The unfair contract terms law is due to commence operation on 12 November 2016. Construction contracts such as contractor/subcontractor agreements, suppliers agreements and consultancy agreements will all be subject to these terms. Below, we look at how the new contract terms will apply to the construction industry, what terms to look out for and how building owners and contractors can protect themselves.
Summary of New Unfair Contract Terms
Currently, the Australian Consumer Law (ACL) protects individuals from unfair contract terms. You can find these protections in Part 2-3 of the ACL, which states that:
A term of a consumer contract is void if:
- The term is unfair; and
- The contract is a standard form contract.
Currently, a “consumer contract” applies to a contract for the supply of goods and services or for the grant of an interest in land to a person who will use it for personal, domestic or household purposes.
The upcoming amendments will extend this section so that the definition of a “consumer contract” will also apply to a “small business contract”.
The small business contract is:
- A contract for the supply of goods and services or sale of interest in land; and
- Where at least one party to the contract is a business that employs fewer than 20 people; and
- The upfront price payable does not exceed $300,000; or
- The contract period is over 12 months, and the upfront price does not exceed $1,000,000.
What is Unfair?
Under section 24 of the ACL, a contract term will be unfair if:
- It will cause a significant imbalance in the parties’ rights and obligations; and
- It is not reasonably necessary to protect the interests of the party who would be advantaged by the term; and
- The term would cause financial or another detriment to a party.
Section 25 then provides a non-exhaustive list of examples of unfair terms. In the context of construction contracts, the most applicable examples given include:
- Terms that only permit one party to vary, avoid or limit the performance of the contract;
- Terms that only permit one party to terminate the contract;
- Terms that only permit one party to penalise the other for a breach or termination of the contract; or
- Terms that only permit one party to change the upfront price of the contract without allowing the other party to terminate it.
What are the Exceptions?
As with any rule, there are always exceptions. Under the unfair contract terms legislation, exceptions include:
- Terms which are required by law;
- Terms that are to do with the main subject matter of the contract; and
- Terms that outline the price payable.
In determining whether a term is unfair, a court will take into account both the transparency of the term and the contract as a whole.
Unfair Contract Terms in the Construction Industry
A “standard form contract” in the ACL is undefined. However, the Australian Competition and Consumer Commission (ACCC) has stated that it refers to a contract that one party has prepared and where the other party has had little or no opportunity to negotiate the terms. Courts when determining whether a contract is a “standard form contract’ will consider the following:
- Whether the contract uses standard or pro-forma terms;
- Whether the contract was given on a take it or leave it basis;
- Whether one party lacked the opportunity to negotiate; and
- The bargaining power of each party.
Those in the construction industry should note that a contract will be presumed to be a standard form contract unless proved otherwise. This presumption is because parties frequently propose contracts to building contractors, subcontractors or consultants on a take it or leave it basis, with little opportunity to negotiate.
There is no express exemption under the unfair contracts legislation for industry-negotiated standard form contracts, including those in the construction industry.
Principals should be aware that negotiations which only slightly vary the document will not exclude the contract from being a standard form contract. That is because contracts in the construction industry tend to be long, lengthy and highly technical in nature, placing a significant risk on the other party’s shoulders.
Remembering that a “small business contract” will only apply where one party employs fewer than 20 people, this will rule out numerous large construction companies. This means that the unfair contract terms will only affect those who work as sole traders or who run small businesses.
What Terms to Look Out For
The new unfair contract terms may affect the following terms which are common to construction contracts:
Time Bar Clauses
These are common clauses that impose conditions on a contractor before the other party to the contract can grant a time extension. It limits the contractor’s rights if they do not comply with the conditions.
For example, let’s say the contractor is aware of an event which is likely to cause delay to them completing building works by a particular completion date. Then according to the time bar clause, an extension may only be granted where the contractor gives notification within a certain number of days along with a program outlining the steps taken to avoid the delay. This period can be as little as two days – it is likely that such short time periods may be unfair.
Principal Discretion Clauses
Often, a contract will contain clauses that give the principal a right to exercise its absolute discretion against the interest of the contractor. For example, the contract term may give a principal the sole discretion to determine whether the contractor has breached the contract. These type of clauses are likely to be considered unfair as it gives the principal unilateral decision-making powers.
Many construction contracts contain a “termination for convenience” clause. These clauses usually permit one party (usually the principal) to terminate the contract but not the contractor due to “convenience”. Both the nature and the one-sidedness of this clause also flags it as a potentially unfair contract term.
Compliance With The New Unfair Contract Terms
For both principals and contractors alike, the best way to comply with the new unfair contract terms is to ensure that all parties to the contract have had a fair say. Contractors who fall under the definition of “small business” should be vigilant before signing the contract and identify any onerous clauses which the ACL may see as “unfair”.
For principals, they should ensure that the terms of the contract are not drafted on a purely one-sided basis. For example, if one party is afforded a right to terminate, the agreement should contain a reciprocal clause extending the other party a similar right.
Additionally, principals should ensure they engage with the contractor and discuss any issues with the contract terms before they execute it. This discussion will also increase the chances that the contract is no longer a “standard form contract” as both parties have had equal bargaining power over contractual terms.
Both principals and contractors should keep in mind that if a contract is varied on or after 12 November 2016, the law will also apply to the varied terms.
As the new law is not yet in effect, we cannot definitively say what terms the ACL will consider as unfair for small businesses. It’s then especially important for principals to review construction contracts, subcontracts, supply agreements and consider removing any terms that may be onerous or unfair. Contractors should be aware of their ability to negotiate a contract to ensure the terms are fair.
Still unsure about how the new unfair contract terms will affect your building or construction business? Get in touch with our building and construction lawyers on 1300 544 755.