by Sean Marriott (Counsel, Clifford Chance) and Lydia Low (Associate Clifford Chance)
As of 9 November 2023, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) significantly broadened the Australian unfair contract terms regime such that where:
- there is a consumer or small business contract;
- the contract is based on a standard form; and
- a term in the contract is unfair,
the term will be void and the responsible business can face significant penalties for the inclusion of each such term under the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) (together, the New UCT Regime) [1]
The broadened scope of the New UCT Regime
The broad application of the New UCT Regime is primarily due to the wider scope of what constitutes a small business contract and a standard form contract.
What is a small business contract?
A small business contract is defined to include contracts where a party has fewer than 100 employees, or less than $10 million annual turnover, with no specific value threshold.[2]
What is a standard form contract?
Standard form contracts are identified by taking into account the following factors:
- Whether the business has a dominant bargaining position;
- Whether the contract was prepared prior to contractual discussions;
- Whether the contract was negotiated, or offered on a ‘take it or leave it’ basis;
- Whether the contract terms take into account the characteristics of the other party or the transaction; and
- Whether the contract form has been used repeatedly.[3]
Importantly, the onus will be on the party seeking to argue that it is not a standard form contract.[4]
What is an unfair contract term?
A term is unfair under the New UCT Regime if, amongst other things, it:
- causes a significant imbalance in the parties’ rights and obligations under the contract;
- is not reasonably necessary to protect the legitimate business interests of the advantaged party; or
- would cause detriment to the disadvantaged party if applied or relied upon.[5]
The Court will consider the relevant term in the context of the contract as a whole, and there is a rebuttable presumption that a term is not reasonably necessary.[6] Accordingly, careful consideration must be given to whether terms are reasonably necessary to protect a legitimate business interest.
In addition, under the New UCT Regime it is not necessary to show actual loss – likely loss or damage may suffice.[7] Where the court identifies an unfair term in a business’s contract, it has the power to affect all of the business’s existing and future contracts.
Unfair Contract Terms – high risk terms relevant to construction projects
Certain high-risk terms, which may contravene the New UCT Regime especially where they affect one party more than another, are likely to be relevant to the construction industry:
- unilateral variation clauses;
- automatic renewals clauses;
- no reliance clauses;
- unjust or disproportionate fees, eg for early termination or late payment;
- assignment without consent clauses;
- unequal limitation of liability or indemnities;
- liquidated damages regimes;
- unreasonable time bars;
- unreasonable right of recourse to security;
- terms excluding non-contractual representation, eg entire agreement clause
- non-transparent incorporation of extraneous documents by reference;
- determination of contractual interpretation;
- determination of default by a party;
- limitations on rights to sue and rights to adduce evidence in proceedings;
- imposing an evidential burden in proceedings;
- unilateral termination clauses; and
- termination for convenience without appropriate compensation.
Careful review of such terms is recommended to ensure compliance with the New UCT Regime.
Penalties and remedies under the new regime
Where a party contravenes the New UCT Regime, the following penalties may be imposed, the maximum penalty for a business that contravenes the New UCT Regime will be the greater of:
- AU$50 million;
- three times the value of the benefit to the business, if the value can be determined; or
- 30% of the business’s adjusted annual turnover if the value of the benefit to the business cannot be determined.[8]
The Courts may also issue orders which:
- void, vary, or deny enforcement of parts or the entirety of the contract; or
- prohibit or injunct use or reliance on the unfair term in future contracts.[9]
Accordingly, the New UCT Regime potentially poses significant risks to head contractors and principals in projects where standard form contracts may be used with numerous individual subcontractors engaged in the same project.
The New UCT Regime may also apply to contracts between head contractors and larger subcontractors who perform critical works on the project, further increasing the risks associated with any potentially unfair contract terms.
Risks for Head Contractors and scope for disputes
Head contractors on large-scale projects who seek to flow down obligations from their upstream contracts with project principals to their downstream contracts with subcontractors, may be exposed to the risk of their downstream contracts being determined to contain unfair terms which are unenforceable under the New UCT Regime, while the corresponding terms remain enforceable in their upstream contract due to the New UCT Regime being inapplicable.
The New UCT Regime needs to be seen in the context of other recent developments and trends which are intended to, or will have the effect of, rebalancing risk up the contractual chain, such as new security of payment regimes in WA and potentially other Australian jurisdictions; the potential for arbitral tribunals and courts to take a more contractor-friendly approach to the enforcement of contractual time bars; and the recent government focus on subcontractor cash flow and insolvency risk in the construction sector.
These changes to the construction contracting landscape will potentially increase the risk of disputes in the short to medium term, whether in court proceedings, arbitration, statutory or contractual adjudication, or expert determinations etc. while construction project stakeholders adjust their business processes to accommodate these and other recent developments, and as the courts approach to these developments emerges and develops over the course of the coming months and years.
Summary
Overall, the New UCT Regime potentially optimises the contractual rights and obligations of subcontractors and shifts risk up the contractual chain from subcontractors to head contractors and principals. Head contractors and principals should therefore:
- identify existing contracts caught by the New UCT Regime, and amend or remove any potentially unfair terms in those contracts which may contravene the New UCT Regime;
- avoid reusing the same contract form on multiple projects without substantial amendments;
- ensure small business parties have a chance to negotiate, and record those discussions;
- draft terms to be only so broad as required to protect legitimate business interests;
- draw key terms to small business parties’ attention during negotiations and any renewals;
- advise small business parties that the standard form contract terms can be negotiated; and
- train personnel to understand the UCT Regime risks and how to avoid such breaches.
Taking the above steps and seeking appropriate legal assistance to ensure compliance with the New UCT Regime may assist head contractors and principals in mitigating their exposure to the risks under the new regime, including the risk of disputes with subcontractors, and may also help to ensure that subcontractors and suppliers are treated fairly in the execution of major projects.
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[1] Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), Schedule 2, Part 1, Divisions 1 and 2
[2] Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), Schedule 2, section 47 which repeals the old section 23(4) of the ACL and substitutes a new section 23(4). Where the ASIC Act applies, the upfront price payable under the contract must not exceed $5 million.
[3] Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), Schedule 2, Part 3.
[4] ACL, section 27(1)
[5] ACL, section 24; ASIC Act, section 12BH.
[6] ACL, section 24(4)
[7] Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), Schedule 2, Part 2.
[8] Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), Schedule 2, Part 2.
[9] Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), Schedule 2 sections 243A and 243B.