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Terminators beware – ACL application to small business contracts

29 April 2020

#Construction & Infrastructure, #COVID-19

Christine Jones

Published by Christine Jones, Marie-Louise Scarf , Thomas Rubic

Terminators beware – ACL application to small business contracts

On 12 November 2016, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) extended many of the protections of the Australian Consumer Law (ACL) to small businesses contracts entered into on or after this date. Those protections also apply to the provisions of a contract that is renewed or varied on or after this date, to the extent of the new provisions. As parties affected by COVID-19 seek to enforce various termination, extension of time, variation and compensation clauses in their contracts, it is an opportune time to review these protections and how the Courts have applied them since their commencement.

Key amendments to the ACL

In summary, the key amendments to the ACL are:

  • s.23 of the ACL provides that any term of a standard form “small business contract” that is “unfair” is void and unenforceable
  • standard form contracts are contracts prepared by one party and given to the other without a reasonable or effective opportunity to negotiate its terms
  • small business contracts are contracts for the supply of goods or services or an interest in land where, at the time the contract is entered into, one of the parties to the contract employs fewer than 20 people and either:
    • the price payable under the contract does not exceed $300,000; or
    • the contract has a duration of more than 12 months and the price payable under the contract does not exceed $1 million.
  • s.24 of the ACL defines when a contract term is unfair, namely if:
    • it would cause a significant imbalance in the parties' rights and obligations arising under the contract
    • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term
    • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
  • s.25 of the ACL provides a non-exhaustive list of unfair contract terms, which includes:
    • a term that gives one party a right to terminate the contract but not another (s.25(b))
    • a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract (s.25(c))
    • a term that limits or has the effect of limiting one party’s rights to sue another party (s.25(k)). Although this section has not yet been considered by the courts, there appears to be a general consensus that if an arbitration clause strictly limits a small business’ rights to sue, then it will likely be unfair and void.

As many of these clauses are the very clauses that parties may seek to rely on in the current circumstances to address supply delays and the inability to resource or access projects, it is important to know whether your contract is a “small business contract” before you seek to rely upon a clause that may be deemed unfair under the ACL.

Although the ACL does not define ‘employee’ (for the purpose of the fewer than 20 people criteria), the term has been held to include casual employees if they are engaged on a regular and systematic basis. There is also potential for the term to include people engaged nominally as contractors and as part of special purpose vehicles.

There has been much court decisions on how to calculate the contract price (for the purpose of the price payable does not exceed the $1 million criteria). It will include both agreed lump sums and an allocation for amounts calculated at agreed schedules of rates based on anticipated quantities.

One area where there has been no court decisions since the ACL amendments commenced is how to calculate the ‘contract duration’. This is of particular relevance to the construction industry where there is often a date for completion and or program for completion of the work, as well as a defects liability or warranty period (DLP) provided for in the contract.

On one view, DLPs should be included in the contract duration as remedial work may be required during that period and the final payment is generally made on the conclusion of those periods, where retentions are returned and final completion is certified after the conclusion of the DLP.

The alternative view is that DLPs should not be included in the contract duration because they are akin to a warranty period, and work is only required in the event that the work, subject to the contract, is not compliant when first completed.

In these circumstances, parties seeking to rely on potentially unfair contract terms should be mindful that there remains great uncertainty about whether some contracts are small business contracts for the purpose of the protections, which may give rise to an argument about whether the term sought to be relied upon is void.

Authors: Christine Jones, Marie-Louise Scarf & Thomas Rubic

Disclaimer
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 newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Christine Jones

Published by Christine Jones, Marie-Louise Scarf , Thomas Rubic

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