Expanded unfair contract terms regime – impact on construction contracts

At the end of last year, the federal government passed legislation to amend the Australian Consumer Law (ACL) to expand and strengthen the unfair contract terms (UCT) regime. The amendments to the UCT regime in the ACL will come into effect on 10 November 2023 (Commencement Date).1

The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 expands the threshold of contracts captured under the ACL, making them subject to the UCT provisions. The bill aims "to strengthen and clarify the existing unfair contract terms regimes to reduce the prevalence of unfair contract terms in consumer and small business standard form contracts".

The current UCT regime applies to 'consumer contracts' and 'small business contracts' that are 'standard form contracts'. The changes will expand the definition of the last two. This may have a cascading effect in the contractual chain on any future project and will impact existing and planned projects, for example:

  • construction contracts made on or after the Commencement Date
  • existing contracts that are renewed on or after Commencement Date
  • existing contracts where the terms are varied on or after Commencement Date.

This article focuses on how the new UCT regime will impact contracts in the construction industry. For more information regarding the amendments generally, please see our previous article here.

Relevance to government

Whilst the debate continues as to when a government agency is conducting a business in its general procurement activities and thereby loses the benefit of crown immunity, the UCT regime will apply to many other participants in a project. Where government mandates terms, which when applied downstream may be unfair, the application of UCT may mean that a head contractor has to choose between complying with the head contract requirement to pass the term downstream and avoiding potential consequences of the UCT regime.

The risk of being put in this invidious position may cause some contractors to avoid government work, or avoid using enterprises that fall within the operation of the amended regime as their subcontractors. This is compounded by the fact that in addition to a term being declared void, the courts will have other powers, including the imposition of substantial penalties (structured to deter a view of penalties as merely a cost of doing business), and the making of other orders in connection with the whole contract, including a prohibition on entering into similar contracts.

Where government is keen to provide opportunities to all sizes of enterprises, it cannot assume that the application of crown immunity to its contract means it can ignore the UCT regime in its dealings. This point is not unique to construction projects and would apply to all government procurement.

Amendments to the definition of 'small business contract'

The ACL currently defines a 'small business contract' as a contract for a supply of goods or services, or a sale or grant of an interest in land in the ACL where:

  • a party to the contract employs less than 20 people
  • the upfront price (i.e. contract value) is either:
    • not greater than $300,000; or
    • not greater than $1 million, where the term of the contract is longer than 12 months.

The changes expand the threshold of what would be considered a 'small business contract' by including at least one party that:

  • employs (on a regular and systematic basis) less than 100 people; or
  • has a turnover of less than $10 million for the last income year (thereby removing the parameters set by contract value entirely).

Only one of the criteria above needs to apply. It is easy to see how this will significantly increase the application of the regime and include many participants in the construction industry, including those on government projects.

Additional circumstances to determine a 'standard form contract'

Under the ACL, there is a statutory presumption that a contract is a 'standard form contract' if alleged by a party (unless proven otherwise). The courts are guided by factors in determining whether a contract is a 'standard form contract', such as bargaining power, whether the contract was prepared prior to discussion between the parties, whether a party was given the opportunity to negotiate the terms and whether the contract was presented on a 'take it, or leave it' basis. The changes include additional circumstances where a contract could still be deemed a 'standard form contract', despite a party having had the opportunity to:

  • negotiate minor or insubstantial changes to terms
  • select a term from a range of options determined by the other party
  • negotiate terms of another contract.

Further, courts will take into account the number of times parties enter into a contract containing the same or substantially similar terms. The more times parties enter into such a contract, the greater the likelihood an inference will be drawn of it being a standard form contract. If parties frequently agree on template contracts containing little to no changes, changes are rarely negotiated and terms are accepted by one party to increase their workflow, these contracts are likely to be considered standard form contracts under the new UCT regime.

Again it is easy to see how this will apply to many engagements of trade contractors in the industry, who are often signed up by head contractors on a standard form with little or no room to negotiate.

What is an unfair contract term?

Under the UCT regime, a contract term would be considered unfair, if:

  • it would cause a significant imbalance in the parties' rights and obligations arising under the contract
  • it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term (there is a rebuttable presumption against this)
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Clause 25 of the ACL contains a list of examples of contract terms that may be unfair. This list is not exhaustive and is intended to provide guidance on what terms could be unfair. Some examples in the list are terms that:

  • give a party a unilateral right to terminate the contract (e.g. termination for convenience clause)
  • unilaterally penalise a party for breach or termination of contract
  • permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract (e.g. automatic 'roll-over' clauses)
  • give a party the power to unilaterally determine whether the contract has been breached or to interpret its meaning
  • assigns the contract to the detriment of another party without their consent (e.g. unfettered assignment without consent clause)
  • limit, or has the effect of limiting, one party's right to sue another party (e.g. time bar provisions).

These terms are not uncommon in contracts used throughout the industry.

Enforcement mechanisms

If a court determines that a term is unfair in a standard form contract, that term would be deemed void. The court may provide declaratory relief or grant an injunction with respect to the unfair contract term. The amendments expand the kind of orders the court may make, such as:

  • make an order declaring the whole or any part of the contract, or a separate agreement relating to the main contract void, unenforceable or to be varied
  • make an order for a party to remedy other existing contracts, in whole or in part, which contain a term similar in effect to a term that may have been declared unfair in proceedings
  • issue an injunction to prevent any term declared unfair being relied upon in an existing contract or included in any future contracts.

The amendments also broaden the penalties for contravention of the UCT regime.

Prevention is better than cure

All participants in the construction industry are likely to be affected by the amendments to the UCT regime. It is common for parties in the industry to engage in projects based on standard form contracts which are not always modified or equally weighted for the sake of expedience.

Where government agencies are comfortable that they have the benefit of crown immunity, it is still necessary for those agencies to consider the application of the UCT regime in their dealings in at least the following respects:

  • mandating terms be passed down to subcontractors which fall foul of the UCT regime and the potential consequences to:
    • the pool of head contractors who are willing to take that on and the potential for downstream business to be directed to only large organisations in order to avoid the risk lying wholly with the head contractor
    • the overall risk management to the project where some participants may have a term declared void whilst others are subject to it.
  • what the position will be for a head contractor that has passed down the term, but it is later declared void by a court thereby putting the head contractor in breach of the head contract.

Footnote

1 Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), s

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.