Australia’s unfair contract terms reforms could affect construction subcontracts

The reforms are set out in the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), known as the ‘UCT Act’. The changes will apply to new contracts – including renewals and contract amendments – that are agreed from 9 November 2023.

Removal of the value threshold for standard form contracts

Currently, the UCT Act only applies to standard form contracts with businesses that have fewer than 20 employees and with a maximum payment of A$300,000 upfront or A$1,000,000 for contracts over 12 months’ duration. The reforms significantly expand this, removing the value threshold and applying the legislation to any standard form contract with a business that has fewer than 100 employees, or a yearly turnover of less than A$10m.

This change will see a large number of subcontractors and suppliers in the construction and infrastructure sector caught within the ambit of the legislation. A failure to comply could see part or all of a company’s standard form contracts declared void, claims for damages and relief brought by the disadvantaged counterparty and significant penalties imposed by the regulator.

Prohibition on unfair contract terms

When the UCT Act comes into force, both the inclusion of an unfair contract term in a standard form contract and the application or reliance on such a term will be prohibited. Penalties have increased five-fold, with corporations now subject to a maximum penalty equal to the greater of A$50m, three times the value of the benefit obtained or 30% of turnover during the relevant breach period.

If a court declares a standard form contract term to be unfair, the UCT Act retains the existing automatic voiding provisions. However, the court’s express powers have been expanded to make orders to void, vary or refuse to enforce part or all of the relevant contract. The court’s powers to issue public warning notices and make orders disqualifying a person from managing a corporation are also extended, and will allow the Australian Competition and Consumer Commission (ACCC) and Australian Securities and Investments Commission (ASIC) to apply for adverse publicity orders.

The reforms also allow courts to make orders preventing a term that is the same or substantially similar in effect to a term that has been declared as unfair from being included in any future standard form contracts, and to prevent or reduce loss or damage which may be caused to any person – whether or not that person is party to proceedings – in relation to such a term. This may include providing injunctive relief.

What is a standard form contract?

The Australian Consumer Law (ACL) does not clearly define a ‘standard form contract’, leaving this to the courts. The starting point is that, if a party to a proceeding alleges that a contract is a standard form contract, the author of the contract bears the onus of proving otherwise. 

The current legislation does specify factors courts must take into account without limiting any other factors the court might consider relevant. These factors include:

• the level of bargaining power vested in one party;
• whether the contract was prepared by one party prior to the relevant transaction;
• whether a party was required to accept or reject terms in the form presented;
• whether a party was given an effective negotiation opportunity;
• whether the terms take into account the specific characteristics of another party or the particular transaction.

  While the courts have previously found that a standard form contract will usually be one established by terms and conditions used on a repeat basis without individual negotiation in connection with the supply of goods or services, they have also noted it is possible for contracts that include some level of customisation to be characterised as standard form contracts.

  The recent changes broaden this by expressly requiring courts to consider the repeat usage of a contract form and expressly permitting the courts to designate a contract as a standard form contract despite there being an opportunity for:

• a party to negotiate minor or insubstantial contract terms;
• a party to select a term from a range of options or alternatives presented to them; or
• a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

Accordingly, unless the courts choose to confirm otherwise, standard form construction subcontracts and other standardised procurement templates will likely be caught by the revised legislation. 

What makes a contract term ‘unfair’?

A term is considered ‘unfair’ if it would cause a significant imbalance in the parties’ rights and obligations, it is not reasonably necessary to protect the legitimate interests of the advantaged party, and it causes detriment if it were to be applied or relied upon. In assessing fairness, a court must take into account the extent to which the term is transparent, and consider the provision in the context of the contract as a whole.

The UCT Act introduces a new rebuttable presumption that if a term of a prior contract has been found to be unfair in previous court proceedings, that term – and any substantially similar term – will be presumed to be unfair in a subsequent proceeding.

Examples of terms which may be considered unfair include terms that:

• allow only one party to avoid or limit performance of, terminate or vary the terms of the contract;
• penalise only one party for a breach or termination of the contract, or allow one party unilaterally to determine whether the contract has been breached;
• allow only one party to renew or elect not to renew the contract;
• limit, or have the effect of limiting, one party’s vicarious liability for its agents;
• allow one party to assign the contract without consent;
• limit, or have the effect of limiting, one party’s right to sue another party;

Ultimately, whether a contract term is to be considered unfair will need to be assessed by courts on a case-by-case basis. Legal commentary and judicial decisions have pointed to certain types of clauses as potentially unfair including broad indemnities, automatic ‘roll-over’ or renewal clauses, disproportionate termination rights, excessive termination fees, extreme time bars, one-sided liability caps, unilateral variation terms, and excessive liquidated or delay damages.

Key takeaways for the construction sector

Companies that use standard form procurement templates to procure from small and medium-sized enterprises, as is typical in the industry, should conduct a comprehensive review to exclude any unfair terms. Significant penalties and adverse legal consequences could flow from a failure to do this.

An interesting consideration for the construction and infrastructure sectors is whether courts would take into account the terms of any upstream contracts. If these have been flowed down to the relevant template, would a court elect not to construe the contract as a standard form?  Also, many standardised construction templates are drafted to ‘cover the bases’, adopting a risk allocation designed to cover typical upstream terms and so avoiding the need to customise the form each and every time. Courts may well not accept this practice as an excuse, giving rise to the potential for a significant gap risk for downstream procurement.

One way to manage this new gap risk might be for the industry to push back against unfair head contract terms on the basis of the new legislation. Principals and procuring authorities should consider their own head contract forms with this legislation in mind, even though head contracts are less likely to be standard form contracts. 

It is also unclear how adjudicators will apply the legislation in security for payment actions and whether adjudications will become the front line for testing the ambit of the legislation. This warrants further analysis, and jurisdictional challenges can be expected.

Co-written by Emily Powe of Pinsent Masons.