Currently, section 23 of the Australian Consumer Law provides protection for consumers from unfair contract terms in standard-form consumer contracts. But what about protecting small business?

As of 12 November 2016, the current unfair contract term protections for consumers will be extended to include small business contracts as well. This change will have a significant effect on the building and construction industry but amounts to a double-edged sword for builders, as the protection against unfair terms cuts both ways. Where the law applies, a builder will be protected from a Principal’s unfair terms and a sub-contractor against the builder’s.

When do the unfair contract term protections for small business apply?

For the unfair contract term protections to apply to a contract:
i. At least one of the entities contracting employs fewer than 20 people;
ii. The contract must be a “standard form” contract; and
iii. The “upfront price” must be less than:
a. $300,000 if the contract term is 12 months or fewer; or
b. $1,000,000 if the contract term is over 12 months.

“Upfront price” means the amount disclosed to the other party before, or when, the contract is entered into and typically refers to the fixed price portion of a contract price. For instance, where a builder has fewer than 20 employees and enters into a schedule of rates contract (where the upfront price is less than the applicable cap), then regardless of the eventual contract price, or the size of the other party, the unfair contract terms provisions will apply.

The Australian Consumer Law does not specifically define what a “standard form” contract is, but provides principles that a court must take into account at section 27(2). Basically, a standard form contract is offered as take-it-or-leave-it basis. The factors that must be taken into account by the court when determining whether a contract is a “standard form” include: whether the contract has been prepared by one party prior to discussions; whether one party was required to either to accept or reject the terms; whether there substantial negotiation; and whether the contract takes into account the specific characteristics of the parties or circumstances. For instance, contracts included in a tender process would most likely be considered “standard form”.

What’s “unfair”?

A term is unfair if: it would cause a significant imbalance in the parties’ rights and obligations; it would cause detriment (whether financial or otherwise) to a party; and it is not reasonably necessary in order to protect the legitimate interests of the party relying on the term. However, terms dealing with the price, the subject matter/scope or terms required by law are excluded from the operation of the provisions.

Examples of types of unfair contract terms can be found at section 25 (1) of the Australian Consumer Law:

a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
e) a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
g) a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
h) a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
i) a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
j) a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
k) a term that limits, or has the effect of limiting, one party’s right to sue another party;
l) a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
m) a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; or
n) a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.

In general, clauses which give mutual rights; are clearly drafted and understandable; and can be shown to be reasonably necessary in order to protect the legitimate interests of the party relying on the term are unlikely to be considered unfair.

Enforcement

A small business can seek a declaration at court that a term is unfair. However, it is more likely that this would be raised during a dispute between parties to a contract. The ACCC or ASIC can also investigate and commence an action. The effect of having a term declared unfair is that the term is severed from the contract. This means that if the contract can still operate without the unfair term, it will. Additionally, the party seeking to impose the unfair term may, depending on the particular circumstances, be found to have engaged in unconscionable or misleading and deceptive conduct.

What should our members do?

It is strongly recommended that any contracts which are likely to be caught by the unfair contract term provisions are reviewed by a suitably experienced lawyer.

If you would like to know more, call the Master Builders’ Legal Department on (03) 9411 4555.