Australia: Standard contract terms soon to become voidable for unfairness

New laws are set to come into play in 2016 which extend the consumer unfair contract protections to small businesses.

The effect of these new laws is that any terms and conditions in standard form contracts which are found to be unfair will be struck out and unenforceable if a party to the contract is a small business. The new laws could significantly impact the construction and infrastructure sector, where standard form contracts are extremely common and many subcontractors, suppliers and service providers are small businesses. Many clauses which are considered standard practice at the moment may be considered unfair under the new laws and, if struck out, principals and head contractors in particular may find themselves unable to rely on many of the protections that they presently take for granted.

The new laws come at an opportune time for small businesses in the construction and infrastructure sector, where the market is tight and principals (and some head contractors) are perhaps making the best of their competitive advantage.

What contracts are caught?

The new legislation extends the unfair contract provisions to any standard form contract where:

  • at least one party is a 'small business'; and
  • the upfront price payable under the contract is less than $300,000 or, if the contract is for a term in excess of 12 months, $1,000,000.

A 'standard form' contract is, for example, a contract:

  • prepared by one party prior to discussions with the other;
  • presented on a 'take it or leave it' basis;
  • presented without any effective opportunity to negotiate its terms;
  • which is generic and not prepared specifically for the relevant transaction or counterpart.

What is a small business?

A 'small business' is a business that employs fewer than 20 people. The head count won't include casual employees unless they are employed on a regular and systematic basis. Many subcontractors, service providers and suppliers could therefore fall into the category of a 'small business'.

In most instances, principals and head contractors won't know in advance whether they are dealing with a small business, unless they make specific inquiries in the early stages of engagement. As a result, the introduction of the new laws could potentially affect a number of standard subcontracts, supply contracts and purchase order terms and conditions.

What terms are unfair?

Under the draft new laws, a term will be considered 'unfair' if it:

  • causes a significant imbalance in the parties' rights and obligations under the contract; and
  • would cause detriment (whether financial or otherwise) to a party if it were to be relied on; and
  • is not reasonably necessary to protect the legitimate interest of the party who would be advantaged by the term.

Whether or not contractual terms will be considered unfair is likely to be the subject of much discussion. Examples of terms that might be found to be unfair are provided in the new laws. Importantly, these include terms that:

  • permit one party to avoid or limit performance of the contract; and
  • limit or have the effect of limiting one party's right to sue another party.

It is possible that terms which seek to exclude or limit liability and those that impose a time bar on the bringing of claims may be examples of 'unfair' terms under the new laws. Other common terms that could be affected include releases, variations by omission, delay costs and liquidated damages.

If a term is found to be unfair, it will be struck out of the contract and will not be able to be relied upon. This poses the question as to the effect of severability clauses in contracts (or the lack thereof) and how far the unfair term will reach. For example, if the payment provisions in the contract a considered 'unfair' and struck out, how can payment be assessed under that contract and what would be the procedure moving forward in relation to payment? This will probably need to be determined on a case by case basis.

Importantly, the new laws will not act to strike out any unfair terms which are otherwise expressly permitted under any other laws. Accordingly, it is now more important than ever that businesses ensure that they are taking the benefit of any limitations or exclusions of liability or other protections that are permitted under Australian law. Principals, contractors and service providers should review their standard contract terms to ensure that such provisions are included in their standard terms.

What does this mean in practice?

One key issue that could determine the success of the legislation is that parties will need to go to court to enforce their rights under the new laws. Similar laws have been in place for larger businesses for some time now, and there is little evidence to show that parties have used those laws to address potential issues in their contracts. For small businesses with contracts under $300,000, we query whether the potential cost and sometimes lengthy process of litigation may discourage some parties from seeking to enforce their rights under the new laws through the courts. It may be the case that small businesses might seek to rely on these laws when negotiating their contract terms, although that may be detrimental to that party's chances of successful award of the contract.

If these laws are sought to be enforced through the courts, it will be interesting to see what the implication of these laws will be on the current view of the courts, which is that commercial parties to a contract are bound by the terms that they agreed, regardless of 'fairness' or 'commerciality'.

Recommendations

With the new laws set to come into effect 12 months after receiving royal assent, those affected by the new laws will have a one year grace period to amend any terms in their standard form contracts as necessary.

Principals and head contractors in particular should review their standard contract terms now, in order to ensure that they understand the potential effect of the new laws when they come into effect next year.

Any contractual terms which may potentially be considered unfair may need to be amended, or perhaps measures may need to be introduced to bring them to the attention of the other party, such as an explanation of their operation. Parties issuing relevant tenders may also want to request information as to whether bidders are "small businesses".

Our Construction and Infrastructure team has extensive experience in drafting and amending contract terms and is available to assist before the new laws come into effect next year.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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Authors
Sarah Shirley
 
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