ACL Unfair Contract Terms Impact Construction Contractors and Suppliers
2 mins reading time
Amendments to the Unfair Contract Terms (UCT) regime (under Schedule 2 – Australian Consumer Law of the Competition and Consumer Act 2010 (Cth) (ACL)) came into effect on 9 November 2023. Their broader application renders UCT’s illegal, attracting substantial penalties and stronger remedies. The amended regime is likely to have a significant impact on standard form contracts, which are widely used within the construction industry.
These reforms are applicable to standard form consumer contracts and small business contracts entered into, renewed, or varied from 9 November 2023.
Expansion of ‘small business’ definition: what does it mean?
‘Small business’ was previously defined as a business that employs fewer than 20 people. The amended regime has expanded this definition to capture businesses with less than 100 employees or less than $10 million in annual turnover in the previous income year. The effect of this amendment broadens the application of UCT’s to more businesses, meaning an increased number of subcontractors and suppliers that operate under standard form contracts will be impacted.
Standard form contracts
If a party alleges that a contract is standard form, it is presumed to be one unless proven otherwise.[1]
There is no universal rule for what does, or does not, constitute a ‘standard form contract’ — and this term is not clearly defined in the ACL. Accordingly, whether or not a contract is a ‘standard form contract’ will be a question for the Courts to determine.
The reforms have expanded the criteria for determining whether a contract is standard form. The ACL now provides that a contract can be considered standard form, despite there being opportunity for a party:
- to negotiate changes to terms that are minor or insubstantial in effect;
- to select a term from a range of options determined by another party; or
- in another contract or proposed contract to negotiate terms of the other contract/proposed contract.[2]
Courts must also consider how often a party uses contracts containing substantially the same terms.
Large contractors and key participants in the construction industry rely heavily on standard form documentation (such as Australian Standard contracts). It is important to assess whether one party uses its bargaining power to reject changes to these commonly used template contracts.
Principals and contractors often amend ‘standard forms’ to create contracts tailored to their projects and commercial risk allocation requirements. Such amended standard contracts, and even bespoke contracts, could fall under the UCT regime if they are offered on a ‘take it, or leave it’ basis. Accordingly, carefully drafted departure tables may well provide important evidence as to the negotiation process and positioning.
Unfair contract term clauses
The test for determining whether a contract term is unfair under the ACL was not amended by the recent changes and it remains that the following must be satisfied –
- the term must cause significant imbalance in the party’s rights and obligations under the contract;
- the term is not reasonably necessary to protect the legitimate interests of the proposer; and
- the term would cause detriment (financial or otherwise) to the other party if it were to be applied or relied upon.[3]
Several contract terms commonly used in construction and building services contracts may well be deemed to be unfair, if not carefully considered. Examples include:
- time bar clauses;
- termination for convenience clauses;
- unbalanced indemnity clauses, liability caps and liquidated damages clauses.
Next steps
To avoid UCT penalties when drafting contracts, it is essential to consider the terms from both party’s point of view, ensure counter-balancing terms are included and allow for reasonable negotiation of terms (whether minor or substantial). This approach will minimise the risk of including terms that may be considered unfair and in contravention of the UCT regime. Documenting the negotiation process is again, strongly recommended to reduce the potential impact of the regime.
Need help?
Contact our experienced project team to assist you with your contract drafting and negotiation processes.
[1] Competition and Consumer Act 2010, Schedule 2 The Australian Consumer Law, section 27(1) (‘ACL’).
[2] ACL section 27(3).
[3] ACL section 24(1).
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ACL Unfair Contract Terms Impact Construction Contractors and Suppliers
Amendments to the Unfair Contract Terms (UCT) regime (under Schedule 2 – Australian Consumer Law of the Competition and Consumer Act 2010 (Cth) (ACL)) came into effect on 9 November 2023. Their broader application renders UCT’s illegal, attracting substantial penalties and stronger remedies. The amended regime is likely to have a significant impact on standard form contracts, which are widely used within the construction industry.
These reforms are applicable to standard form consumer contracts and small business contracts entered into, renewed, or varied from 9 November 2023.
Expansion of ‘small business’ definition: what does it mean?
‘Small business’ was previously defined as a business that employs fewer than 20 people. The amended regime has expanded this definition to capture businesses with less than 100 employees or less than $10 million in annual turnover in the previous income year. The effect of this amendment broadens the application of UCT’s to more businesses, meaning an increased number of subcontractors and suppliers that operate under standard form contracts will be impacted.
Standard form contracts
If a party alleges that a contract is standard form, it is presumed to be one unless proven otherwise.[1]
There is no universal rule for what does, or does not, constitute a ‘standard form contract’ — and this term is not clearly defined in the ACL. Accordingly, whether or not a contract is a ‘standard form contract’ will be a question for the Courts to determine.
The reforms have expanded the criteria for determining whether a contract is standard form. The ACL now provides that a contract can be considered standard form, despite there being opportunity for a party:
- to negotiate changes to terms that are minor or insubstantial in effect;
- to select a term from a range of options determined by another party; or
- in another contract or proposed contract to negotiate terms of the other contract/proposed contract.[2]
Courts must also consider how often a party uses contracts containing substantially the same terms.
Large contractors and key participants in the construction industry rely heavily on standard form documentation (such as Australian Standard contracts). It is important to assess whether one party uses its bargaining power to reject changes to these commonly used template contracts.
Principals and contractors often amend ‘standard forms’ to create contracts tailored to their projects and commercial risk allocation requirements. Such amended standard contracts, and even bespoke contracts, could fall under the UCT regime if they are offered on a ‘take it, or leave it’ basis. Accordingly, carefully drafted departure tables may well provide important evidence as to the negotiation process and positioning.
Unfair contract term clauses
The test for determining whether a contract term is unfair under the ACL was not amended by the recent changes and it remains that the following must be satisfied –
- the term must cause significant imbalance in the party’s rights and obligations under the contract;
- the term is not reasonably necessary to protect the legitimate interests of the proposer; and
- the term would cause detriment (financial or otherwise) to the other party if it were to be applied or relied upon.[3]
Several contract terms commonly used in construction and building services contracts may well be deemed to be unfair, if not carefully considered. Examples include:
- time bar clauses;
- termination for convenience clauses;
- unbalanced indemnity clauses, liability caps and liquidated damages clauses.
Next steps
To avoid UCT penalties when drafting contracts, it is essential to consider the terms from both party’s point of view, ensure counter-balancing terms are included and allow for reasonable negotiation of terms (whether minor or substantial). This approach will minimise the risk of including terms that may be considered unfair and in contravention of the UCT regime. Documenting the negotiation process is again, strongly recommended to reduce the potential impact of the regime.
Need help?
Contact our experienced project team to assist you with your contract drafting and negotiation processes.
[1] Competition and Consumer Act 2010, Schedule 2 The Australian Consumer Law, section 27(1) (‘ACL’).
[2] ACL section 27(3).
[3] ACL section 24(1).