What is the new law?

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 extends the consumer “unfair contract terms” protections to small businesses and takes effect on 12 November 2016.
 
Since 2010, a term of a “standard form contract” with a “consumer” (a consumer contract) could be declared void if it was found to be “unfair” - this includes (potentially) residential standard form construction contracts issued by industry or any other bodies.

The new law amends the Australian Securities and Investments Act 2001 (ASIC Act) and the Australian Consumer Law (ACL) so that these protections also apply to “small business” and “small business contracts” (not just to consumer contracts).
 
Under the new law, a Court will be able to declare that an “unfair” term in a standard form “small business contract” is void. 

As with the existing consumer protections, the contract will continue to bind the parties, if it can continue to operate without the unfair term. If the contract cannot operate without the term, then it may be void entirely.
 
Does this apply to your contracts? 
 
A “small business contract” is a standard form contract where, at the time it is entered into:

  • at least one party is a “business” that employs less than 20 persons (a “small business”); and
  • the “upfront price” payable under the contract does not exceed either $300,000 or $1,000,000 if its duration is more than 12 months.

When calculating the number of employees of a business, each full-time and part-time employee should be counted as one person.  Casual employees are only to be counted if they are employed on a regular and systematic basis.
 
If you are a builder or contractor that enters into standard form contracts with small business subcontractors or suppliers (such as bricklayers, plumbers, carpenters, plasterers etc.) then the new law will likely apply to those contracts (subject to the threshold limits).
 
In determining whether a contract is a “standard form contract” a court may consider any matter, but will 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;
  • whether one party was, in effect, required to either accept or reject the terms of the contract (excluding the upfront price payable); and
  • whether the terms of the contract take into account the specific characteristics of another party or particular transaction.

The new law applies to contracts entered into on or after 12 November 2016 and contracts that are renewed, or varied, after 12 November 2016.
 
What terms may be “unfair”? 
 
The concept of “unfair” contract terms is not new. At common law, it has always been open to an aggrieved party to argue that a term of a contract is unconscionable and therefore void.

Under the legislation a term is “unfair” if it:

  • would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • would cause detriment to a party if it were to be applied or relied on.

In considering whether a term in a contract is unfair, a court will look at how transparent the term is (whether it is expressed in plain language, legible, presented clearly and readily available) and the overall rights and obligations of each party to the contract.
 
It is not clear what terms in standard form construction contracts might be considered to be “unfair” – depending upon the circumstances, they could include:

  • short time bars (e.g. 24 or 48 hrs) on claims for variations, extensions of time or other claims;
  • termination for convenience clauses (particularly where the subcontractor is left “out of pocket”);
  • terms entitling a superintendent or principal to make unilateral assessments or determinations as to a subcontractor’s entitlement;
  • excessive or punitive consequences for default (e.g. default interest rates, penalty fees);
  • one party being entitled to unilaterally vary essential terms (e.g. price, payment terms) without giving the other party a termination right;
  • the exclusion of certain remedies for default;
  • a party being liable for things that are outside of their control or do not arise from their breach of contract or duty of care (for example, under an indemnity).

If a term in a standard form small business contract is found to be “unfair”, the term will be void, in other words not binding on the parties.  If the balance of a contract can continue to operate without the unfair term, then the contract will otherwise remain binding on the parties.

If a party attempts to enforce a term that is declared to be “unfair” then consequences can apply, including court awarded compensation to the affected party. 
 
So what should you do?

Contracting with “small businesses” (less than 20 employees)
 
Builders and contractors entering into contracts with “small businesses” should:

  • identify when they are dealing with a “small business” and a “small business contract” (in which case, the new law will apply); and
  • review standard form contracts to identify and consider revising terms which are at risk of being ‘unfair’ and void under the new law.

The new law could impact contractors seeking to “back to back” obligations “down the contracting chain”. While the head contractor / head contract may not fall within the scope of the legislation, contracts with subcontractors may be covered by the law. 
 
As a result it is possible that a term validly imposed at the head contract level might be considered to be “unfair” if applied “down the chain” at the “small business” subcontractor level (although it may be argued that such term is necessary in the subcontract to protect a legitimate commercial interest). This risk will need to be considered and managed or priced accordingly by contractors.
 
What if you are a “small business”?
 
If your business satisfies the test for a “small business” and you enter into standard form contracts on what is substantially a “take it or leave it” basis, and the contracts also satisfy the threshold requirements (i.e. under $300,000 or under $1,000,000 with a duration of more than 12 months) – then you should consider whether the contracts you enter into, renew or amend after 12 November 2016 may contain terms that could be said to be “unfair” and whether such terms can be challenged. 
 
It may be that the new law will encourage a party relying on an “unfair” term in a standard form contract to negotiate an outcome with a small business, in circumstances where they might otherwise have no interest, or incentive, to do so.   
 
Similarly, a “small business” may be able to argue in the context of an adjudication application under the Construction Contracts Act (WA) that a particular term is “unfair” and should be treated as being void by an adjudicator.