Builders beware: how amendments to the unfair contract terms regime will affect the construction industry - Contracts and Commercial Law

From 10 November 2023, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) will effect sweeping amendments to the unfair contract terms regime in the Australian Consumer Law (the UCT law). These amendments will not only greatly increase the number of contracts entered into within the construction and building services industries likely to be subject to the UCT law, but introduce significant penalties and grant additional powers to the courts to enforce compliance with the amended regime.

In advance of the amendments to the UCT law coming into effect in 2023, participants in the construction and building services industries should take time to:

become familiar with the UCT law;
carefully consider how the amendments to the UCT law will affect their contracting approach; and
take steps to review, assess and amend their contract templates and contracting processes (even if they have already been subject to an earlier UCT review).

Corrs considered the amendments to the UCT law in detail in a previous Insight, available here.

What contracts will be subject to the amended UCT law?

The UCT law applies to 'consumer contracts' and 'small business contracts' that are 'standard form contracts'.

Even though the amendments to the UCT law will not change the definition of 'consumer contract', changes to the definitions of 'small business contract' and 'standard form contract' could result in a larger number of public and private sector construction contracts, subcontracts, supply agreements and services agreements becoming subject to the UCT law. This will create risks that Principals, Contractors and Subcontractors may not have considered or accounted for. The amended UCT law will apply to:

contracts made on or after the commencement of the relevant amendments on 10 November 2023;
existing contracts that are renewed on or after that date; and
terms of an existing contract that are varied on or after that date.

Amendments to definition of 'small business contract'

As amended, a 'small business contract' is a contract for a supply of goods or services, or a sale or grant of an interest in land, where at least one party satisfies either or both of the following conditions:

a party makes the contract in the course of carrying on a business and at a time when the party employs fewer than 100 persons (excluding casual employees, unless employed on a regular and systematic basis); and/or
a party's turnover for the party's last income year that ended at or before the time the contract is made, is less than A$10 million.

In the construction and building services industries, this amended definition of 'small business contract' may capture works contracts, consultancy agreements, supply agreements and subcontracts entered into by public and private sector entities carrying on a business, including government departments and entities (within all three tiers of government) and small to medium sized Australian subcontractors, consultants (including architects and engineers), tradespersons and suppliers.

Amendments to scope of 'standard form contract'

To date, when determining whether a contract is a 'standard form contract', courts have been required to consider whether one party was required to reject or accept the terms of a contract in the form it was presented, and whether they were given an opportunity to negotiate the terms of the contract. There is also a statutory presumption that a contract is a 'standard form contract' unless the respondent to any claim under the UCT law proves otherwise.

The amendments to the UCT law provide that a contract may be determined to be a 'standard form contract' despite there being an opportunity for a party to:

negotiate minor or insubstantial changes;
select a term from a range of options; and/or
negotiate terms of another contract.

In addition, the amendments will require the courts to take into account how often a party has used contracts containing substantially the same terms. Essentially, the more often a party uses contracts with terms that are substantially the same (e.g. Australian Standard contracts), the more likely a court will consider that contract to be a 'standard form contract'.

Standard form contracts are widely used throughout the construction and building services industries, including by government and industry associations. Any template contracts that are used on a take it or leave it basis (or with which one party uses its bargaining power to reject departures to the terms of template contracts) are likely to be 'standard form contracts' for the purposes of the UCT law.

When is a contract term 'unfair'?

The UCT law states that a term is 'unfair' if it:

would cause a significant imbalance in the parties' rights and obligations arising under the contract;
is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The UCT law provides some guidance and lists examples of terms that may be unfair. These include, but are not limited to, terms that permit or have the effect of permitting a party to unilaterally:

vary the terms of the contract;
avoid or limit performance of the contract;
assign the contract to the detriment of another party without that other party's consent;
vary the upfront price payable under the contract without the right of another party to terminate the contract; and
vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract.

This list of examples is not exhaustive and only provides a guide to the types of terms that may be unfair. Such terms may or may not be found by a court to be unfair depending on a range of matters, including consideration of the contract as a whole. A thorough analysis of the relevant contract term (having reference to the test in the UCT law) will be required to determine if it is unfair.

Against this context, a range of terms commonly seen in contracts entered into in the construction and building services industries should be carefully considered. These could include:

automatic renewal clauses;
time bars on claims;
liquidated damages regimes;
assignment without consent clauses; and
termination for convenience without compensation clauses.

If such clauses are used in a manner that creates significant imbalances in the rights and obligations of the parties, and go beyond what is reasonably necessary to protect the legitimate interests of the party seeking to rely on the clause, these could be considered to be unfair by the courts.

What are the consequences of proposing, applying or relying on unfair terms?

Private disputes

Given that the main consequence of a term being declared unfair is that it is rendered void (i.e. unenforceable), a party in a distressed project may seek to rely on the UCT law as a basis to obtain a declaration that an unfavourable term is void as an unfair term. This may be done strategically in respect of variation or extension of time regimes in circumstances where parties seek to claim relief.

Similar arguments have been made in respect of security of payment regimes. For example, where a term prescribing a process for payment is found to be inconsistent with the time periods for provision of payment claims and payment schedules under a security of payment regime, that term may be found to be void.

Penalties and declaratory relief

The amendments to the UCT law will also introduce significant penalties for breaching the UCT law that substantially increase the risk of non-compliance with the UCT law. Further, under the amended law, a court may make declaratory orders to:

redress, in whole or in part, loss or damage that has been caused, or to prevent loss or damage that is likely to be caused;
on application by the ACCC, prevent a term that is the same or substantially similar to an unfair term from being included in future contracts; or
on application by the ACCC, prevent or reduce loss or damage which is likely to be caused to any person by the unfair term.

A court may also order injunctions restraining parties from:

entering into any future contract that contains a term that is the same or substantially similar to an unfair term; or
applying or relying on a term in any existing contract that is the same or substantially similar to an unfair term (whether or not the contract is before the court).

These are significant new powers which could affect the use of particular types of terms in future standard form contracts. For example, the ACCC could apply to a court to prevent particular time bars in standard form construction contracts (whether applying to entitlements to claim extensions of time, cost relief or otherwise) from use in standard form contracts not yet entered into.

Compliance with the Australian Consumer Law

Importantly, parties are not able to contract out of the UCT law or the Australian Consumer Law. It is therefore not open to parties to simply dispose of risks arising under the UCT law by including a broad-brush exclusion or limitation of liability in relevant contracts. In particular, careful consideration should be given to how common terms restricting reliance and limiting liability are impacted by the UCT law.

Where to next?

As mentioned earlier, the amendments to the UCT law will commence on 10 November 2023. This provides a critical window for participants in the construction and building services industries to review their current contract templates and contracting processes.

To do so, collaboration between commercial and legal teams is desirable to ensure a common understanding is reached on:

when the UCT law will and will not apply to a contract;
what terms can and cannot be included in standard form contracts so as to ensure compliance with the UCT law; and
appropriate conduct of procurement processes to ensure compliance with consumer laws more generally.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.