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Small business and unfair contract terms within the construction sector: are your contracts compliant?

08 March 2017

#Construction, Infrastructure & Projects, #Procurement

Published by:

Victoria Gordon

Small business and unfair contract terms within the construction sector: are your contracts compliant?

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (SBUCTA) commenced on 12 November 2016. This law extends the existing unfair contract term regime, that applied to consumer, to a new category of ‘small business contracts.’

What Contracts Are Regulated

This new law makes unfair terms in small business contracts void. In order for the law to apply, the following must be present:

  • at least one of the parties must be a small business (meaning less than 20 employees by headcount – which includes full-time, part-time and regular and systematic casuals)
  • the up-front contract price must be less than $300,000, or less than $1m if the contract exceeds 12 months
  • the contract must be a standard form contract (ie drafted by one party and put to the other with little opportunity to negotiate)
  • the contract must contain an unfair term.

Where these factors are in place the unfair contract term will be declared unlawful and severed from the contract on application of one of the parties, with compensation also being available to the aggrieved party. The following issues are particularly relevant to small businesses within the construction sector.

The Unfair Contract Terms Regime and the Construction Sector

Standard Form Contracts

The Australian Standards forms dominate the Australian construction contracting landscape. The wide range of forms available in Australia serve as an efficient and effective means of drafting contracts.

The most commonly-used standard forms for commercial building work are the Australian Standards (AS) 2124-1992 and AS 4000-1997 (General Conditions of Contract – for construct only delivery), combined with their variants AS 4300-1995 (general conditions for design), AS 4902-2000 (general conditions of contract for design and construct) and AS 4122-2010 (consultant agreement). Standards Australia is currently revising the suites of AS 2124-1992 and AS 4000-1997. It is proposed that the two suites will be merged into a new suite of AS 11000: General conditions of contract. In addition, and more likely to apply here, we have AS4905-2002 and AS4906-2002 (both minor works contracts).

The Australian Standards forms have not been amended to reflect SBUCTA and are unlikely to be as these forms are used on both big and small projects, and with big and small businesses. Accordingly it would be inappropriate to redraft to accommodate the new unfair contract terms law, when it will not always apply.

Issues with Risk Pass Through

One issue that will certainly arise however is that, on a large construction project, a head contractor will be required to take upstream risks in the contract that may otherwise be unfair and will not be able to pass these down to a subcontractor with fewer than 20 employees if the value of the work is less than the prescribed level of either $300,000 or $1m. This will create a gap for the head contractor that it will be left with, with its only choice being to:

  • negotiate the ‘unfair’ clauses upstream
  • choose a subcontractor that is not a small business
  • take those risks and accept they cannot be passed down.

Special Purpose Vehicles

As stated, the new laws apply to businesses with less than 20 employees by head count. This is counted having regard to the contracting entity only and not, for example, an entire group or a number of related entities. Where entities set up subsidiaries for a particular contract, project or purpose the contracting entity may be small but the related (sometime parent) entity could be very large. 

These situations are very common in the construction and infrastructure sector and will mean that these new laws may apply where entities would not necessarily expect them to, or indeed need them to as the contracting entity will itself, or will be part of a group that, has substance is not one therefore that this legislation has been introduced to protect.

Common unfair terms

A term will be declared unfair if:

  • it causes a significant imbalance in the parties’ rights and obligations under the contract
  • it is not reasonably necessary to protect the legitimate interest of the party who would be advantaged by them
  • it would cause detriment to a party if it were relied upon.

The ACCC investigated standard form contracts in various industries and published a report in November 2016 called ‘Unfair terms in small business contracts: A review of selected industries’ which highlights some terms of concern. Some of these that are particularly relevant to the construction sector are highlighted below.

1. Right to unilaterally vary the contract

Broad and unfettered terms that allow unilateral variation for any reason and/or when prior notice is not provided may be unfair. This occurred in ACCC v Bytecard Pty Limited (Federal Court 24 July 2013) when it was held that the right to unilaterally alter a contract was unfair. Whilst this case was a case involving the IT sector, these kinds of clauses are common in construction contracts.

2. Automatic rollover

Automatic renewal terms that do not provide reasonable notice to notify and/or a period to exit the renewal may be unfair. This occurred in
ACCC v Chrisco Hampers (Federal Court 2016), where it was held that an automatic rollover clause was unfair. Again, these clauses are very common in the construction industry and particular in service and maintenance contracts.

3. Early termination 

These are fees payable by a party on the event of an early termination of the Contract. Again these are common in construction contracts and are subject to the unfair contract terms regime.

4. Liquidated Damages

Liquidated damages are a feature of most construction contracts. Where the liquidated damages regime is not a penalty, and so passes that test, it still may be considered unfair depending on the amount, when it applies and also when considered in light of the actual losses being suffered. The application of these laws to liquidated damages will be interesting in the context that, previously, provided they were not penalties they were valid and enforceable. This will no longer be the case.

5. Limited Liability

A common feature of most construction contracts is a limitation of the parties’ liability to each other. These limitation of liability will be reviewed under this legislation where it applies and where the clause is unfair.

6. Termination clauses with no cause

Termination for convenience clauses are very common in construction contracts and project agreements. This is particularly the case in Government contracts, and therefore back-to-back subcontracts.  These clauses will be void where they are unfair which is likely if they are one-way, do not provide for appropriate compensation or are found to not protect a legitimate business interest.

7. Wide indemnities 

Construction contracts tend to contain broad indemnity clauses. These will be subject to this legislation particularly where there is no link to liability and they go well beyond the general law position, which is often the case.

8. Wide Discretionary Powers

Construction contracts often contain clauses in favour of the principal (against the head-contract) and head-contractor (against its sub-contractor) enabling that party to unilaterally determine rights (for example to a variation or to an extension of time) and certify work. These unilateral and broad discretionary powers will be void and unfair.

What Can/Should Parties Do

Parties to construction contracts should consider if the new laws apply to their contract and if they do they should consider amending clauses that may be found to be unfair and then consider whether they amend those clauses or seek to make an argument that they are necessary to protect a legitimate business interest. 

Authors: Scott Alden and Victoria Gordon

Scott Alden, Partner
T: +61 2 8083 0419

Christine Jones, Partner
T: +61 2 8083 0477

Troy Lewis, Partner & National Head of Construction and Infrastructure
T: +61 7 3135 0614

Stephen Burton, Partner
T: +61 7 3135 0604

Suzy Cairney, Partner
T: T: +61 7 3135 0684

Stephen Natoli, Partner
T: +61 3 9321 9796

Kyle Siebel, Partner
T: +61 3 9321 9877

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources.

Published by:

Victoria Gordon

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