In November 2016, new legislation will come into force prohibiting the use of unfair terms in small business contracts. The legislation is likely to have an impact on construction contracts that fall in the relevant category and the extent of such impact will depend on the specific terms in question.

As the law currently stands in Australia, the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) afford consumers certain protections from unfair contract terms.

From 12 November 2016, the Treasury Legislation Amendment (Small Businesses and Unfair Contract Terms) Act 2015 (Cth) (the Act) comes into force to extend the existing consumer protections to 'small business contracts'. The reforms aim to alter the current power imbalance between small and large businesses.

What are the key features of the Act?

The Act applies to 'standard form contracts' that are entered into with a 'small business' (i.e. one with less than 20 employees) and which have an upfront contract price of:

  • AUD 300,000 or less; or
  • AUD 1,000,000 or less (where the term of the contract is for more than 12 months).

The Act is not limited by the type of goods and services being provided under the small business contract.

The Act also applies to:

  • small business contracts entered into or renewed on or after 12 November 2016; or
  • terms of existing small business contracts that are varied on or after 12 November 2016.

Terms that are found to by a court to be 'unfair' may be declared void.

What are 'standard form contracts'?

The Act does not define the phrase 'standard form contracts'. Considerations are likely to include whether:

  • the relevant contract was effectively a template contract, pre-prepared by one of the parties prior to any negotiation;
  • the relevant contract was subject to negotiation or if it was offered on a 'take it or leave it' basis; and/or
  • there was inequality of bargaining power between the parties.

Unfair contract terms

Under the Act, a contract term will be unfair if it:

  • causes a significant imbalance in the parties' rights and obligations under the contract;
  • is not reasonably necessary to protect the legitimate interests of the advantaged party (it is automatically presumed that this is the case unless the advantaged party proves otherwise); and
  • would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.

In determining whether a term is unfair, a court may take into account such matters as it thinks relevant but must take into account the extent to which the term is transparent (i.e. is expressed clearly, legibly, in plain language and is readily available to any party affected by it) and the contract as a whole.

The ACL and ASIC Acts contain non-exhaustive lists of example terms which may fall within this definition of 'unfair' as follows:

Terms which permit, or have the effect of permitting, one party (but not another party) to:

  • avoid or limit performance of the contract;
  • terminate;
  • vary the terms of the contract; or
  • renew or not renew the contract.

Terms which permit, or have the effect of permitting, one party to:

  • vary the upfront price payable under the contract without the right of another party to terminate the contract;
  • unilaterally vary financial services to be supplied under the contract;
  • unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
  • unilaterally determine whether the contract has been breached or to interpret its meaning; or
  • assign the contract to the detriment of another party without that party's consent.

Terms which limit, or have the effect of limiting:

  • one party's right to sue another party;
  • one party's vicarious liability for its agents; or
  • the evidence one party can adduce in proceedings relating to the contract.

Terms which:

  • penalise (or have the effect of penalising) one party but not another party for a breach or termination of the contract; or
  • impose (of have the effect of imposing) the evidential burden on one party in proceedings relating to the contract.

Interestingly, the terms which define the subject matter of the contract and the relevant upfront price (which determine whether the Act will apply to the contract) are exempt.

Unfair terms in construction contracts

The changes are likely to impact certain industry specific contracts, including construction industry contracts.

Construction contracts are already subject to legislation regulating the inclusion of certain terms. Security of payment legislation exists in each state and territory to address certain unfair payment terms. For example:

  • security of payment legislation in each state and territory prohibits the inclusion of certain provisions in construction contracts. Examples include: 'pay when paid' provision, provisions allowing payment after a certain number of days and other provisions prescribed by the regulations; and
  • security of payment legislation in Western Australia and the Northern Territory imply certain provisions into construction contracts where they are either not included in the relevant contract or, if they are included, do not meet the minimum standard set by the relevant legislation. Examples include: provisions about variations of a contractor's obligations, a contractor's entitlement to be paid, a contractor's entitlement to claim progress payments, how a party makes claims for payment, how a party responds to claims for payment, the time for payment, interest on overdue amounts, ownership of goods, unfixed goods on insolvency and retention money.

The new Act applies more generally than the security of payment legislation and, depending on the circumstances and drafting of the relevant provision, may operate to prohibit certain terms in standard form construction contracts that may otherwise be considered 'normal'.

Commonplace terms in construction contracts that may be considered unfair include:

  • Time bars: Time bars require, as a precondition to a party's entitlement to make a claim, that the relevant party notifies the other of its claim within a set timeframe. Things to consider when determining whether or not a time bar is unfair within the meaning of the Act include the length of the notice period (a short notice period is more likely to be unfair) and how onerous the notification requirements are (if an unreasonable amount of supporting material is required)
  • Variations to scope: Variations may be considered unfair if one party has the power to unilaterally vary the scope of work or services to be supplied. Relevant considerations include if there is a requirement to comply with a variation prior to an agreement on price and time
  • Termination for convenience: Such provisions usually give the principal power to unilaterally terminate the relevant contract in the absence of default by the other party (e.g. 'for any reason' or 'for its convenience'). In determining whether the clause is fair, relevant considerations include the procedure for termination for convenience and what entitlements the terminated party can claim on termination.

Other examples of terms that may be considered unfair are broad indemnity clauses, broad exclusions of liability, terms that allow a party's representative to make unfair unilateral determinations and warranties in design and construct contracts that make a contractor liable for preliminary design work by others.

Parties should also bear in mind implications for pass through provisions and the potential 'gap' between head contracts and subcontracts where, for example, provisions included in head contracts that sit outside scope of the legislation cannot be included in smaller contracts down the line.

Consequences

Terms which are found to fall foul of the Act will be unenforceable and may be declared void. If the relevant contract can operate without the unfair term then the term will be severed from the contract. If not, the entire contract will be void.

What now?

  • If you are a business that is likely to enter into, vary or renew a standard form contract with a small business on or after 12 November 2016, then you should consider whether amendments to your standard form contracts are required in order to comply with the Act
  • If any terms of those contracts are or have the potential to be unfair, consider amending or removing the term
  • Where there is some uncertainty about the fairness of a standard form provision, parties may wish to include tiered clauses. For example, a limitation of liability clause could be drafted so that certain limits applied, unless those limits were found to be unfair, in which case higher limits would apply. This concept has not yet been tested but it may provide parties with an option for clauses where there is uncertainty.