Unfair Contract Terms in B2B Equipment Leases

A recent case in the NSW Supreme Court inadvertently highlighted the kind of contractual provision which is likely to fall foul of the forthcoming national laws dealing with unfair terms in business-to-business (B2B) contracts.

In the case of Unison Finance Group Pty Ltd v Electric Life Pty Limited [2015] NSWSC 170, the financier-lessor, Unison, entered into an agreement to rent personal computer and other related office equipment to Electric Life as lessee. As most rental agreements and leases do, the contract provided for an automatic extension upon expiry of the contract’s initial four year term.

The extension period to apply would be 12 months from the end of the initial term, unless within a three month ‘window” opening into the period between 180 and 90 days prior to the lease’s expiry date, Electric Life gave notice that it wanted the lease to end on that date.

Also, a drafting anomaly in the lease agreement had the effect that, should the automatic extension clause apply, it too would carry over as a provision of the extended lease, rather than falling away. This meant that, if Electric Life wanted the extended term to end it had to give notice during the same three month window.

As it transpired Electric Life failed to give appropriate notice for nine years following the end of the lease’s initial term. As lessee it was contractually obliged to pay rent every quarter during each of those years, even though the equipment had long since been written off by Unison, and in fact had been disposed of by Electric Life at some uncertain point during the nine year extension period.

Under the current law the judge, Adams J, had no choice but to uphold the strict terms of the lease, even though in his judgement he alluded to “unjust enrichment” and “unfair advantage” accruing against the $55,000 “inertia” or extra rent received by Unison.

However, such a decision would be highly unlikely from 2016, when new Australia-wide laws for B2B contracts are introduced.  These new laws will render ineffective terms in contracts such as the Unison lease agreement which are defined as “unfair”.

This development of the law represents an extension to business customers of the rights retail consumers already have under the Competition & Consumer Act 2009 (CCA), and, as regards credit contracts, under the ASIC Act 2001.

So, if under the new laws Electric Life qualified as a “small business”, the value of the leased  equipment did not exceed $250,000, and the lease fell within the definition of a ”standard form” contract  (all very likely), the court could very easily deem the automatic extension clause unfair, and strike it out.

The decision for Unison would therefore have been reversed, and Unison obliged to refund most of the inertia rent it received to Electric Life.

Despite the reassuring decision in the Electric Life case, equipment vendors and financiers of all sizes should commence reviewing their standard form hiring agreements without delay.