Unfair Contract Terms in Construction Contracts: Are you aware of the risks?

by | 19 Jun, 2024

If you work in the construction industry as a developer, builder or subcontractor, it is highly likely that the newly expanded unfair contract term (UCT) regime will apply to you. The introduction of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (the Act) heavily expanded the scope of the UCT regime and created new, heavier penalty provisions. The penalty provisions set out in the act amend those found in Schedule 2 of the Competition and Consumer Act 2010 (Cth). 

 The construction industry’s use of standard contracts, engagement of small businesses through subcontractors and regular interaction with consumers means that the risk of liability from the UCT regime is high. 

The Unfair Contract Term Regime

The amendments to the UCT regime by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) commenced on 9 December 2023. 

As set out in the Act, a contract term is unfair if:  

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

All three elements must be proved by an applicant for a court to find the term unfair. The court is allowed to consider any factors it deems relevant but must consider the extent to which the term is transparent and the contract as a whole. Following the Act’s introduction, the maximum penalties for corporations that enforce an unfair contract term is now the greater of $50,000,000, three times the value of the benefit received or 30% of the company’s adjusted turnover during the breach period. 

What is a standard form contract?

The Act clarifies that a person contravenes the UCT regime if the unfair contract term applied, or relied on, is a term of a standard form contract. 

In order to define what a standard form contract is, the court is able to take into account any factor. However, they must consider the following factors: 

  1. the balance of bargaining power;
  2. whether the contract was prepared by one party;
  3. whether the other party was required to accept or reject the contract in the form presented;
  4. whether the other party was permitted to negotiate the contract; and
  5. whether the terms take into account any specific transaction or party details.

For example, if you are a low volume residential home builder then the home building contracts that your clients sign may still constitute a standard contract despite only being used every so often. 

Now, courts are permitted by law to determine a standard form contract despite the existence of:  

  1. an opportunity for a party to negotiate changes to terms of the contract that are minor or insubstantial;
  2. an opportunity for a party to select a term from a range of options determined by another party; or
  3. an opportunity for a party to another contract to negotiate terms of the other contract.

As an example from a builder’s perspective, even if your home building contract allows for the homeowner to select from a range of terms, or if you give one homeowner the power to negotiate but another home owner does not have power to negotiate, your contract may still be a standard term contract. 

Who does the UCT regime apply to and what’s changed?

The UCT regime applies to small business contracts and consumer contracts. 

A contract is a consumer contract if the contract is for a supply of goods or services or a sale or grant of an interest in land, and the individual who is acquiring the good, service or interest acquires it predominantly for personal, domestic or household use or consumption. Examples may include residential leases, home building insurance contracts or home building contracts. 

Following the Act coming into effect, the definition of small business contract was changed to a far wider scope. The definition of a small business is now a business that employs fewer than 100 persons or has a turnover of less than $10,000,000. There is no longer a price cap on the contract price, meaning that any contract regardless of the price may be subject to the UCT regime

Next Steps

As a result of these changes, it is highly likely that even if you or your company are not a small business, the party on the other side may be. This means that the UCT regime along with its associated penalty provisions may apply to your contractual arrangements. For example, in subcontractor – head contractor relationships where the subcontractor is likely a small business 

In the alternative, you may be one of these small businesses who have previously been affected by unfair contract terms, and these amendments may provide some additional leverage to ensure that your contracts remain fair. 

To ensure that you as a business are protected from these changes, we recommend: 

  1. reviewing your contracts that fit the standard term contract definition for any unfair contract terms; and
  2. reviewing your client or customer base to assess whether they (or you) have less than 100 employees or an annual turnover of less than $10,000,000.00.

 

If you have any questions, please contact the team at Keighran Legal + Advisory.

 

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