On 12 November 2016, amendments to the Australian Consumer Law by the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) open the way to a new remedy for many parties aggrieved by standard form contracts. Many building contracts, consultancy agreements and service agreements will fall within the scope of these changes, as do many other common contracts.
The main mischief intended to be addressed by the Act is a perceived imbalance of bargaining power that manifests itself in unfair terms in standard form contracts. The beneficiaries of the changes are intended to be small businesses, but the application of the reforms will be much wider than that.
This new remedy has the potential to make contract terms void where they are found to be “unfair”. It is highly likely that this new remedy will be frequently raised in disputes concerning standard form building contracts and consultancy and service agreements.
The new remedy
Section 23(1) of the Australian Consumer Law will be amended to provide that:
“A term of a consumer contract or small business contract is void if:
(a) the term is unfair; and
(b) the contract is a standard form contract.”
Small Business Contract
Although already operating for consumer contracts, the new remedy will apply to small business contracts entered into on or after the date the amendments commence (12 November 2016). A contract is a small business contract if:
- the contract is for the supply of goods or services, or a sale or grant of an interest in land; and
- at least one party to the contract is a business that employs fewer than 20 persons; and
- the upfront price payable under the contract does not exceed $300,000 (or if the contract has a duration of more than 12 months, the upfront price payable does not exceed $1,000,000).
The number of building contracts, consultancy and service agreements that will fall within the scope of this definition is immense.
Standard Form Contract
The term ‘standard form contract’ is not defined, but generally speaking means a pro-forma document used for a broad range of customers or clients and is presented on a “take it or leave it” basis.
Where a contract is alleged to be in standard form, it will be assumed as such unless the party who issued the contract is able to establish the contrary. The Court (or Tribunal), in determining whether a contract is in standard form, must take into account the following:
- whether one of the parties has all or most of the bargaining power relating to the transaction;
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
- whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
- whether another party was given an effective opportunity to negotiate the terms of the contract; and
- whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.
What makes a contract term unfair?
A contract term is unfair if, and only if, it satisfies three requirements:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it is not reasonably necessary in order to protect the legitimate interests of the party advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Terms that define the subject matter of the contract or set out the price cannot be declared void. Similarly, a term that is required, or expressly permitted or required by legislation is also exempt from the regime.
Examples of terms in standard form construction contracts
The potential impact of the new remedy is profound. Some of the terms in, for example, building contracts and subcontracts that require careful attention include:
- Liquidated damages clauses that:
- require sub-contractors to indemnify contractors higher up the contracting chain;
- underestimate the homeowner’s loss due to delay and cap the contractor’s liability for damages unreasonably (eg. default positions of $1 per day); and/or
- provide onerous or unnecessary preconditions or bars on claims for any delay or disruption caused by the principal.
- “Termination of Convenience” clauses that allow one party to terminate the contract at their convenience.
- Unilateral variation clauses which provide that a contractor, if directed by the principal, is bound to execute a variation which is outside the general scope of the contract.
- Clauses imposing unreasonably short time bar provisions or which deem a party to have forgone all of its claim if a notice or response is not given within the specified period of time.
- Clauses disavowing a principal’s obligation to act reasonably, in good faith or which entitle a Principal to act in a manner against the other party’s interests “in its absolute discretion”.
- Clauses requiring an aggrieved party to litigate or arbitrate their disputes in a foreign jurisdiction, or even interstate.
When a dispute arises with a standard form contract, a term relied upon may be at risk of being held “unfair” and therefore void. The possibility of that may well go to thoughts as to the dispute’s ‘commercial’ resolution.
Legal advice as to the terms most exposed to be deemed “unfair” will assist parties better understanding their contracts and negotiating positions. It can also identify options as to how these terms can be amended in a manner that makes the contract more reliable.