In brief - New legislation will provide protection for certain subcontractors
On 12 November 2016, the Treasury Legislative Amendment (Small Business and Unfair Contract Terms) Act 2015 came into effect. This Act extends the current Australian Consumer Law (ACL) consumer protections against unfair contract terms in standard contracts to small businesses. As this extension will impact almost all construction industry participants, we take a look at key terms which may be deemed to be unfair under the new legislation.
Unfair contracts protection regime to include small businesses
In the September edition of CBP Focus, Faith Laube and Andrew Murray explored how the then proposed changes to the ACL contract protection regime would affect contractors and the construction industry generally in their article Unfair contract terms targeted by new legislation.
By way of recap, the changes, which came into effect on 12 November 2016, aim to protect small businesses (being businesses with less than 20 employees) from unfair terms in standard form contracts. The legislation applies to contracts with small businesses with either:
- an unadjusted price that does not exceed $300,000, or
- a duration exceeding 12 months and an unadjusted price that does not exceed $1,000,000
Briefly, under the ACL a provision included within a standard form construction contract will be considered "unfair" if:
- it causes a significant imbalance in parties' rights and obligations under the contract
- it is not reasonably necessary to protect the legitimate interests of the advantaged party
- it would cause detriment to the small business if relied upon
To assist in the identification of "unfair" contract terms, section 25 of the ACL provides a non-exhaustive list of 13 criteria that may be (but are not necessarily) unfair contract terms. This "grey list" includes provisions that permit one party to unilaterally avoid, terminate, renew or vary the contract, provisions that limit one party's vicarious liability or right to sue, and provisions that penalise one party but not the other for breach or termination of the contract.
Typical key terms found in standard form construction contracts which may be considered unfair
This article briefly examines some key terms typically found in "standard form" construction contracts that may potentially engage the unfair contract provisions of the ACL.
Time bars in construction contracts usually stipulate that a contractor is only entitled to make a claim (for example, in relation to an extension of time, variation etc) if the contractor provides notice of the claim within a specified time period. Time bar provisions arguably fall under the ACL's grey list as "a term that limits, or has the effect of limiting, one party's right to sue another party".
In applying the three-step test as provided by the ACL, it is clear that time bar provisions would cause detriment to the contractor if relied upon. However, both contractor and principal have a "legitimate interest" in having claims swiftly considered, as delays in this context may impact the principal's ability to effectively determine the claim, as well as limiting the contractor's cash flow while waiting for the outcome of their claim. Much will depend on the reasonableness of the time allowed and the content of the notice to be given.
Arguably time bar provisions are reasonably necessary to protect the legitimate interests of both principal and contractor. However, this argument may be difficult to sustain if, as is usually the case, the time bar provisions burden the contractor and not the principal. In light of this, time bar provisions may be considered unfair under the extended ACL regime if the provision imposes a shorter time period than what is "reasonably necessary". Other relevant considerations in determining unfairness may also include the nature and extent of notification requirements and the purpose of the time bar.
The complex nature of the modern construction industry relies upon an administrative process that empowers the principal or superintendent, with unilateral discretion, to determine key issues on site, such as determining whether contractor work is defective or complete. However, despite this commercial reality, any term prescribing such powers likely falls under the grey list because it "is a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning".
Nonetheless, a principal has a legitimate interest in having decisions promptly executed (without contention) to ensure that the works can progress. However, given the significant imbalance that unilateral principal/superintendent terms can engender, it may be necessary to impose certain restrictions on this term (e.g. the superintendent must act honestly, fairly and reasonably) to ensure that this term isn't voided under the extended unfair contract regime. In essence, any term empowering superintendents/principals under the new unfair contract regime should not extend beyond what is reasonably necessary to protect the principal's legitimate interest.
Any standard form construction contract that contains a unilateral variation clause will fall under the grey list as this provision is a "term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract". Despite this, the commercial reality of construction projects dictates the necessity for unilateral variation clauses in order to reasonably protect the principal's legitimate interest to complete the works in a manner that is appropriate for the principal.
Clearly unilateral variation clauses reflect the legitimate interests of the principal. However (perhaps because of this), there is a significant risk that such provisions may be considered as unfair, especially where the contractor is required to comply with a variation before a consensus as to the direction's consequences (including as to price and time) has been agreed to. Generally, contracts will provide for progress payments as the works proceed. However, many standard variation provisions effectively require the contractor to undertake potentially significant variation work with resolution of legitimate time and money entitlements left to final "wrap-up" or dispute resolution process. Such clauses effectively circumvent the concept of "progress" payment.
Where the inclusion of a variation direction provision is being considered in a standard form construction contract, the term's discretionary breadth should be considered, i.e. whether the term is restricted to the original scope of goods or services under the contract or is extended to entirely different goods or services. Further, to mediate against potential issues of significant imbalance between parties, mechanisms within the variation power to provide opportunities for the parties to negotiate or an independent third party to determine (even on an interim basis), potential variations and the relevant time and cost consequences should be considered.
Liquidated damages and extension of time provisions
Any liquidated damages provision that constitutes an overestimate of the principal's likely losses due to delay falls under the grey list as "a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract". In light of this, such terms may be considered unfair to the contractor. However, the extension of the unfair contracts regime is hardly of great utility to contractors in this context as disproportionate liquidated damages rates were already voidable at common law by virtue of their nature as a penalty.
In light of this, if the rate of damages is a genuine pre-estimate of the loss, one would be hard pressed to argue that such a clause is unfair as it would be reasonably necessary to protect the principal's legitimate interests from the costs associated with the contractor's breach of contract.
Extension of time (EOT) provisions generally provide that if works are delayed by the principal and/or the contractor, the contractor may be granted an additional equivalent period of time to complete the works. EOT provisions therefore effectively sidestep the effect of any delay caused by a party trying to recover the liquidated damages for failing to complete the works by the Date for Completion. However, it is likely that any attempt to restrict the operation of EOTs in favour of the principal may be considered to go beyond what is necessary to protect the principal's legitimate interest. For example, not allowing an EOT for separate contractor (who is under the control of the principal and not the contractor) causal delay, may be in that category.
Standard form construction contracts to small businesses should undergo risk assessment
The extension of the unfair contract protections to small businesses is bound to create a number of uncertainties. Therefore, it would be prudent to carry out a risk assessment on any standard form construction contract (indeed any construction contract) that may be used with a small business which either comes into effect, or will be renewed or varied on or after 12 November 2016.
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.