How a menacing shark ultimately had to cough up the consumer

Are you a business owner using a standard form contract for the supply of goods and services to consumers?[1] Are the terms of that contract fair and are you acting in good faith in the performance of that contract? Misleading or deceptive, unfair terms in a standard form contract and unconscionable conduct will bring you undone. Such was the case in Australian Competition and Consumer Commission v Smart Corporation Pty Ltd (No 3) [2021] FCA 347.

Jackson, J of the Federal Court had to decide whether Smart Corporation Pty Ltd (No 3) formerly trading as Australian 4WD Hire (the company) had:

  1. engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (ACL) and false or misleading representations in contravention of s 29(1)(g) of the ACL;
  2. unfair contract terms in a standard form consumer contract making those contract terms void pursuant to s23(1) of the ACL; and
  3. engaged in unconscionable conduct in contravention of s 20(1) of the ACL.

Material Facts

The company was in the business of hiring out 4WDs typically to tourists wanting to travel in remote areas of Australia and on unsealed roads.

From January 2014 to August 2019, the company represented on its website and in emails that its 4WD vehicles were fully insured when over half of the vehicles were only insured for third party property damage.

Under the standard terms and conditions, hirers were required to pay a security bond. They would pay between $1,500 and $5,000 depending on the driver’s age and other circumstances.

Various iterations of the standard form contract allowed the company to:

  1. use GPS data to conclude the consumer had engaged in a Prohibited Operation (which included driving in contravention of any traffic laws, driving outside of built-up areas between sunset and dawn and driving during periods of low visibility) and the consumer acknowledged a Prohibited Operation may cause excessive wear and tear and the company was likely to suffer loss and damage;
  2. at its sole discretion charge consumers for damage to the vehicle rather than making a claim with the insurance company;
  3. deduct from the consumer’s security bond a minimum of $500 per incident;
  4. require consumers to act at all times in the company’s best interests and not defame or denigrate the company following return of the vehicle.

Thirty one customers, after returning their vehicle, received emails from the company alleging the customers had engaged in numerous speeding violations, in the order of hundreds and which entitled the company to deduct money from the bond for each violation. The emails used violent language, threatened litigation and were intimidating. In the emails of three customers, the company falsely alleged the police had issued speeding fines. Jackson, J noted the adverse consequences for one customer reported to be travelling at 128 km/h at 4:07:00 pm, 128 km/h at 4:08:00 pm, 128 km/h at 4:09:00 pm, and so on. Sometimes the interval was a matter of seconds. So if the vehicle was speeding at that time, it was doing so continuously, meaning there was not a separate ‘violation’ for each reading, assuming there were any ‘violations’ at all.

After these emails, the company deducted money from the security bonds of twenty five of the customers for ‘excessive wear and tear’ or as a ‘night driving fee’ irrespective of whether any damage had been done to the vehicle. Six customers did not receive any part of their bonds back.

Misleading or deceptive conduct, false or misleading information

Jackson, J held that statements on the company website and in emails that vehicles were fully insured was misleading or deceptive in breach of s 18 of the ACL because:

  1. they obscured the existence of a discretion to charge consumers for the damage to the vehicle rather than claim from the insurance company; and
  2. not all the vehicles were insured for damage.

The statements that the vehicles had the benefits of insurance for off-road use but then qualified with a discretion to charge consumers for any damage to a vehicle were false or misleading in breach of s 29(1)(g) of the ACL.

Unfair contract terms

A term in a standard form consumer contract is unfair if it:

  1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Jackson, J held the GPS provisions were unfair contract terms within the meaning of s 24 of the ACL and declared them to be void pursuant to s 23 of the ACL.

The relevant clauses stated that with the use of GPS tracking data, the company could conclude a consumer had engaged in a Prohibited Operation. A Prohibited Operation included driving in contravention of any traffic laws, driving outside of built-up areas between sunset and dawn and driving during periods of low visibility including but not limited to fog and heavy rain. The relevant contract terms stated a Prohibited Operation may or will cause excessive wear and tear and was likely to cause damage to the vehicle making the consumer liable to pay compensation for the damage.

