Legislative changes regarding unfair contract terms for small business contracts comes into effect in every state on 12 November 2016.
If you enter into agreements with contractors, consultants and suppliers that are small businesses, you should review your contracts now. Failure to do so may result in your contracts being unenforceable.
What contracts will be affected?
Contracts impacted by this change are:
(a) standard form;
(b) supplying goods or services or selling or granting an interest in land;
(c) where at least one party employs less than 20 people (including regular casual employees); and
(d) where the upfront price payable is no more than $300,000 or $1 million for a contract greater than 12 months.
How will this impact the construction industry?
The construction industry will be particularly affected by these changes, as:
(a) there are a large number of subcontractors, consultants and suppliers who will qualify as a small business;
(b) use of standard form contracts is the typical method of procurement in the industry;
(c) there are a number of industry-standard terms which may be found to be unfair under the new legislation; and
(d) small businesses will be able to rely upon the fast track adjudication process provided for in security of payment legislation to enforce their rights.
What is an unfair term?
Section 24(1) of the Australian Consumer Law will state that a term of a small business contract is unfair if:
(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The law requires the Court to consider the contract as a whole and the extent to which the term is transparent.
Typical construction contracts which may contain unfair terms include:
(a) Time bars;
(b) Variation clauses;
(c) Liquidated damages clauses;
(d) Termination for convenience clauses; and
(e) Limitation of liability clauses.
What happens if a term is unfair?
If a term is found to be unfair, it will be void and is not binding on the parties.
Who determines whether a term is unfair?
Ultimately, a court or tribunal can decide that a term is unfair. However, under security of payment legislation, an adjudicator is required to apply the law. This would include determining (on an interim basis) whether a standard form contract contains voidable unfair terms and whether the clauses being relied upon by either party are enforceable.
We expect that unfair terms would almost certainly be in issue in any adjudication application involving a small business.
What should you be doing?
1. Seeking advice about strategies for this legislative change will put you in the best position.
2. Have a separate suite of subcontracts, supply agreements and consultants agreements for small businesses.
3. Amend tender or other documentation so the other party warrants that they have read the definition of small business and confirm that it does or does not apply to their business. (While you cannot contract out of the Act –the party seeking to enforce it must prove they are a small business at the time of entry into the agreement).
For further advice concerning whether any of existing clauses in your contracts may be considered to be unfair, we recommend that you:
(a) contact our team to see how we can help you; and
(b) also read our 13 May 2016 update if you would like to find out more.
What happens if a term is unfair?
If a term is found to be unfair, it will be void and is not binding on the parties.
Who determines whether a term is unfair?
Ultimately, a court or tribunal can decide that a term is unfair. However, under security of payment legislation, an adjudicator is required to apply the law. This would include determining (on an interim basis) whether a standard form contract
contains voidable unfair terms and