Changes to unfair contract terms explained
Published on May 9, 2017
It is now the time to make sure that your contracts are ready for the new changes, or you could be faced with a contract term being declared void.
If one or more contract terms are declared void (and thereby unenforceable) in a standard form contract, it could have wide reaching implications for your business.
What is a standard form contract?
Standard form contracts are prevalent throughout the construction industry.
Features of standard form contracts include the following:
- The contract was presented on a ‘take it or leave it’ basis;
- One party has all the bargaining power;
- The contract was drafted without any discussions between the parties;
- No negotiation took place; or
- Specific characteristics of another party weren’t taken into account.
What is an unfair term?
A contract term is unfair if it:
- Causes a significant imbalance in the parties’ rights and obligations arising under a contract;
- Isn’t reasonably necessary in order to protect the legitimate interests of the party advantaged by the term; and
- Would cause detriment (financial or otherwise) to a party if the term were applied or relied on.
When reviewing contract terms to determine whether they are unfair, a court may take into account any matter it considers to be relevant, but must also take into account the following:
- The extent to which the term is transparent (that is, whether it contains plain language, is legible, is clearly presented, and is readily available to any party affected by the term); and
- The contract as a whole.
Any standard form contracts, that your company uses, should be checked to ensure that, where contracting with small businesses they don’t contain potentially unfair clauses in areas such as:
- Termination for the convenience of one party;
- Variations to the scope of works and contract price;
- Extensions of time to perform works under the contract;
- Delay damages;
- Substitution of materials;
- Limitation of the liability of one party; and
- Indemnities provided by one party to another.
The changes from 12 November apply to the following:
- Standard form contracts entered into on or after 12 November 2016;
- Standard form contracts renewed on or after 12 November 2016; and
- A variation of a standard form contract term on or after 12 November 2016.
Businesses that have fewer than 20 employees and an up-front contract price of $300,000 or less (or $1,000,000 or less for contract terms over 12 months) are protected under the new legislative provisions, so consider reviewing your suite of contracts now to remove any unfair terms.
Small business and the construction industry
Small business is a large proportion of the construction industry. ABS data shows that as at June 2012 businesses with fewer than 20 employees accounted for 97.7 per cent of all construction businesses and took in 49 per cent of the total income in the construction industry.
Standard form contracts are widespread throughout the construction industry and the repercussions of the new changes are massive, affecting developers, builders and sub-contractors.
Fewer than 20 employees (including some casual staff)
The protections apply when contracting with a small business, being a business that has fewer than 20 employees, including casual staff that are employed on a regular or systematic basis.
Q: How do I know if the business I’m entering into a contract with is a small business?
A: That’s a good question. Performing due diligence in the procurement stage pre-contract is advised, but with projects subject to critical time frames this may not always be practical. Accordingly there may be uncertainty about whether another contractor is a small business or not. The safest strategy is to ensure there are no unfair terms in any contracts used by your business.
Standard form contracts
The contracts that are caught by the provisions must be standard form contracts. The presumption in the legislation is that a contract is a standard form contract until proven otherwise.
Q: But I purchase my contract off the shelf, so can’t I be confident that there will be no unfair contract terms?
A: A large percentage of the construction industry uses standard form contracts. Those contracts were drafted prior to the new protections for small business and care must be used to ensure that the standard form contracts don’t contain unfair contract terms.
The protections are for contracts within certain up-front price brackets
The small business protections only apply to contracts where:
- For a contract term of 12 months or less the up-front price of the contract is no more than $300,000; or
- For a contract term of longer than 12 months the up-front price is no more than $1,000,000.
- Note that this is the up-front price, i.e. the price of the contract at the time it is entered into. The new provisions aren’t industry-specific and this one-size-fits-all doesn’t cope well with common features in construction contracts that either raise or lower the contract price throughout a project, such as provisional sum item adjustments and prime cost items.
Q: The up-front contract price was $275,000 when the contract was signed, but during the build with provisional sum adjustments the contract price jumped to $310,000. Doesn’t that mean that the unfair contract provisions don’t apply now?
A: No. With respect to contract price, the relevant trigger is the contract price at the time the contract was signed.
It may be difficult sometimes to know whether the business you are contracting with has fewer than 20 employees and the unfair contract protections operate regardless of your knowledge, so businesses need to be careful to adopt a cautious approach to this legislative change and should ensure that contract terms do not fall foul of the unfair contract provisions.
This will avoid a potentially costly finding that one or more terms in a standard form contract are void and cannot be enforced.
Consider a review of your standard form contract suite to ensure that your business is protected.