On November 12 2016, the unfair contract terms legislation will apply to ‘small business contracts’. The update raises questions about the applicability of the new provisions to construction contracts. We outline the key considerations and exemptions below.
The Extension to Small Business Contracts
Importantly, the law has widened the types of contracts that will be caught by the Australian Consumer Law. The former terminology, consumer, had a particular meaning and many small business relationships fell outside its scope. Consequently, if there was a contractual relationship that contained unfair terms, there was no direct consumer law protection that would scrutinise the language of that relationship.
A small business contract is one where at the time of the agreement, one of the parties had less than 20 employees and where either:
- The upfront price payable for the contracts doesn’t exceed $300,000; or
- The contract is set to go longer than one year, and the upfront price payable doesn’t exceed $1,000,000.
The small business contracts will likely be caught if they are standard form contracts and contain unfair terms.
What Situations Make a Contract ‘Standard Form’?
When determining whether a contract is standard form, a court must consider:
- Whether there is an imbalance in obligations (i.e. does one party have all the bargaining power relating to the contract?);
- Whether one party prepared the contract without negotiation or input from the other party, other than on price and description of the work;
- Was the contract effectively, a “take it or leave it” situation; and
- Did the contract take into account the particular circumstances of the contracting party?
What Makes a Term Unfair?
Unfair contract terms will typically be those that:
- Cause a significant imbalance in the parties’ rights and obligations;
- Are not required to protect the party’s legitimate interests; and
- Cause some financial hardship or other hardship on the small business if followed.
Whether a term is unfair is assessed in the context of the contract as a whole meaning that other terms may exist within the contract to reduce the unfairness of a term.
The consumer law refers to a number of situations that are likely to make a term unfair:
- Where one party can terminate the contract without cause and claim damages;
- Terms that allow one party to limit or avoid performing the contract;
- Terms that provide for penalties on only one party for breach of the contract;
- Terms that allow just one party to vary the contract without input or agreement from the other party, including, for example, the upfront price payable (where this gives no right to terminate), and the goods and services to which the contract relates;
- Where only one party can renew the contract; and
- Terms that seek to limit the liability of one party over the other and allow them to determine the meaning of the contract.
A Guide to Keeping Your Contracts Fair
You should always seek to have a construction law specialist prepare your contracts, especially if you have relied on standard form agreements in the past.
Some key things to keep in mind include:
- If your contracts are standard form, you will need to think about how you do business. Is the other party able to negotiate key elements? Are there safeguarding provisions to give back negotiating or protective rights to the other party?
- Do you have clauses that seem ancient in their language and look like they give you a lot of power in the commercial context?
- Are there clauses that give you more rights to terminate, vary or renew the agreement?
- Are there clauses that seek to limit when you will be responsible for breaches, or allow you to claim money if the contract is breached or terminated but not the other party?
These types of clauses may run foul of the new laws. If you have any questions or need assistance updating your standard form contracts to ensure they comply, get in touch with our building and construction lawyers on 1300 544 755.