The GPS provisions imposing a financial penalty of $500 per incident to be deducted from the consumer’s security bond was in the absence of any causal link between the amount payable and the cost of repairing damage to the vehicle. As Jackson, J pointed out, the customer would have to acknowledge that simply exceeding the speed limit by one kilometre would have caused excessive wear and tear and damage. A customer driving at night on a sealed highway and well maintained but outside a built-up area would be in breach of the contract and the company could deduct the amount of the security bond which could be as much as $5,000. It allowed the company to recover money far exceeding any loss the company may have suffered as a result of the customer’s behaviour. The relevant contract terms caused a significant imbalance in the rights of the parties and they were not necessary to protect the legitimate interests of the company.

The clause giving the company a discretion to claim damage from the customer instead of the insurer was held to be an unfair contract term. The effect of this clause placed the entire financial risk of damage to the hired vehicle on the consumer, at the sole discretion of the company, even if the company had insured against that risk. The company had insurance and consumers would reasonably expect it to make a claim with the insurance company. The contract terms caused a significant imbalance in the rights and obligations of the parties to the contract and it was not reasonably necessary to protect any legitimate interest of the company.

The non-disparagement clause stating that hirers must act in the best interests of the company and not defame the company in any way after the hire period had expired was held to be an unfair contract term. Jackson, J noted this clause was entirely in favour of the company and there was nothing in the contract that counterbalanced that obligation. The right of indemnity for breach of contract in the absence of any causal link between the driver’s behaviour and damage to the hired vehicle and the right to deduct from the security bond only exacaberated the imbalance. Jackson, J also noted the clause was not necessary to protect the legitimate interests of the company because it was a short term hire arrangement. There was no ongoing relationship that would call for a party to act in the interests of the other party.He said the prohibition went too far noting it is possible to defame and denigrate someone by expressing views which are not only genuinely and honestly held, but are also true.

Unconscionable conduct

In deciding whether the company engaged in unconscionable conduct, the Federal Court can take into account any factor, but the following are particularly important:

  1. The relative bargaining strength of the parties.
  2. Whether any conditions were imposed on the weaker party that were not reasonably necessary to protect the legitimate interests of the stronger party.
  3. Whether the weaker party could understand the documentation used.
  4. The use of undue influence, pressure or unfair tactics by the stronger party.
  5. The requirements of applicable industry codes.
  6. The willingness of the stronger party to negotiate.
  7. The extent to which the parties acted in good faith.

Jackson, J found the conduct of the company was unconscionable in breach of s 20(1) of the ACL. His Honour evaluated the emails of thirty one customers and found the conduct displayed by sending those emails to be dishonest, unfair, involving bad faith, deception, unfair pressure and included harsh and unjustified threats of legal action and other adverse consequences for the consumers which were out of all proportion to any prejudice which the company had suffered or would suffer as a result of the customer’s conduct.

Jackson, J found the large bonds retained after hire and the intimidation not to challenge the retention of those bonds was to secure a profit because the amounts deducted for ‘excessive wear and tear’ and night driving bore no relationship to any loss suffered by the company.

Finally, His Honour found the two former directors of the company were knowingly concerned in and a party to, the misleading or deceptive conduct, false or misleading representations and the unconscionable conduct of the company thus empowering the Federal Court to make orders for a pecuniary penalty.

Penalties

The two former directors of the company were ordered to repay to the Australian Competition and Consumer Commission, on behalf of the consumers, the respective amount identified for each consumer. They were disqualified from managing a corporation for a period of three years. The company and the two former directors were also ordered to pay a pecuniary penalty in the sum of $870,000, $179,000 and $174,000 respectively.


[1] A standard form contract is one that has been prepared by the business owner and is not subject to negotiation between the parties – ie it is offered on a “take it or leave it” basis.

DISCLAIMER – This is general information only. It is not legal advice. You should seek independent legal advice for your particular circumstances.