context of that contract.

The Federal Court (Perram J) undertook this factual assessment in the AIBI Case. The relevant facts were that AIBI Holdings Pty Ltd (AIBI), which operated a vocational education services business, entered into a series of three contracts with Virtual Technology Services Pty Ltd (VTS) for the provision of IT services. These contracts were entered into in 2016 (first agreement), 2017 (second agreement) and 2020 (third agreement). Each of the contracts took the form of a standard set of terms and conditions attached to two front pages which identified the parties, the fee structure and the duration of the agreement. There was also a schedule to each agreement which identified the services to be provided by VTS. AIBI became dissatisfied with the quality of the services provided by VTS and ultimately did not pay invoices rendered by VTS. In response, VTS suspended the provision of services to AIBI, relying on a clause in the third agreement entitling it to withhold services if its invoices were not paid. AIBI claimed that this clause was void on the basis that it was unfair within the terms of Part 2-3 of the ACL and that VTS was in breach of the contract. VTS submitted that Part 2-3 of the ACL was not applicable to the contract on the basis that the third agreement was not a standard form contract.

The Court accepted that the terms and conditions forming part of the third agreement were commonly used by VTS in most of its client agreements. While the front pages and the schedule of services were tailored to reflect the agreement with AIBI, the Court observed that the presence of these parts of the contract would not prevent the third agreement from being characterised as a standard form agreement.

A review of the background indicated that AIBI’s focus was on the price of the services and that there had been significant negotiations between the parties on this issue and ultimately AIBI had secured beneficial price changes through those negotiations. This led the Court to conclude that AIBI was not in a position where it had to accept or reject the third contract, that AIBI had been given an effective opportunity to negotiate the terms of the contract and that the third contract reflected the particular characteristics of AIBI. This conclusion was reached despite the fact that the parts of the third contract comprising the standard terms and conditions remained unchanged.

In addition to the mandatory considerations under section 27(2), the Court had regard to bargaining power of AIBI in the context of the sequence of the first, second and third agreements and the fact that certain set-up costs incurred by VTS were amortised over the term of each agreement with the balance of such costs being payable by AIBI if it terminated the agreement early without cause. AIBI’s negotiating position was compromised when it sought to replace the second agreement with the third agreement as it could only terminate its relationship with VTS if it paid out the balance of those costs existing at the end of the second contract. The Court observed that AIBI’s diminished bargaining position derived from “consensual acts taken by AIBI, namely entry into the two earlier contracts”. Having regard to this and the analysis of the mandatory matters, the Court held that the third contract between AIBI and VTS was not a standard form contract.

Key takeaway

While a standard form contract will typically be one established by terms and conditions used on a repeat basis in connection with the supply or goods or services, it is possible for contracts that include some level of customisation to be characterised as standard form contracts. For example, standard form agency, distribution or procurement agreements may be set up with the aim of avoiding or minimising negotiation and changes. Even where there has been some level of negotiation and customisation of these style of documents, an assessment of the contract should be undertaken by reference to the matters identified in section 27(2) of the ACL. If there is a risk that a contract is classifiable as a standard form contract, you should remove any unfair terms.

For more information contact the Addisons Competition, Consumer & Antitrust team.

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