Australia: Builders beware - Does your standard contract measure up? - ACCC targets unfair construction contracts

Last Updated: 4 April 2017
Article by Murray Thornhill

Since 12 November 2016, small businesses can apply to courts under the Australasian Consumer Law ("ACL") to set aside or amend unfair contract terms.

The Australian Competition and Consumer Commission ('ACCC') also has the power to make these applications on behalf of both small businesses and consumers.

The ACCC has set its priorities for 2017 by focusing on (amongst other areas), unfair contract terms in the construction sector.

HHG Legal Group has considered what kinds of terms commonly found in construction contracts might now be set aside or amended as being unfair. We have identified the following six kinds of terms as likely candidates:

  1. Termination for convenience without reciprocal compensation or notice

A contractor typically has to spend a lot of time and money tendering for and then mobilising to commence a construction project. For a principal or head contractor to take the benefit of that expenditure of time and money and then simply to dismiss the contractor from site, without reasonable cause, compensation or notice, would, in our view, very likely attract the court's censure. An exception might be where the principal or head contractor seeking to rely on a termination for convenience clause can show that an appropriate premium was built into the contract price, to cover, or at least to compensate the contractor for, the risks associated with sudden termination of its contract.

  1. Time bars that do not reasonably reflect upward obligations

Time and again, and as recently as last year, the courts have reaffirmed the importance and reasonableness of time bars under construction contracts, with respect to extension of time and price variation claims. The rationale is that in a typical contractual chain, each party will have a reciprocal obligation to notify the party above it, of an event that is likely to delay the progress of works or cause those works to cost more money. Unless such notice is given in a timely manner at each point in the contractual chain, the owner/principal may suffer substantial losses, for failure to meet its own commercial commitments to third parties.

Having said this, we consider that a court is now likely to investigate more carefully whether the actual time bar at each point in the contractual chain is reasonably set having regard to the obligations of those parties who sit above the time-barred contractor.

For example, if a sub-sub-contractor's sub-contracting employer has 10 days to notify of a delay event, then it may be considered reasonable to give the sub-sub-contractor only five days to give that notice to the sub-contractor. However, if a sub-contractor is only given seven days to notify the head contractor of a delay event which the head contractor, under its own contract, has 28 days to notify to the owner, we expect that the time bar may be more likely to be set aside or amended as unfair.

  1. Prior works liabilities

We expect it to become more difficult in most cases for a contractor to justify to a court, why it would hold a sub-contractor liable to rectify or to compensate for a defect in works that were undertaken by another sub-contractor, prior to the liable sub-contractor's commencement of their own works. In other words, if you did not do the defective work yourself, why should you be exposed to liability for their defective state? Despite the inherent unfairness in imposing such a requirement on sub-contractors in most circumstances, this kind of provision sometimes appears in sub-contracts for major works.

  1. Bad progress payment profiles

The rates of progress payments should in general reasonably reflect the proportion of total expenditure that the contractor expects to incur, at each point in the life of the project. For example, if the contractor expects to incur 20% of the total cost of the project in the first stage of its works, then its progress payment should be set at around 20% of the total contract price (with some flexibility, of course). In that case, if, for example, the contract provides for only 5% of the total contract price to be paid on account of the first progress claim, then we expect this may, in some cases, be considered to be an unfair contract term, which a court may amend, to reflect more accurately the contractor's proportional expenditure.

  1. Unnecessarily complex notice provisions

The courts have consistently regarded it as reasonable to require a contractor, to provide information that is reasonably necessary to enable the parties sitting above them in the contractual chain, to make certain adjustments and decisions based on that information. However, if a construction contract imposes an obligation on a contractor to notify facts or circumstances that do not appear necessary to enable those that sit above the contractor to make relevant decisions or adjustments, then this may be regarded as unfair.

  1. Unfair exclusions of liability

Finally, if your contract unreasonably excludes your entitlement to take action against your head contractor or principal for disruption or prolongation of your works, where this has resulted from the head contractor's failure, for example, to manage the site or the project properly, we expect that in some cases, this will be considered unfair.

  1. Conclusion

The extent of a court's power under the ACL to set aside or amend unfair provisions of standard form contracts is still uncertain.

What is known, however, is that the ACCC has given priority to certain kinds of standard form contract and that construction contracts are amongst those given priority.

Construction contractors should be mindful of this when negotiating their contract terms. If necessary, contractors should report any provision which considered to be unfair, to the ACCC. We have flagged the above six kinds of provision as likely at least in some circumstances to be treated by a court as 'unfair' for the purposes of the ACL but there may be others.

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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Murray Thornhill
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