In our August 2016 edition, we wrote about the imminent extension of the unfair contracts terms regime in the Australian Consumer Law to certain small business contracts, which could potentially have an effect on contracts in the construction industry.

This legislation has now come into effect as of 12 November 2016.

We reiterate the key features of this legislation.

A term of a “small business contract” as defined, is liable to be declared void, if the term is unfair, and the contract is a “standard form contract”.

The legislation defines what a “small business contract” and what a “standard form contract” is, and also provides guidance on when a term will be considered “unfair”.

Two key requirements of a "small business contract" are:

  1.  At the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons.
  2. An upper monetary limit on the contract value. Either of the following applies:

(i) The upfront price payable under the contract does not exceed AU$300,000 

(ii) The contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed AU$1 million

There is a rebuttable presumption that the contract is a “standard form contract”. In considering whether the contract is a “standard form contract”, the legislation provides a list of matters to be considered. The tenor of the matters to be considered is whether one party was essentially given the contract on a “take it or leave it” basis, without having an effective opportunity to negotiate the terms of the contract.

A term will be considered unfair if it meets all of the following criteria:

(a) It would cause a significant imbalance in the parties' rights and obligations arising under the contract

(b) It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term

(c) It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on

Implications of the Reform

This new regime has the potential to render unenforceable, a number of clauses common in contracts in the construction industry. For example:

(a) Terms that permit a party to unilaterally vary “the characteristics of the goods or services to be supplied” under a contract as raised as an example of a potentially unfair term in the ACL

(b) Time bars may potentially fall foul of the unfair term regime as they tend to be imposed on one party to the contract (creating an imbalance) and, if relied upon, cause a detriment by restraining a party’s entitlement to make claims for time or money

(c) Liquidated damages clauses which are not considered penal on the test in Andrews v ANZ, may nevertheless be rendered unenforceable as unfair because the standard required to be considered unfair is arguably lower than that to be considered penal 

Key Takeaways

To limit exposure to the new protections extended to small businesses, contractors are encouraged to immediately:

(a) Undertake a review of their contracting practices and systems to determine whether any of their existing standard contracts contain terms which may be considered unfair under the regime

(b) Take steps to amend any non-compliant standard contracts

(c) Consider the implications of these new amendments in respect of contractual arrangements up the contracting chain, especially in the case of 'back to back' contractual provisions.