Are The Terms In Your Construction Contracts Fair?

In its recent years of operation, the unfair contracts regime in Australia has had little discernible impact in the realm of construction contracts.

Introduction

The Australian Competition & Consumer Commission (ACCC) has advocated for several years for the introduction of penalties to unfair contract terms, including their submissions in December 2018 and March 2020 where their principal recommendation was that the inclusion of an unfair contract term in a standard form contract is an express contravention of the Australian Consumer Law (ACL) and should be subject to civil pecuniary penalties.¹

On 9 November 2022, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (UCT Act) came into effect.

The aims of the UCT Act are to:

• help ease the cost of living by increasing penalties for breaches of competition and consumer laws; and
• to provide greater protection for consumers and small business from unfair contract terms given that consumers and small businesses often lack the resources and bargaining power to effectively review and negotiate terms in standard form contracts they are offered by a larger party.²

Overview of the UCT Act

The UCT Act comprises of 2 Schedules:

• Schedule 1 to the Act amends the Competition and Consumer Act 2010 (Cth), including the Australian Consumer Law (ACL), to increase the maximum penalty applicable to certain breaches of competition and consumer law to ensure that the price of misconduct is high enough to deter anti-competitive behaviourand unfair activity, and to ensure consumers retain a robust level of protection.³
• Schedule 2 of the Act amends the current laws regulating the existing unfair contract terms provisions and reduces the prevalence of unfair contract terms in consumer and small business standard form contracts.⁴

Time periods

The reforms brought about by the UCT Act will come into force on 9 November 2023.

More specifically, the changes will apply to:⁵

• standard form contracts made or renewed on or after 9 November 2023;
• a term of a contract that is varied or added on or after 9 November 2023. However, it is to be noted that changes relevant to deciding whether a contract is a standard form contract apply to the whole contract.

Proposed changes that you need to be aware of

Standard form contract

A standard form contract is a standard set of terms and conditions that are often utilised by entities when conducting business as it avoids the transactional costs associated with heavily negotiated contracts.

The common standard form contracts used in the construction industry include:

1. Australian Standards Contracts (such as AS2124- General Conditions of Contract);
2. Master Building Association Contracts;
3. Housing Industry of Australia contracts;
4. Contractors’ standard forms of subcontract or supply; and
5. Purchase Order terms and conditions.

Under the reforms (and in the context of the construction industry), a ‘standard form contract’ will not be limited to unamended contracts produced by industry associations and may now include bespoke contracts that are offered on a take it or leave it basis.

In light of the UCT Act, it is important to note that there is still no universal rule for what constitutes a standard form contract, instead, this is left to the Courts to interpret. Pursuant to section 42 of the UCT Act, the Court may now also consider several matters in determining whether a contract is a standard form contract. This includes, but is not limited to:

a)    whether there was an opportunity for the other party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect;

b)    whether the other party has had an opportunity to select a term from a range of options determined by another party; and

c)    whether the other party has had the opportunity to negotiate the terms of the proposed contract.

The effect of the recent amendments is that the Court will now consider a variety of different factors when determining whether a contract is a standard form contract.

Expanded scope – “small business”

The UCT Act now gives “small business” a wider definition. The definition of “small business” has been expanded to capture entities which:

• employ fewer than 100 employees (increased from 20); or
• have an annual turnover of less $10 million.

Contact value threshold

Previously, small businesses were protected from unfair terms in standard form contracts if the upfront price payable was under $300,000, or $1 million for contracts lasting more than 12 months.

Under the new UCT regime, the contract value threshold no longer applies for contracts under the ACL.⁶

Penalties

Under the former regime, unfair contract term breaches carried no penalties and were seen by companies and individuals as no more than a “contractual risk”. The effect of the new Act is that it has amended the CCA and ACL penalties regime. This now means that a business which  relies on unfair contract terms in their day to day contracting are exposed to serious penalties under the CCA. The new maximum penalty for an individual is $2.5 million and for body corporates, it is the greater of:

• $50 million;
• If the Court can determine the value of the benefit obtained – three times the value of the benefit; and
• If the Court cannot determine the value of the benefit – 30% of the adjusted turnover during the breach turnover period for the offence, act or omission.

What does this mean for construction contracts?

Generally, if clauses in construction contracts create a significant imbalance in the rights and obligations of the parties and go beyond what is reasonably necessary to protect the legitimate interests of the party seeking to rely on the clause, these could be considered unfair by the Courts.⁷ 

In construction contracts, the types of clauses that the Courts may consider to be unfair include:

a)    clauses that allow for unilateral (and unreviewable) determinations to be made by one party on time and cost entitlements;

b)    unreasonable time bars on claims;

c)    termination for convenience without compensation that favours one party over the other.

In addition to there being considerable penalties for entities being found to have utilised contracts with unfair terms and as outlined above, if the Courts determine that an unfair contract clause is used widely by a party, these contracts can be voided, amended or the clause not enforced across all contracts.

What should be done now?

It is best to consider terms in a contract from both party’s point of view and check that appropriate counter-balancing terms are included for consumers or small businesses. Any key terms to a contract should be raised to the attention of consumers or small businesses. Parties should ensure that clear and concise language is used in a contract. Broad terms, as well as terms that seek to avoid a party’s obligations under the ACL, should not be included in a contract. The ACCC has also helpfully provided tips for parties to consider when reviewing their contracts. This may be accessed via this link

While the legislative reforms will not always apply, there is a real risk the legislation will apply if parties are engaging with small to medium-sized businesses, and there is little real negotiation of the contract terms. We recommend that during the remainder of transition period (ie before 9 November 2023), parties review their commonly used forms of contracts to check for any unusually harsh or unreasonable terms that might be considered unfair, and take legal advice to appropriately update these terms.

Lavan’s Construction & Infrastructure team is well placed to assist in this process.