Impact of the Unfair Contract Terms Legislation on Standard Form Construction Contracts
The impending introduction of the new small business unfair contract term legislation on 12 November 2016,1 has raised questions on whether provisions contained in standard form construction contracts may be caught under the legislation.
How will the legislation apply?
The legislation will apply to construction contracts to the extent that:
- the contract entered into is a ‘standard form’ contract;
- the other party to the contract is a ‘small business’, meaning that it employs fewer than 20 persons, excluding casuals unless they are employed on a regular or systematic basis; and
- the contract is worth less than $300,000, or for contracts which are entered into for longer than a 12 months period, less than $1,000,000.
What is a ‘Standard Form Construction Contract’?
In the construction industry, a ‘standard form contract’ is generally understood to mean a pro-forma contract published by an association, organisation, committee or government, and it is a product of negotiation or consultation with various construction industry groups.2 The most commonly used ‘standard form contracts’ in the construction industry include the Australian Standards construction contracts suite, which includes contracts such as the AS4000-1997 (General Conditions of Contract) and AS4901-1998 (sub-contract conditions).
Potential Unfair Terms in Standard Form Construction Contracts
The Australian Consumer Law (ACL) specifies that a clause is unfair if it:
- causes a significant imbalance in parties’ rights and obligations under the contract;
- is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
- it would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.
Whilst the legislation doesn't specify a meaning of what constitutes an ‘unfair term’ for the purposes of a small business contract, the ACL contains a list of terms that may be considered unfair in consumer contracts including (but not limited to) terms that permit one party the unilateral right to avoid or limit its performance under the contract or to terminate the contract.3
Some common terms used in standard form construction contracts that are potentially at risk of being declared unfair under the legislation include:
- Termination for Convenience – Such clauses normally give one party the unilateral right to terminate a contract at its option and for its own convenience, regardless of whether the other party has committed a default or breach of that contract. The unilateral right of one party to terminate the contract at its option at any time may be considered ‘unfair’.
- Superintendent or Principal Discretion – Many standard form construction contracts give the principal or its superintendent the exclusive right to make particular decisions and interpretations under the contract (such as whether the contract has been breached, whether the work is defective, or as to the value of a variation claim). Such right may be considered ‘unfair’ as it has the effect of enabling one party to unilaterally determine whether the contract has been breached or to interpret its meaning.
- Time Bars – Time bars prevent a party under the construction contract (normally the subcontractor) from being entitled to a claim for a variation or an extension of time if the claim hasn’t been brought within a certain timeframe and/or a strict notification procedure isn’t complied with as set out in the contract. A short timeframe and an onerous notification procedure may be considered ‘unfair’.
- Variations – many standard form construction contracts contain provisions that gives one party (normally the principal or head contractor) the right to unilaterally direct a variation to the scope of the work or to particular terms of the contract. Such provision can be construed as unfair as it provides one party but not the other the right to vary the terms of a contract.
Minimising implications for the construction industry?
The incoming legislation will no doubt have implications and consequences for principals and head contractors who rely on standard form construction contracts, more so than subcontractors, and who are more likely to be considered a small business for the purposes of the legislation. With this issue in mind, parties reliant on standard form construction contracts will need to consider revising terms in standard form construction contracts, and implementing workable solutions when entering into/or negotiating standard form contracts with small businesses.
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1. Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth).
2. Taylor, Alisa, ‘Fair play on the building site: How extending unfair contract term protections to small businesses will impact construction projects” (2015) 31 Building and Construction Law Journal 365 at 373.
3. Australian Consumer Law (Cth) s25.