Construction contracts and unfair contract terms

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As reported by us at the time, in November 2016, the Australian Consumer Law (ACL) extended its unfair contract term provisions to certain small businesses. These provisions, which previously only applied to consumers, were introduced in an effort to level the playing field between small and large enterprises.

This article is intended to remind industry participants about the scope of the unfair contract term provisions and their relevance in business-to-business transactions within the construction industry.

Large businesses using standard form contracts to engage smaller operators should have reviewed their contract terms to ensure compliance and small contractors should be aware of what should and should not be included in a small business contract.

If you are unsure whether your business-to-business contracts comply with the unfair contract term provisions or whether a term would be considered unfair you should seek legal assistance.

The provisions apply to ‘small business contracts’

The unfair contract term provisions relate to ‘small business contracts’. These are business transactions when at least one of the parties is a small business (defined as a business employing fewer than 20 people), and the contract is a ‘standard form contract’.

The term ‘standard form contract’ is undefined but would essentially capture precedent contracts prepared by one party and offered on a ‘non-negotiable’ or ‘take it or leave it’ basis. The provisions apply to contracts for any type of goods or services with an up-front value of up to $300,000, or $1,000,000 where the contractual terms run for more than 12 months.

An unfair term contained in a small business contract will be unenforceable. The offending term will be struck out and, if possible, the remaining contract will remain in place.

The provisions took effect on 12 November 2016 however any contracts entered into prior to that time that have been varied will also be caught.

What is an ‘unfair contract term’?

A term is unfair if it:

  • creates a substantial imbalance between the parties’ rights and obligations; and
  • would cause a significant detriment (financial or otherwise) to the business if it were relied upon by the advantaged party; and
  • is not genuinely necessary to protect the interests of the advantaged party.

Factors generally considered in determining whether a term is unfair include:

  • the respective bargaining power between the parties;
  • the transparency of the unfair term and the way it is expressed (whether it is obvious and easy to understand);
  • the entirety of the contract and the surrounding circumstances.

Application in the construction industry

Builders and head contractors should ensure that when using standard form contracts to engage ‘small business’ subcontractors or independent contractors such as surveyors and architects that they comply with the unfair contract term provisions.

The provisions under the ACL have wider scope than previous legislation in most jurisdictions that prohibit onerous payment conditions such as ‘pay when paid’ terms. The ACL captures terms that may have previously been considered ‘the norm’ in the construction industry.

Recurring terms in standard construction contracts that might be deemed unfair when contracting with a small operator include:

  • Variation provisions which allow the head contractor to unilaterally vary the terms of the contract or the scope of works at any time. Unconstrained variation terms could be seen to cause significant detriment to a subcontractor. These terms should be redrafted by including provisions that enable the subcontractor to terminate if the variation is excessive or provisions that require the head contractor to give reasonable notice of variations.
  • Indemnity clauses that excessively extend liability to the subcontractor beyond what would reasonably be necessary to adequately protect the head contractor against loss or damage.
  • Liability clauses that exclude or disproportionately limit the liability of the main contractor even if they are partially at fault.
  • Termination clauses allowing the head contractor to cancel the agreement at any time ‘for convenience’ and without reason or default by the other party. Contracts should consider a fairer process for termination and set out the subcontractor’s rights or entitlements on termination. Reasonable notice of defaults or potential defaults and providing a timeframe for these to be remedied before terminating might also be more reasonable.
  • Entire agreement clauses or terms that imply that the subcontractor has no recourse to remedies outside the terms of the contract. These clauses could constitute misrepresentation.
  • Time bars which may provide onerous timeframes and notification procedures for subcontractors to claim for variations or an extension of time under the contract. The shorter the timeframe and more onerous notification requirements, the more likely the term will be considered unfair.
  • Principal discretion clauses which purport to give the head contractor the exclusive power to determine certain terms of the contract, for example, whether a term has been breached or whether work is considered defective.

Conclusion

If contracts have not already been reviewed, head contractors should ensure their small business contracts do not contain unfair terms which may be deemed unenforceable. Such clauses may attract unnecessary attention and could potentially affect the reputation of the business.

Rather than delete a potentially unfair clause entirely, terms may be redrafted so they are more even-handed whilst still protecting the legitimate interests of the business. Consideration should be given to ‘tiered’ clauses allowing an alternative clause to be adopted in the event that a more severe clause might be considered unfair.

If you are a small business contractor and believe you have entered into an agreement with unfair terms, you could request to have the term removed or try negotiating for a fairer replacement clause.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].