Do Your Contracts Contain ‘Unfair Terms’?

Planned Cover, Jackson McDonald , 16 February 2017

The new Unfair Contract Terms law has the potential to impact a broad range of construction industry contracts, including those dealing with the supply of services provided by architects. Unfair contract terms provisions will apply to standard form ‘small business contracts’ entered into on or after 12 November 2016 and contracts that are renewed, or varied, after 12 November 2016.

During calls for public comment, it appeared that industry representatives of the architecture profession held some hope that the proposed legislative amendments addressing unfair terms in small business contracts may address issues such as:

  • perceived inequities in tendering processes (for example high number of tenderers, high costs of tendering, requirement to provide intellectual property without recompense);
  • unreasonable requirements around assumption of liability by, and indemnities sought from, architects;
  • (for those states affected by the ability to contract out of proportionate liability) the imposition on an architect of full liability (for negligence) despite the existence of concurrent tortfeasors.

These, among others, were considered as possible issues that might be addressed. Now that the legislation is here, has it responded to any of those issues? The answer is, in part, yes. 

What is the new law?

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 extends the consumer “unfair contract terms” protections to small businesses which are a party to a “small business contract”. This law took effect on 12 November 2016. The new law applies to contracts entered into after this date, and to contracts that are renewed or varied after this date (but note, a reference to ‘varied’ is a reference to variation of a term of a contract, not merely the fact that a variation mechanism in a contract has been triggered).

Does this apply to your contracts?

A ‘small business contract’, to which the new law relates, must be a standard form contract where, at the time it is entered into:

  • at least one party is a ‘small business’, being a business that employs less than 20 persons (each full-time and part-time employee is counted as one person, and note that there are provisions describing how to deal with casual employees in this count); and
  • the ‘upfront price’ payable under the contract does not exceed either $300,000, or $1,000,000 if its duration is more than 12 months.

In determining whether a contract is a ‘standard form contract’ a court may consider any matter, but will take into account aspects including the relative bargaining power of the parties, whether one party prepared and offered the contract prior to any specific discussions and the offer of the contract by one party on ‘take it or leave it’ terms. A reference to ‘standard form’ does not mean that it has to be a document issued as a standard contract (for example by an industry body) – the term ‘standard form’ refers more to the basis upon which it is offered.

What terms may be ‘unfair’?

Under the legislation a term is ‘unfair’ if it:

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

It is not clear what terms in standard form construction contracts might be considered to be ‘unfair’ – depending upon the circumstances, in the context of architecture consultancy agreements they could include unreasonably short time bars (for making claims); unilateral right to terminate (without appropriate compensation), unilateral rights to assess claims and bind the other party; requiring a party to assume unreasonable liability for items outside of its control.

Exclusions and exceptions

The legislative regime excludes some categories of terms including, relevantly, terms that define the main subject matter of the contract, terms that set the upfront price payable, and terms that are required or expressly permitted by a law of the Commonwealth, or a state or Territory. Some categories of contracts are also excluded from the regime. 

Why does it matter?

If a term in a standard form small business contract is found to be ‘unfair’, the term will be void – in other words non-binding. If the contract cannot continue without the unfair term, then the consequence may be that the entire contract is void.

If a business seeks to impose an unfair term in circumstances captured by this regime, it runs the risk that the term is declared void (by the Court), or is considered as being void by an adjudicator or arbitrator (on the basis that the new law states that an unfair term is void). If an architecture practice is a ‘small business’, then that practice should consider whether the contracts it enters into, renews or amends after 12 November 2016 may contain terms that could be said to be ‘unfair’ and whether such terms can be challenged and/or negotiated up front.

It is unlikely that the new legislation will respond to concerns about the contracting out of proportionate liability legislation – given the express exclusion of terms which are expressly permitted by law (some proportionate liability legislation expressly allows for contracting out). Further, the issues around unfair tendering practices are not likely to be caught, but of course will depend on the specific circumstances in each particular case. The new legislation does not protect a bad bargain, but there are some positive outcomes which will benefit small business.

Both sides of this contracting arrangement should therefore be aware of the issues and opportunities raised by this new legislation. 

Disclaimer: This information is intended as a guideline only and should not be relied upon as legal advice. If you require legal advice, please contact Jackson McDonald.

This article was prepared by Jackson McDonald for Planned Cover and is republished here courtesy of Planned Cover. Isla McRobbie and Matthew Lang at Jackson McDonald can provide assistance in this area.

Planned Cover is an ACA National Corporate PartnerThe ACA submission on unfair contracts can be found here. 

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