Unfair contract terms, construction contracts and the defects liability period

Oct 25 2016

Publications

On 12 November 2016, amendments to the Australian Securities and Investments Commission Act 2001 (Cth) and Schedule 2 of the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law) commence which invalidate unfair terms in small business contracts.  Our previous alert on the change to unfair contract terms legislation is available here.

A contract is caught by the changes as a small business contract if, among other criteria, either of the following applies:

  • the upfront price payable under the contract does not exceed $300,000; or
  • the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1 million.

In other words, contracts that have an upfront price payable of more than $300,000, but less than $1 million, and have a duration that is less than 12 months, are not small business contracts. Accordingly, these contracts are not subject to the new protections.

Conversely, contracts that have an upfront price of between $300,000 and $1 million and have a duration of greater than 12 months will be subject to the new unfair contract terms legislation.

What about the defects liability period?

Although the duration of most contracts will be a straightforward calculation, construction contracts contain additional complexities that must be accounted for. One such complexity is the defects liability period (DLP). As a general proposition, the DLP is a period of time after practical completion during which a contractor is contractually obliged to correct defects.

In the context of the threshold questions in the unfair contract terms legislation, the DLP is a point of contention in the calculation of the contract duration. It is arguable that there are at least two different approaches to the calculation of the duration of a construction contract which is subject to a DLP:

  • the DLP is treated as a contractual obligation and included in the calculation of the duration. The duration of the construction contract is the construction period plus the DLP; or
  • the DLP is treated as a separate warranty, provided by the contractor, on the goods or services provided under the construction contract, and, is excluded from the calculation of the duration of any construction contract. The duration of the construction contract is therefore the construction period only.

A large number of construction contracts have upfront prices payable of between $300,000 and $1 million, and, have periods of time for practical completion (i.e. the actual construction period, excluding any DLP), of less than 12 months. How the DLP is treated when calculating the duration of a construction contract in these circumstances will determine whether a particular construction contract is a small business contract, and accordingly, whether the construction contract is subject to the new protections.

Is the DLP a warranty?

In the Australian Consumer Law, a warranty against defects is a representation communicated to a ‘consumer’ in connection with the supply of goods or services, at or about the time of supply, to the effect that a person will (unconditionally or on specified conditions):

  • repair or replace the goods or part of them; or
  • provide again or rectify the services or part of them; or
  • wholly or partly recompense the consumer,

if the goods or services or part of them are defective, and includes any document by which such a representation is evidenced.

In most instances, a small business will not be a ‘consumer’, as that term is defined in the Australian Consumer Law.  As a consequence, it is unlikely that the definition of warranty against defects will apply to a small business contract.

Should the DLP be counted in the calculation of small business contract duration?

Most standard form construction contracts provide for a final payment mechanism whereby:

  • within a certain number of days after the expiry of the last DLP, the contractor will give a final payment claim;
  • in response, a final certificate will issue which evidences the moneys finally due and payable between the contractor and the principal; and
  • the final certificate is conclusive evidence of, amongst other things, discharge of each party’s obligations in connection with the construction contract.

Where a contract is subject to such a regime, it seems to us that the DLP is to be considered part of a series of construction obligations of the contractor under a construction contract, rather than a separate warranty on the goods and services provided by the contractor. There are also obligations under the construction contract imposed on both the contractor and the principal in terms of the issuing of a final claim, the assessment of the final claim, the issuing of the final certificate, the payment of any monies pursuant to the final certificate and the potential issuing of a notice of dispute in connection with the final certificate.

As a result, it is certainly arguable that the duration of a small business construction contract is the construction period plus the DLP.

On that basis, a construction contract with an upfront price payable of between $300,000 and $1 million, and under which the period of time for practical completion is less than 12 months will be a small business contract and caught by the new protections provided the DLP extends the contract duration beyond 12 months.

What does this mean for me?

There is genuine uncertainty about whether the new protections will apply to many construction contracts, particularly where the upfront price payable is between $300,000 and $1 million and the construction period plus the DLP is greater than 12 months.

Parties who contract with small businesses should exercise caution and assume that the new protections apply until such time as there is clarification from the legislature or consideration by the Court.

For further information please contact:
Andrew Kelly | Partner | +61 7 3338 7550 | akelly@tglaw.com.au
Thomas McKillop | Senior Associate | +61 7 3338 7530 | tmckillop@tglaw.com.au