Introduction
Participants in the Australian construction industry may need to fundamentally rethink their approach when entering into certain contracts following amendments to the unfair contract terms (UCT) provisions of the Australian Consumer Law (ACL) 1 that came into effect in November 2023.The position prior to November 2023
Back in the day, a party to an Australian construction contract that complained that the contract contained an "unfair" term was clutching at straws. 2 Subject to limited exceptions, 3 Courts were not concerned by unfair terms in commercial contracts.That position was altered to an extent in November 2016, when the scope of the UCT regime (which, until that time, had only applied to "consumer contracts") was expanded to apply to certain "small business contracts". 4
After November 2016, certain "unfair" terms in "small business contracts" that were "standard form contracts" were void.5 A contract containing an unfair term continued to bind the parties if it could operate without the unfair term.
As a result, parties negotiating a contract could propose a term that may have been unfair, comfortable in the knowledge that, at worst, that term might be inoperative.
The November 2023 amendments
Amendments to the UCT regime that came into effect on 9 November 2023 altered the equation for a party proposing or administering a "small businesses contract" that is a "standard form contract" and that that contains a term that is "unfair". Unfair terms are still void. 6 However, now, a person who proposed the unfair term 7 or who attempts to apply or rely on an unfair term 8 may potentially be liable for a substantial penalty. 9"Substantial" penalties
The maximum penalties provided for by the new UCT regime are potentially crushing. In the case of:
- an individual, a penalty of up to $2,500,000 may apply; and
- a corporation, a penalty of up to $50,000,000, or 30% of the corporation's adjusted turnover during the breach turnover period may apply.
As a result, it would be imprudent for a party proposing a standard form, small business contract to include an unfair term "just to see" if that term is rejected by the other side.
What is a small business contract?
For the purposes of the new UCT regime, a "small business contract" is a contract to which at least one party employs fewer than 100 people or had a turnover the previous year of less than $10,000,000.10 Ordinarily, the party which receives the contract has the relevant characteristics. However, equally, a contract qualifies if the party with those characteristics proposes the contract.
What is a standard form contract?
A contract proposed by a party may be caught by the definition of a "standard form contract" even if the other party is given an opportunity to negotiate changes,11 select terms from a range of options 12 or negotiate terms. 13
What types of terms might be unfair?
The UCT provisions of the ACL contain guidance on the meaning of "unfair"14 and examples of unfair terms.15 A term in a small business contract will be unfair if it:16
- would cause a significant imbalance in the parties’ rights;
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it; and
- would cause detriment to a party if it were applied or relied on.
In the construction context, the new UCT regime has the potential to impact clauses such as:
- strict time bars or preconditions to claiming payment for variations and extension of time;
- onerous notification procedures; and
- one-sided limitation of liability or exclusion clauses.
New approaches are needed
The 2023 amendments to the UCT regime are a significant development. A party which is proposing to enter into a standard form, small business contract needs to give consideration to whether any term it contains is unfair, and if so, whether that term is really necessary. A party which may wish to rely on a clause in a standard form, small business contract entered into on or after 9 November 2023 needs to consider whether that term may be unfair.
Authors: Lex Orange & Stephen Kuhn
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References
1 The ACL is contained in Schedule 2 to the Competition and Consumer Act 2010 (Cth). Part 2-3 of the ACL contains the key UCT provisions.
2 The parties to a commercial contract, it was thought, were capable of looking after their own interests.
3 See for example the Contracts Review Act 1980 (NSW) and the Fair Trading Act 1999 (Vic).
4 "Small business contract" was a defined term in the ACL following the 2016 amendments. The scope of what constitutes a "small business contract" has subsequently grown, so that only its current definition will be given below.
5 ACL s 23(1). The terms "small business contract", standard form contract" and "unfair" are defined in the ACL. The current definitions of those terms will be discussed further below.
6 CCA s 23(1), (2).
7 CCA s 23(2A).
8 CCA s 23(2C). The prohibition on relying on an unfair term applies to contracts entered into after the November 2023 amendments to the UCT regime came into force.
9 See CCA s 224. The word "substantial" is perhaps an understatement.
10 Previously the UCT regime only applied to contracts for which the upfront price payable was below a prescribed threshold. No such restriction is contained in the newest incarnation of the UTC regime. Due to the prevalence of complex corporate group structures in the construction industry, there is scope for a contract with a subsidiary (say) of a corporate giant to be captured by that definition.
11 ACL s 27(3)(a).
12 ACL s 27(3)(b).
13 ACL s 27(3)(c). Moreover, if a party alleges a contract is a standard form contract, the Court will presume that is the case and it is up to the other party to prove otherwise: ACL s 27(1).
14 ACL s 24.
15 ACL s 25.
16 ACL s 24(1).
