Australia: Unfair contract terms legislation may apply to construction contracts

Construction Law Update - July
Last Updated: 24 July 2016

KEYWORDS: MISTAKEN BREACH

KEY TAKEAWAY

The construction industry must now take note of consumer protection legislation. From 12 November 2016, any unfair term in a standard form contract with a small business could be rendered void. This raises special concerns for some of the most common terms in subcontracts, supply agreements and consultancy agreements.

Part A: When does the legislation apply?

While the Unfair Contract Terms (UCT) regime will not apply to major head contracts, it may well apply to subcontracts, supply agreements and consultancy agreements if the following conditions are met:

  • one party is a "small business";
  • the parties have signed a "standard form contract"; and
  • no exceptions (under the legislation) apply.

Where the legislation applies, the next question is whether there are any unfair terms.

  1. What is a "small business"?

The ACL defines a small business as one that, at the time the contract is entered into or renewed, employs under 20 people on a head count.1 In general, the UCT regime will apply to contracts with a small business where:

  • the upfront price payable under the contract is $300,000 or less, or
  • the contract has a duration of more than 12 months and the upfront price payable under the contract is $1,000,000 or less.2

The contract must also be for the supply of goods or services, or the grant of an interest in land.

  1. What is a "standard form contract"?

Under the UCT regime, a contract will be presumed to be a standard form contract unless proved otherwise.3 Beyond this presumption, in assessing whether a contract is a standard form contract, a court must consider various factors prescribed in the legislation, such as whether one party had all or most of the bargaining power in the transaction and whether the other party had an opportunity to negotiate the terms.4

Interestingly, there is no express exemption in the UCT regime for industry-negotiated standard form contracts.5

Further, it has been suggested that a negotiation that "merely tinkers with the document" will not be sufficient to exclude it from the UCT regime.6 It is therefore unclear whether standard form construction contracts will be covered by the UCT regime.

  1. Exceptions to the regime

The UCT regime exempts the following provisions from its scope:

  • terms that define the subject matter of the contract;7
  • terms that set the up-front price payable under the contract;8 and
  • terms that are required or expressly permitted by a law of the Commonwealth, a State or a Territory.9

Lord Steyn captured the difficulty with these exceptions when he said that, broadly speaking, all terms of the contract are in some way related to the price or remuneration.10 There are as yet no Australian cases that consider the scope of the exemption.

  1. What is an "unfair term"?

While the UCT regime does not set out a definitive meaning of what would be an "unfair term", it provides three indicia. A term may be considered unfair if it:

  1. would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
  2. is not reasonably necessary to protect the legitimate interests of the party who is being advantaged by the term; and
  3. would cause detriment (financial or otherwise) to a party if it were relied on.

The onus of proving requirements (a) and (c) lies with the party asserting unfairness. Requirement (b) is presumed, and the onus of rebutting this assumption lies with the party allegedly favoured by the term.

Should a term meet these criteria, the court must then form a view about whether the term is unfair taking into consideration the extent to which the term in question is transparent, and the contract as a whole.

The UCT regime provides a non-exclusive list of examples of terms that may be (but are not necessarily) unfair. These include:

  • a term that effectively permits one party to terminate the contract;
  • term that effectively penalises one party for a breach or termination of the contract;
  • a term that effectively permits one party to vary the terms of the contract;
  • a term that effectively permits one party to vary the upfront price payable under the contract without allowing
  • the other party to terminate the contract; and
  • a term that effectively permits one party to assign the contract to the detriment of another party, without that other party's consent.

The following common terms in standard form construction contracts might be challenged.

Part B: How will the legislation affect construction projects?


Time bars and deeming provisions Time bars have the effect of limiting one party's right to sue another. The merits of a time bar may be relevant to its potential "unfairness", as may the advantages of resolving disputes expeditiously, but there may be concerns where the time bar is unreasonably short.

Novation clauses A novation clause might have the effect of permitting one party to assign the contract unilaterally, to the detriment of another party. Assignment clauses have been held to be unfair if they create confusion and inconsistency.11 If a novation clause requires a consultant to agree to a future assignment to a then unidentified party, there might be an argument the clause is unfair. The principal would need to demonstrate that it is reasonably necessary.

