Lobux Pty Ltd v Willshaun Pty Ltd [2022] FCA 204 is a warning to businesses to be mindful of their security and charging clauses in standard terms and conditions (i.e. ‘take it or leave it’ contracts) to avoid such clauses being found to be void and therefore unenforceable.
Lobux and Willshaun entered into a standard form contract for Lobux’s supply of equipment to Willshaun.
When Willshaun did not pay for the equipment, Lobux sought to rely on its general security clause in the contract which gave Lobux a security interest in any land, realty or other assets capable of being charged and owned by Willshaun either now or in the future to secure Willshaun’s performance of its contractual obligations.
Willshaun sought a declaration from the Court that Lobux should be prevented from enforcing its security interest on the basis that that general security clause was unfair (and therefore void) as it provided Lobux with “an overabundance of security in light of the reciprocal obligations of Willshaun and relative risk of non-payment by Willshaun”.
Section 24 of the Competition and Consumer Act 2010 (Cth) sets out that a term of a standard form contract is considered unfair and void where:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied upon.
The Court found that the general security clause in the contract was unfair and therefore void and unenforceable as it “creates a significant imbalance in the parties’ rights and obligations arising under the agreement. It charges all rights, title and interests in all of the customer’s assets which are ‘capable of being charged’ either ‘now or in the future’. Such a clause is excessive”.
The Court was satisfied that the contract already had fair protections in favour of Lobux through retention of title of the equipment until all amounts had been paid by Willshaun, as well as Lobux having a security interest in all goods that had been or would be supplied by Lobux to Willshaun.
The key takeaway from the decision in Lobux Pty Ltd v Willshaun Pty Ltd is that businesses should closely review their standard terms and conditions to ensure that the security clauses are not excessive and are reasonably necessary to protect their legitimate interests in the context of the transaction.
While it may be preferable for business to ‘lock and load’ their contracts with as much security as possible to protect their interests, businesses will now need to carefully consider whether such security is suitable, fair and not excessive, including whether a general charge over other property of a customer (i.e. property that is not supplied by the business) is suitable and fair in the circumstances.
If you would like advice or assistance in relation to commercial contracts, please contact our Senior Associate, Josef Ferraro on jferraro@marsdens.net.au or our accredited business law specialists and Partners Justin Thornton on jthornton@marsdens.net.au and Rahul Lachman on rlachman@marsdens.net.au or otherwise by calling them on (02) 4626 5077.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.
