CONSTRUCTION Alert: If you contract with small business, you have until November to prevent key terms from being declared unfair

25 February 2016


Recently the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth) (the Bill) received royal assent.  Commencing from 12 November 2016, the Bill will amend the Competition and Consumer Act 2010 (Cth) (the Act) so as to extend protections currently in place in the Act invalidating ‘unfair contract terms’ in consumer contracts to also apply to standard form small business contracts. 

This means that, from 12 November 2016, an unfair contract term contained in a standard form small business contract can be declared void and is intended to protect small businesses in circumstances where they are less likely to retain in-house counsel, properly understand the impact of such terms, and have less ability to negotiate or refuse ‘standard form’ contracts.  However, these changes may have unintended impacts across the building and construction industry and there are important practical steps businesses can take prior to their introduction to protect their interests.

Will this affect me?

If you are a small business or contract directly with small businesses, these changes will likely affect you.  Relevantly, the protections will apply to invalidate unfair terms in:

  • standard form contracts;
  • involving a small business;
  • for the supply of goods or services or sale or grant of an interest in land;
  • where the upfront price payable is $300,000 or less (or $1,000,000 if the duration exceeds 12 months); and
  • where the contract is entered into or renewed (or in some cases, varied) after 12 November 2016.

We will examine each of these requirements in turn.

What is a standard form contract?

Generally, a standard form contract is a contract offered on a ‘take it or leave it’ basis.  However, the definition is not “one size fits all” but will be applied by the courts having regard to a number of matters set out in the Bill, including the following:

  • the existence of an imbalance in bargaining power between the parties;
  • the extent and effect of pre-contract discussions or negotiations between the parties; and
  • whether the contract takes into account the specific characteristics of the party or transaction.

By way of example, all of your standard terms of trade will likely be considered standard form contracts, however negotiated and amended construction contracts will probably not be. 

Where a contract is alleged to be standard form, it will be presumed as such and it will be up to the other party to prove otherwise.  For that reason, it is important that parties offer the other party an opportunity to negotiate the contract and retain evidence of any contractual negotiations, as these will be key to proving the contract is not standard form.  If there is no real negotiation, or you have not retained evidence of such negotiation, it may be presumed that the contract is standard form and the protections will apply.

What is a small business?

Under the Bill, a small business is one that employs less than 20 persons.  It does not matter whether those persons are employed on a full time or part time basis, however casual employees are only counted if employed on a ‘regular and systematic’ basis. 

In its submission to the Treasury on the Bill, Master Builders estimated that the definition will capture over 90% of employing businesses in the building and construction industry. On that basis, it appears that the regulation of unfair contract terms should affect almost all participants in the industry.

In order to identify at an early stage whether you are dealing with a ‘small business’, it is important that you accurately identify the number of people employed by each tenderer during the tendering stage.  This can be done by imposing an obligation on each tenderer to disclose the size of its workforce at the time the tender was let, as well as its anticipated workforce at the time of contracting (if, for example, it will be required to increase its workforce to carry out the work).

The effect of this may be that contractors elect not to let work to those businesses employing less than 20 persons in order to avoid dealing with this issue.  Conversely, it could mean that small businesses are provided with a competitive advantage as they may assume contractual risk at a lower cost on the basis they will be automatically protected from unfair terms.

What is the ‘supply of goods and services’?

The ‘supply of goods and services’ is given an expansive definition and covers most contracts in the building and construction industry.  For example, a subcontract between a glazier and contractor for the supply and installation of glass windows will be a contract for the supply of glass and related items (goods) as well as for the supply of installation (services). 

What is the ‘upfront price payable’?

The ‘upfront price payable’ is defined in the Act as being the consideration that is provided under the contract and is disclosed at or before the time the contract is entered into, but does not include any other consideration that is contingent on the occurrence or non-occurrence of a particular event.  The monetary limits are $300,000, or $1,000,000 if the contract duration exceeds 12 months.

The majority of construction contracts are completed with a price that is different from the amount set out in the contract.  This is due to the multitude of ways under the contract that the price can be adjusted for variations, delays and provisional sums or prime costs.  As a result of this definition, it is likely (but not certain) that the ‘upfront price payable’ is merely the contract price and excludes the effect of any later variations.  This obviously will lead to issues with “cost plus” contracts, where the upfront price payable is likely to be uncertain and may have to be estimated at the time of contracting.

It is likely that the majority of residential construction contracts, and a large number of commercial contracts, will fall within these monetary limits.  Care should be taken at the tendering stage to note the ‘upfront price’ of the contract and, where this is uncertain, retain evidence of each parties’ views of that price as a at the time of contracting as well as any surrounding circumstances supporting those views.

When do the changes come into effect?

The amendments to the Act will come into effect from 12 November 2016 and will apply to those contracts entered into or renewed after that date, as well as any terms varied after that date. 

What is an unfair term?

There is no specific list of unfair terms within the Bill and it will be up to the courts to identify unfair terms, having regard to a number of factors set out in the Bill (as well as the existing case law relating to unfair terms in consumer contracts), including whether the term:

  • will cause a significant imbalance in the parties’ rights and obligations under the contract;
  • is not reasonably necessary to protect the legitimate interests of the party with the benefit of the term; and
  • would cause detriment (financial or otherwise) to a party if applied and relied upon.

Courts must also take into account the transparency of the term (i.e. whether it is in plain English and capable of being readily understood) and the contract as a whole when considering whether a term is unfair.                                                                                                                                    

Examples of terms that will likely be held to be unfair are unilateral variation clauses, broad indemnity clauses, broad exclusions of liability, termination for convenience clauses, and time bars (or other conditions precedent) to claiming variations or extensions of time.  These terms are ubiquitous in the construction industry and exist in almost all construction contracts. 

Where a term is held to be unfair, it will be declared void ab initio (as if it never existed), however the contract will continue to bind the parties (if possible to do so).  Therefore, it is important that contracts contain clearly drafted and operable severance clauses (allowing the court to remove void terms without affecting the remainder of the contract). 

How can I be sure I’m protected?

We strongly recommend seeking legal advice from experienced construction lawyers with a firm knowledge of these requirements.  A review should also be undertaken of all standard form contracts you intend to utilise, renew, vary, novate or assign after November 2016 to ensure that terms you rely upon are not rendered unenforceable. 

Given the obvious advantages of including (for example) time bars and termination for convenience clauses in construction contracts, contractors should also consider preparing two sets of standard form contracts with one reserved for use when contracting with small businesses.

Written by:

Andrew Kelly | Partner | +61 7 3338 7550 |

Andrew Mackintosh | Senior Associate | +61 7 3338 7551 |