ACCC eviscerates standard equipment finance contracts: key terms declared unenforceable

In brief

In August 2022 the Federal Court gave judgment in the unfair contract terms (“UCT”) case launched by the Australian Competition and Consumer Commission (“ACCC”) against Fujifilm Business Innovation (formerly Fuji-Xerox) (“Fujifilm”), nearly two years ago. The judgment declared many well understood equipment finance terms to be unfair and hence unenforceable. Because Fujifilm had decided at the outset not to offer any counter argument or reference any historical precedent against the ACCC’s position, the regulator was given an unfettered right to undermine 40 years of settled law and thereby threaten SME finance across the board.

Discussion

In November 2020, the competition regulator, the ACCC launched an action in the Federal Court against Fujifilm. The ACCC alleged that Fujifilm’s standard form SME finance contracts contained numerous UCTs.

The full suite of Fujifilm’s contracts was considered by the court. It included typical rental, lease, commercial hire purchase and software financing agreements that nearly all SME financiers use in various forms in their day-to-day transactions.

As examples of the types of clauses that were challenged, in Fujifilm’s standard form Rental Agreement, the following clauses have been deemed unfair-

• Formalities of the Rental Agreement’s commencement
• 90 day holding over period
• The ‘unders’ charge if the equipment’s minimum usage not achieved
• Limited termination rights for the customer compared to Fujifilm’s rights
• Actuarial payout (including claims for break and other costs)
• Prohibition on assignment by the customer

Some responses to the deemed unfairness of the clauses above could be the following:

• The standard form opening clause of the Rental Agreement simply purported to give certainty to the point at which the contract (and hence the financing) commenced. The clause was precise and effective to achieve its intended purpose – hardly unfair.
• A 90 holding over period may not be unfair if the customer is paying its instalments on 90 day rests.
• If a minimum level of equipment usage is not achieved the contract’s financing structure is jeopardised. ‘Unders’ could be picked up by way of indemnity upon expiry, but this heightens the financier’s credit risk. it would likely attract the opprobrium of unfairness anyway.
• At a number points in the judgment, a clause was deemed unfair simply because the customer had no right corresponding to Fujifilm’s right: for example, an indemnity for client breach but not for breach by Fujifilm. The ACCC (and hence the court) failed to appreciate that financing contracts are by nature asymmetrical, not for reasons of unfairness but because the financier has corresponding legal and economic obligations to its own funders.
• As regards the asymmetrical prohibition on the customer (but not the financier) assigning its rights and obligations under the contract, this reflects two things: that the financier approves the transaction based on the credit risk on the customer alone, not some assignee; and secondly, the financier must always have the right to assign the benefits of the contract if it needs to rebalance its balance sheet.

Perhaps the most disappointing aspect of the Fujifilm decision is that a key provision of equipment finance contracts – the liquidated damages clause, comprising an actuarial payout upon early termination – is deemed unfair. This viewpoint is completely contrary to the otherwise authoritative 1993 decision of the NSW Supreme Court in two separate cases heard together: Beneficial Finance Corporation Ltd v Sharker, and Operating Lease Pty Ltd v Harrison & Another (“Sharker’s case”).

Historically, superior courts in Australia have long recognised that it is useful to both contracting parties to be able to record at the outset what amount may be payable upon a breach or termination, and how it is to be calculated. Doing so may limit court proceedings and expense.

As the court observed in Sharker’s case, a financier acquires rented goods solely to make its investment in the relevant transaction. A finance contract is therefore structured to permit progressive profit (return) by way of instalment (interest and principal) payments by the customer, against the financier’s capital outlay. If the financier loses the benefit of the customer’s future contractual performance (say due to credit default) then recovery of the financier’s investment by way of rebated (discounted) instalments does not convert such a clause into a penalty. Provided the clause comprises a genuine pre-estimate of damage, it is neither inappropriate nor unfair.

How could unfair clauses be improved?

There is no doubt that some of Fujifilm’s clauses in its Rental Agreement erred on the side of caution as regards protecting against the slightest risk of damages and loss. For example, if goods are delivered late fore whatever reason, the contract should be clear that repayments do not commence until delivery and/or installation. Also, the contract’s terms should all be included in the document the customer signs, not indirectly by reference to other terms found on a website (particularly those terms which may change at any time without notice). Further, the variation of costs and charges for equipment supplies should at least be made by way of explanation and prior notice, if not outright consent from the customer. And so on.

Conclusion

It is difficult to reconcile the 2022 Federal Court’s decision in the Fujifilm case with the NSW Supreme Court’s decision in the Sharker case. The apparent divergence in judicial approach largely comes about from Fujifilm’s unwillingness to challenge the ACCC’s initial allegations. In addition, the Fujifilm contractual suite seems to have been a bit over protective of Fujifilm, to the exclusion of a more reasonable consideration for the customer the company had otherwise worked so hard to attract. In any event, the decision in the Fujifilm case potentially has wide ramifications for the timeliness and availability of SME finance in the future.