Superintendent or principal discretions Unilateral powers held by the superintendent or principal may have the effect of permitting one party to unilaterally determine whether the contract has been breached or to interpret its meaning. Since the principal has a legitimate interest in having decisions made swiftly, these powers might not be considered unfair, at least where the superintendent must act honestly, fairly or reasonably.12

Termination for convenience clauses A termination for convenience clause has the effect of permitting one party (but not the other) to terminate the contract, and so could potentially be considered unfair.

  1. Establishing that a term is "unfair"

If a small business encounters a term that it wants to challenge, it may apply directly to the court to have the term declared unfair. It may also seek intervention from ASIC. If the court finds that a term is unfair, it will declare the term void. However, if the remainder of the contract can continue to operate without the term, it will.13

  1. Tender process contracts

While many in the construction industry have given some thought to the enforceability of in-house standard forms, requests for tender (and the "process contracts" they can create) are another possible concern under the extended UCT regime.

A process contract essentially exists to protect the integrity of the tendering process14 by creating "binding obligations on the party calling for tenders to evaluate each tender in a certain way".15 The purpose of the process contract is to protect bidders from being treated unfairly before a contract is executed. Similarly, the purpose of the UCT regime is to protect small businesses from unfair contract provisions.

The tender process was an issue raised by three organisations in the submission phase of the UCT regime.16 Arguably, a process contract is not a contract for the provision of goods or services under section 23 of the ACL and, as such, would not be subject to the UCT regime.

However, the ACL's broad definition of "service" is relevant. In Obeid v ACCC, 17 it was held that the Minister who ran an EOI process had, in allowing appellants to participate in an EOI process, provided a right, benefit or privilege within the definition of "services" under s4(1).18

If this finding were applied to the extended UCT regime, the "service" in question could (arguably) be provided by the party issuing the Request for Proposals to the small business and therefore be subject to the UCT regime.

Nothing in the legislation would prevent such an outcome. It is therefore not yet clear whether process contracts will fall outside the scope of the UCT regime.

  1. Conclusion

Until case law on the UCT regime develops, it is hard to know how courts will approach these arguments. Doubtless, many parties will be interested in challenging clauses where no other relief is available. The prudent approach is to review contracts, subcontracts, supply agreements and consultancy agreements before 12 November 2016 and consider amending or removing terms that might be "unfair" in light of the new statutory provisions from any suite of documents used with small business counterparties.

Footnotes

1 Section 23(5)
2 Section 23(4)
3 Section 27
4 Section 27(2)
5 Jeannie Paterson, Unfair Contract Terms in Australia (Thomson Reuters, 2012) at [5.80]
6 Jeannie Paterson, Unfair Contract Terms in Australia (Thomson Reuters, 2012) at [5.60]
7 Section 26(1)
8 Section 26(1)
9 Section 26(1)
10 Director General of Fair Trading v First National Bank Plc [2002] 1 AC 481; [2001] UKHL 52 [31]
11 Director of Consumer Affairs (Vic) v Backloads.com Pty Ltd [2009] VCAT 754 at [262]
12 Alisa Taylor, "Fair Play on the Building Site: How Extending Unfair Contract Term Protections to Small Businesses Will Impact Construction Projects" (2015) 31 Building and Construction Law 365 at 383
13 Section 23
14 R v Ron Engineering & Construction (Eastern) Ltd [1981] 1 SCR 111 at 273
15 NSW Department of Services (Technology & Administration), Tendering Manual (November 2010) Chapter 2, at 6
16 ' Post Office Agents Association Limited submission regarding Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015' (May 2015); 'Housing Industry Association submission to the Treasury on the "Extending Unfair Contract Term Protections to Small Businesses Consultation Paper' (1 August 2014); 'Master Builders Australia Submission to the Treasury on Extending Unfair Contract Terms Protection to Small Business — Draft Legislation' (12 May 2015)
17 [2014] FCA 839
18 Obeid v ACCC [2014] FCA 839 at [54]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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