In Short
- Unfair contract terms in construction may cause an imbalance in rights, leading to one-sided agreements.
- Common unfair terms include time bar clauses, principal discretion, and broad indemnity clauses.
- Contractors should review contracts carefully to ensure fairness and avoid disadvantageous terms.
Tips for Businesses
To avoid unfair contract terms, ensure that all parties have equal input in the contract and review clauses carefully. Contractors and small businesses should especially look out for terms that limit their rights, such as unilateral discretion or overly strict deadlines.
It is essential that you are aware of unfair contract terms to avoid entering a disadvantageous construction agreement. Construction contracts include contractor or subcontractor agreements, supplier agreements and consultancy agreements. These agreements are subject to laws regulating unfair contract terms. This article explains how such laws apply to the construction industry, what terms to look out for and how building owners and contractors can protect themselves.
Unfair Contract Terms and the ACL
The Australian Consumer Law (ACL) protects individuals from unfair contract terms. Accordingly, you can find these protections in Part 2-3 of the ACL, which state that:
A term of a consumer contract or small business contract is void if:
- the term is unfair; and
- the contract is a standard form contract.
A “consumer contract” is a contract for the supply of goods and services or the grant of an interest in land to a person who will use it for personal, domestic or household purposes.
A “small business contract” is:
- a contract for the supply of goods and services or the sale of an interest in land;
- where at least one party to the contract is a business that employs fewer than 20 people; and either
- 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.
A “standard form contract” is where only one party prepares the contract. The other party has little or no opportunity to negotiate the terms. Construction contracts are generally standard form contracts, unless proved otherwise, and are therefore subject to these laws. 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.
What is an Unfair Contract Term?
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;
- it is not reasonably necessary to protect the interests of the party gaining the advantage of the term; and
- the term would cause financial or another detriment to a party if relied upon.
Some examples of unfair contract terms may include terms that permit a party to:
- penalise the other for a breach or termination of the contract;
- change the upfront price of the contract without allowing the other party to terminate it;
- pay unreasonably high interest rates on late payments;
- unilaterally extend or renew the contract without the other party’s consent; and
- impose unreasonably high cancellation fees or charges.
Additionally, a term is unfair if only one party has the power to:
- vary, avoid or limit the performance of the contract;
- terminate the contract;
- unilaterally vary the characteristics of the goods or services to be supplied; and
- unilaterally determine whether the contract has been breached or to interpret its meaning.
More specific examples of potentially unfair contract terms in construction contracts are outlined below.
Time Bar Clauses
These are clauses that impose conditions on a contractor before the other party can grant a time extension. It limits the contractor’s rights if they do not comply with the conditions.
For example, let us say the contractor is aware of an event likely to delay building work completion by a particular date. A time bar clause could provide that an extension may only be granted where the contractor gives notification within a certain number of days of the event, along with a program outlining the steps to avoid the delay. If the notification period is too short or the notification steps are too onerous, such a clause is likely unfair.
Principal Discretion Clauses
Often, a contract will allow 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. This type of clause is likely unfair as it gives the principal unilateral decision-making powers.
Termination Clauses
Many construction contracts contain a “termination for convenience” clause. These clauses usually permit one party (usually the principal) to terminate the contract due to “convenience”. Unfortunately, the contractor does not enjoy this same right. The one-sidedness of this clause places it at risk of being an unfair contract term.
Indemnity Clauses
Clauses that contain one-sided, broad and unreasonable indemnities by one party are another example of unfair terms sometimes found in construction contracts. Generally, it is unreasonable to require a sole party to take responsibility for losses suffered in connection with performed work caused by a third party or an event beyond the first party’s control.
Case Study
Karpik v Carnival PLC, in the Australian High Court, demonstrates the key issues courts will consider when deciding whether contract terms are unfair. The case involved a waiver clause that was in question.
Overall, the court decided that the clause was unfair, considering that it:
- created a significant imbalance in the parties’ rights in favour of Carnival;
- was not reasonably necessary to protect Carnival’s legitimate interests;
- if enforced, would cause detriment to consumers by denying them the benefits of participating in representative proceedings; and
- lacked transparency due to its presentation in the contract.
You should therefore consider these issues when drafting cluases in your contract that may benefit one party over the other.
Continue reading this article below the formWhat are the Exceptions?
In determining whether a term is unfair, a court will consider both the transparency of the term and the contract as a whole.
Avoiding Unfair Contract Terms
The best way to avoid unfair terms in your contract is to ensure that all parties to the agreement have a fair say. Furthermore, contractors who fall under the “small business” category should be vigilant before signing the contract and identify any onerous clauses which come across as “unfair”.
Principals should also ensure that the terms of their contracts 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.
Download this free Commercial Contracts Checklist to ensure your contracts will meet your business’ needs.
Key Takeaways
In summary, principals need to review their construction contracts, subcontracts and supply agreements and consider removing any terms that may be onerous or unfair. Contractors should also be aware of their ability to negotiate a contract to ensure the terms are fair.
If you need help with non-disclosure agreements, our experienced construction lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
An unfair contract term is one that causes a significant imbalance between the parties’ rights and obligations, is not reasonably necessary to protect the interests of the party advantaged by the term and causes financial or other detriment to a party if the advantaged party relies on it.
A termination clause is a provision outlining how a party may end the agreement. A termination clause is not inherently unfair. However, certain termination clauses, such as ‘termination for convenience’, maybe unfair as they allow one party to end the agreement without extending that right to the other party.
We appreciate your feedback – your submission has been successfully received.
