Key Points:

There are several terms typically found in "standard form" construction contracts that could now fall foul of the unfair contract term prohibitions in the Competition and Consumer Act.

From November 2016, Federal unfair contract terms legislation will apply when doing business with contractors and suppliers that are a small business (fewer than 20 employees).

Now is the time to be considering whether the terms of template contracts used when contracting with small businesses might be "unfair", and working out how that should be addressed. As discussed below, construction industry players have less than 8 months remaining to undertake this review - see the 'pre-start' checklist for some tips.

Extension of unfair contract term prohibitions

Legislative amendments will soon extend the unfair contract term prohibitions in the Competition and Consumer Act 2010(Cth),introduced in 2010, but limited to contracts with consumers, to contracts with small businesses. This is part of a reform agenda to give small businesses a fair go by protecting them from vulnerability to unfair terms in standard form contracts offered as "take it or leave it" deals.

The extended prohibitions will affect contracts entered into or renewed on or after 12 November 2016.

Who and what do the prohibitions apply to?

The prohibitions will apply to "standard form contracts" that:

  • are entered into with a small business (a business with fewer than 20 employees); and
  • have an upfront contract price of up to $300,000, or $1 million for contracts with a term of 12 months or more.

Unhelpfully, the legislation does not define what is a "standard form contract". Conceptually, it would seem to capture industry standard forms such as Australian Standards. It is also likely to extend to template contracts developed by individual organisations presented on a "take it or leave it" basis.

This means that the legislation is likely to apply to numerous subcontracts and standalone minor works, supply and consultancy contracts used on construction projects of all sizes.

What are unfair terms?

A term will be deemed unfair if it:

  • causes a significant imbalance in the parties' rights and obligations;
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it; and
  • could cause detriment to the other party.

The legislation contains a non-exhaustive list of 13 criteria specifying what may constitute an unfair term. They include terms that permit one party to unilaterally vary the characteristics of the goods or services to be supplied, terms that penalise one party but not the other for breach or termination of the contract, and terms that have the effect of limiting one party's right to sue another party. The parameters set by this non-exhaustive list are somewhat vague or grey1. That greyness is compounded by the fact that terms that define the subject matter of the contract, and those that set the upfront price payable under the contract, are exempt. How far that exemption might reach is not clear.

Implications for the construction industry

The lack of precision in what is an unfair term is not particularly helpful for any party from a practical perspective, and is unlikely to readily effect the desired protection for small businesses. This is in contrast with some existing construction industry-specific legislation that implies and prohibits particular terms2.

Applying the list of 13 criteria to terms typically found in "standard form" construction contracts, terms that could fall foul of the unfair contract term prohibitions include:

  • time bars, particularly those with short notice periods;
  • variation clauses allowing unilateral variations to be directed;
  • terms that allow a superintendent / principal's representative to make unilateral determinations;
  • warranties in design and construct contracts that make a contractor liable for preliminary design work by others;
  • novation clauses; and
  • termination for convenience clauses.

The answer in each instance will depend on the particular wording and operation of the term in issue. Factors which will mitigate against a clause being unfair are the protection of legitimate interests or controls/limits on its application.

Head contractors in particular should be alive to the reach of the legislation. Terms which might be negotiated and/or priced at head contract level may not be able to be "back to backed" down the contractual chain if they are "unfair" at that lower contractual level.

"Take it or leave it"?

Commentators have questioned to what extent, if any, the prohibitions will in fact assist or be utilised by small businesses in their day-to-day commercial dealings. Unlike some statutory prohibitions such as the maximum periods for payment in SOP legislation, relief from an unfair term requires court intervention.

Nonetheless, the operation of the unfair contract term legislation should not be ignored. It is prudent to review any frequently used "standard form" contracts to identify potentially unfair terms which could impact dealing with small businesses, and give consideration to addressing them.

Pre-start checklist

Identify

  • template contract suites that could include contracts with small businesses, or standalone minor works subcontracts, supply and consultancy agreements;
  • any existing contracts of that nature that are due for renewal on or after 12 November 2016.

Review the terms identified in those contracts against the "unfair contract terms" criteria.

Consider amending or removing any potentially unfair terms, including considering whether corresponding amendments are required higher up the contractual chain or whether pricing / risk profiles require adjustment as a result.