DAVID GLINATSIS
New legislation commencing on 16 November 2016 will prohibit unfair terms in Standard Form Contracts with small businesses.
The reform is an extension of unfair contract legislation which currently applies to financial services and consumer contracts where consumers are protected from unfair terms in circumstances where they have little or no ability to negotiate the terms of their contracts.
The current reform is part of an initiative to extend the protections given to consumers to small businesses which are also vulnerable to unfair terms in Standard Form Contracts provided on a “take it or leave it basis”.
The effect of the reform is to render unenforceable, terms of the contract which a Court determines unfair.
The new unfair contract laws will have a serious impact on the construction industry and the construction supply chain, and are likely to affect Standard Form construction contracts such as Subcontracts, Supply Agreements, Consultancy Agreements, Minor Works Agreements and Purchase Orders with small businesses.
With not much time left before the new laws commence, participants in the construction industry should review Standard Form Contracts and, in particular, terms including time bars, variations, delay claims, liquidated damages and termination.
The prohibitions against unfair terms will apply to small business contracts where:
The small business protection only applies in respect of a Standard Form Contract.
The legislation, however, does not define a Standard Form Contract.
In determining whether a contract is a Standard Form, a Court must take into account whether:
Although there are clearly a variety of factors that will determine what constitutes a Standard Form Contract, the new laws are likely to apply to any form of amended or bespoke Contract that is presented on an “take it or leave it basis”.
There is no express list of “unfair terms”.
A Court, however, will consider a term to be unfair if the term:
In determining whether a business contract is unfair, a Court must take into account the extent to which the term is transparent and the Contract as a whole.
A term is transparent if the term is:
There is no list in the legislation as to what constitutes an unfair term ,however, the legislation does provide various examples of an unfair term, which include a term in a contract that permits, or has the effect of permitting one party:
a) determine whether the Contract has been breached; or
b) to interpret its meaning; or
c) to assign the Contract to the detriment of another party without that other party’s consent.
Other examples include:
In a Standard form Construction Contract, there are a number of provisions that could foreseeably be considered to be unfair and are at risk of being unenforceable.
Examples of terms which may be held by a court to be unfair in construction contracts include:
Where a term is found by Court to be unfair, the clause will be void ab initio (as if the clause never existed) and will be unenforceable.
A finding by the Court that a clause is void and unenforceable does not necessarily mean that the whole of the Contract is unenforceable.
If, however, the void clause goes to the heart of the Contract, there is a risk that the whole of the Contract can also be declared void and unenforceable.
The unfair contract legislation for small businesses has a significant implications for the construction industry from a risk, commercial and reputational point of view.
The key concern for the Construction Industry is that a term relied upon by a Principal or Head Contractor may be held to be unfair and declared void and unenforceable.
This will mean that contractual clauses once relied upon by Principals and Head Contractors to defeat claims by Subcontractors may no longer be enforceable.
Given the imminence of the commencement of the legislation, Principals and Head Contractors should, as a minimum:
a) identify when and where there is a risk that the Act may apply;
b) review and adjust how Standard form Contracts are negotiated with small business; and
c) where appropriate, dilute the harshest terms in Standard Form Contracts.
If a term of the Contract is declared void by a Court, the decision of the Court will be published. This may result in reputational damage for the Principal or Head Contractor if the Court makes findings that the Principal or Head Contractor have acted unfairly against a small business.
It may also be possible that Subcontractors may seek to take advantage of the unfair contract laws in Security of Payment adjudications.
Although only the Court has the power to declare that a term is unfair, the legislation does state that an unfair contract term is void if the terms are unfair and the contract is in a Standard Form.
It will not be surprising if Subcontractors will seek the apply the unfair contract laws in Security of Payment adjudications to overcome harsh contractual terms such as time bars which could otherwise operate to defeat payment claims.
The legislation may also empower subcontractors to be more proactively engaged in the negotiation of the terms of the Subcontract.
Kreisson has expertise and experience in advising Principals and Head Contractors as well as Subcontractors of their rights and entitlements and can provide assistance in revising and amending Standard Form Contracts and in the development of risk mitigation strategies.
This communication is sent by Kreisson Legal Pty Limited (ACN 113 986 824). This communication has been prepared for the general information of clients and professional associates of Kreisson Legal. You should not rely on the contents. It is not legal advice and should not be regarded as a substitute for legal advice. The contents may contain copyright.
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