Servcorp at centre of looming unfair contracts case

Servcorp chief operating officer Marcus Moufarrige

In the world that is ahead serviced offices for small enterprises are going to be one of the boom areas of the nation.

And no one does it better than the market leader Servcorp.

But there is a tragic irony in the Servcorp story

Two years ago the parliament of Australia, with the support of all the major parties and the crossbenchers, passed unfair contracts legislation designed to protect Servcorp’s small business customers against unfair standardised contracts.

About eight million contracts nationwide must be changed and Servcorp will be a major beneficiary from the increased activity in the sector.

But after two years of negotiation and preparation time Servcorp is now headed towards having its own required “fair contracts” for service offices set by the courts.

The courts have already taken a strong stand in the JJ Richards case and the descendants of the great “JJ” (Joseph John Richards) received a well deserved but minor ear clip from the courts on their settlement.

But the Servcorp case will set wider precedents so if Servcorp wins in the courts then almost certainly the parliament, which is becoming impatient with corporate antics in other areas, will amend the small business legislation focusing on serviced offices. Small business will be a big focus of the next election.

The fair contracts legislation was carefully crafted so that the fair contract requirements were not a one-way street and it’s important that the legitimate interests of Servcorp be looked after.

Servcorp leases floors in major buildings in Australia (and in other countries) and then sub leases them to small operators. Servcorp invests heavily to make sure the communication/computer systems accessible by its small enterprise and other customers are top class so the entrepreneurs can match the technology of the giants.

When a small enterprise customer gets to the end of a contract, Servcorp needs to have adequate notice if the entrepreneur does not want to renew. And if the tenant damages the building or does not pay the rent Servcorp must have clear rights. Conversely the entrepreneur renewing needs to know the lease cost for the year ahead.

According to the ACCC, which is taking Servcorp to court, Servcorp “standard contracts” with small enterprises include terms that:

Automatically renew a customer’s contract and allow Servcorp to unilaterally increase the contract price after the renewal and without prior notice to the customer;

Permit Servcorp to unilaterally terminate the contract and to impose penalty-type consequences on the customer;

Unreasonably limit Servcorp’s liability and impose unreasonable liability on the customer;

Permit Servcorp to unilaterally determine whether the contract has been breached;

Permit Servcorp to unilaterally acquire the customer’s property without any notice.

I have not seen a Servcorp contract so I can’t verify whether the ACCC is right or wrong. But in their statement to the ASX Servcorp did not deny the ACCC allegations. Unless there is agreement with the ACCC before trial, courts will decide whether the ACCC allegations against Servcorp are true or false.

But if the ACCC is telling the truth then Servcorp is in breach of the spirit if not the letter of the fair contracts laws and so these clauses (not the entire contract) are void. However the fair contract laws do not apply to contracts if there has been a negotiation

Servcorp’s defence is that they believe their contracts are not “standardised” so the act does not apply.

In their statement to the stock exchange Servcorp says that their contracts are not standardised because the small business operators have the right to negotiate.

If the courts determine that a large organisation can get around the act by inserting a clause, which says that the contract can be negotiated, then the legislation is potentially useless. The whole thrust of the legislation is that there is a total imbalance in negotiating power between large organisations and small enterprises. The small enterprise has little or no negotiating power when dealing with a giant so must be protected from over zealous big law firms extracting big fees from large organisations in a world where small enterprise growth is going to take more and more of our employment.

In my view (and it’s up to the courts) Servcorp would have to show that the offending clauses are often negotiated out and that the right to negotiate is regularly used.

A second issue is that the controversial clauses do not appear to be in the main contract but in a subsidiary back-up document.

As long as the back-up document applies to the total agreement this would be a very controversial defence,

Also the fact that there have not been many complaints is not of major relevance. This indicates that Servcorp rarely uses its powers. But if that’s the case making the documents fair should not alter its business.

This is what the big banks found. In the world ahead there is set to be an explosion in small businesses using serviced offices which will be fuelled by the fair contracts legislation.

Servcorp has had almost two years (the act came into operation in November, 2015 to apply from November 2016) to adapt its contracts. More importantly, strategically, Servcorp should emerge as a trendsetter on behalf of its small business customers.

It’s not too late. The banks, mesmerised by their big law firm advisers, started like Servcorp but then turned the legislation to everyone’s advantage.