Wider reach and new penalties for breach of the unfair contract terms regime to impact the construction industry

Broader definition of a “small business”

The laws apply to small business contracts, which are contracts for the supply of goods or services, or the sale of a grant of an interest in land, where at least one party is a small business. The reforms broaden the definition of “small business”:

Broader definition of a ‘standard form contract’

Another change relates to how a court decides whether a contract is a “standard form contract”. Under the reforms, in addition to the matters a court must already take into account in deciding whether a contract is a standard form contract, a court must also take into account whether one of the parties has made another contract, in the same or substantially similar terms; and, if so, how many such contracts that party has made.

The reforms also provide that a court may decide that a contract is a standard form contract despite there being an opportunity for a party to do any of the following:

• negotiate minor or insubstantial changes to terms;
• select a term from a range of options; or
• negotiate terms of another contract.

The concept of “standard form contracts” is not limited to unamended contracts produced by industry associations such as Standards Australia, but is likely to include any amended or bespoke form of contract that is prepared by one party and presented to the other party on a take it or leave it basis, or where the other party is not given an effective opportunity to negotiate the contract terms.

New penalties for unfair contract terms

Currently a contractual term found to be unfair is void, but there are no pecuniary penalties for the party trying to enforce the term. Under the reforms, in addition to the term being void, substantial pecuniary penalties will apply to a person who proposes, applies or relies on an unfair term.

For a corporation, the potential maximum penalty for each unfair term will be the greater of:

• AUD $50 million;
• 3 times the value of the benefit (if the court can determine the value of the benefit); or
• 30% of the adjusted turnover during the breach turnover period (if the court cannot determine the value of the benefit).

An individual who has aided, abetted, counselled or procured or been knowingly concerned in proposing, applying or relying on an unfair term may also be exposed to a penalty of up to AUD $2.5 million for each unfair term. Therefore, company officers and senior managers will also be at risk when the reforms come into force.

The court will have a range of other remedies available, including making declaratory orders against the advantaged party to redress, prevent or reduce loss or damage to the other party (for example, varying the contract).

When is a contract term unfair?

Under the ACL, a term of a small business contract is unfair if it:

• would cause a significant imbalance in the parties’ rights and obligations under the contract;
• is not reasonably necessary to protect the legitimate interests of the advantaged party; and
• would cause detriment (whether financial or otherwise) to the small business if relied on.

In deciding whether a term is unfair a court must take into account the extent to which the term is transparent and the contract as a whole. The ACL provides a list of examples of provisions that may be unfair.¹

In August 2022, the Federal Court handed down judgment in Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928. Some of the unfair terms identified in the judgment that are sometimes seen in construction industry contracts include automatic renewals clauses, unilateral variation clauses, and uneven limitation of liability, assignment and termination regimes. “No reliance” clauses, requiring agreement by one party that it has read extraneous documents not provided by the other party and excluding liability for other pre-contractual representations, were also found to be unfair in this case.

Some other types of clauses commonly seen in construction industry contracts which may be considered unfair (depending on the contract as a whole) are unreasonable time bars, broad rights of recourse to performance security and termination for convenience clauses without appropriate compensation.

Compliance with the unfair contract terms provisions is challenging, because many clauses commonly used in construction industry contracts could be considered unfair by the Australian Competition and Consumer Commission (ACCC). However, a risk mitigation strategy can greatly reduce the risk of the ACCC deciding to take action in relation to a contract term. This strategy may include reviewing relevant contracts, obtaining expert legal advice on potentially affected contract terms, and recording the outcomes of the review process, such as amendments made to some terms and reasons for decisions made not to amend other terms.

Conclusion

During the grace period before commencement of the reforms, we recommend that construction industry participants consider:

• which of their contracting arrangements may be caught by the expanded definition of “small business contracts” (for example subcontracts, supply contracts and consultancy contracts);
• procurement/ contracting procedures and whether these minimise the risk of contracts being found to be standard form contracts; and
• carrying out a contract review and obtaining expert legal advice on potentially unfair terms, to minimise the risks posed by the reforms.