Key takeaways

With the expanded scope of the UCT regime, more construction businesses need to consider whether their standard form contracts remain compliant.

Construction industry contracts are particularly likely to fall within the expanded scope of the UCT regime, given common terms relating to recourse to security, termination for convenience and limitations of liability may be found by a court to be unfair.

Additional civil penalties have been enacted, which create a greater deterrent to the use of unfair terms in standard form contracts.

Detailed overview of new unfair contract terms regime

Who do the new laws apply to?

Amendments to the Competition and Consumer Act 2010 (Cth) ("Act") took effect on 9 November 2023. The new laws apply to all participants in Australia, including in the building industry, who operate using standard form contracts with their supply chain or customers, where at least one of those parties is a small business.

Whilst this legislation previously applied to small businesses, the definition of "small business" has expanded significantly to capture much larger businesses than before.

Previous definition of small business

Pre 9 November 2023, the legislation applied to contracts with 'small businesses', which were defined as:

• Businesses with fewer than 20 employees
• A contract value under AUD 300,000, or under AUD 1 million where the contract had a duration greater than one year

New definition of 'small business'

This definition has now expanded, so that businesses will be deemed to be 'small businesses' if:

• They have fewer than 100 employees employed on a regular and systematic basis (up from 20 employees).
• They have a turnover of less than AUD 10 million in the previous financial year.

Impact of changes

Accordingly, the scope of businesses subject to the unfair contracting provisions has expanded significantly. Furthermore, the value of the contract in question is no longer a consideration. The legislation applies to all contracts with small businesses, provided either limb of the new definition is met.

What is a standard form contract?

Major contractors and other key participants in the construction industry rely extensively on standard form documentation, such as purchase orders, supply agreements and standard form subcontracts. These are often subject to minimal, if any, negotiation.

Under the amendments to the Act, "standard form contracts" now extend to contracts where the counterparty has had a chance to negotiate terms that are minor or insubstantial in effect, or where the "standard form" involves a menu of options determined by another party.

What is an unfair contract term?

An unfair contract term is one that:

• Causes an imbalance in the rights of the parties under the contract
• Is not reasonably necessary to protect the legitimate interests of the party that is entitled to the benefit of the term
• Would cause financial or other detriment to a party of the clause were to be applied or relied upon

Terms defined in the Act as potentially unfair include:

• Termination for convenience allowing termination at will by one party without compensation to the other party
• Terms that limit one party's right to sue another party
• Rights for one party to assign the contract, to the detriment of the other party, and without consent

Furthermore under the pre-amendment legislation, the courts have considered other types of terms as being unfair, including:

• Limitations on liability that benefit one party but not the other
• "One-way" indemnities
• Unilateral variation rights

Remedies and enforcement

In addition to the expansion to the definitions of "small business and unfair contract terms", the amendments to the Act also significantly expand the remedies available to the party subject to the unfair term. These remedies now include:

• The court may find that the unfair term is a contravention of the Act.
• The court may vary the unfair term or refuse to enforce it.
• The court may find that part, or all of, the contract is void if the court considers it appropriate to prevent or reduce loss that may be caused by the contravention.
• The Australian Competition & Consumer Commission (ACCC) may seek monetary penalties against corporations which breach the UCT provisions to a maximum of the greater of:
  • AUD 50 million
  • Three times the value of the benefit to the relevant party from the unfair contract term
  • 30% of the adjusted turnover of the company during the period of the breach or the preceding 12 months, whichever is longer
• The ACCC may also seek penalties of up to AUD 2.5 million against individuals involved in the contravention.

What to do?

Construction businesses enter into contracts with other participants, both large and small.

Very often, a principal will not know or seek to determine whether it is dealing with a small business, as defined under the Act. Also, some businesses may not be aware that they are a 'small business' under the revised definitions, and not aware of the additional negotiating power that may be available to them.

We recommend that where standard form contracts are used, they should be reviewed to ensure that they are not 'unfair' within the meaning of the Act, paying particular attention to clauses already identified as problematic and to the opportunity allowed for negotiation of the contract terms.

Where practicable, participants in the industry should allow the opportunity for negotiation of terms and establish record management systems during the tendering process or when issuing agreements originating from a head contract which can be used as evidence of flexibility and willingness to negotiate.

If you would like to find out more about Unfair Contract Terms in your Construction documentation, please reach out to the Baker McKenzie contacts above.