Unfair Contract Terms in Standard Form Construction Contracts: What Your Construction Business Needs to Know
The Unfair Contract Terms regime under the Australian Consumer Law has real penalties attached, and applies to standard form contracts with small business counterparties as much as it applies to consumer contracts. For most construction businesses, the practical exposure is in their Subcontract suite, their Purchase Order terms, their Supply Agreements and any other standard terms they put forward to their counterparties.
The penalties are very significant. For a corporation, the maximum penalty for each contravention is the greater of $50 million, three times the value of the benefit obtained from the contravention (if a court can determine it), or 30% of the corporation’s adjusted turnover during the breach turnover period. For an individual, the maximum penalty is $2.5 million per contravention. Each unfair term included in a standard form contract may give rise to a separate contravention, so the penalties on a contract with multiple unfair terms can be very large.
What the Unfair Contract Terms Regime Covers
The Unfair Contract Terms regime sits in Part 2-3 of the Australian Consumer Law (ACL), which is Schedule 2 to the Competition and Consumer Act 2010 (Cth). The mirrored provisions for financial products and services sit in the Australian Securities and Investments Commission Act 2001 (Cth).
Section 23 of the ACL voids an unfair term in a standard form consumer contract or small business contract, and makes it illegal to enter into, apply or rely on (or purport to apply or rely on) an unfair term in such a contract. The contract continues to bind the parties if it is capable of operating without the unfair term.
Section 24 sets out when a term is unfair. A term is unfair if it would cause a significant imbalance in the parties’ rights and obligations arising under the contract, it is not reasonably necessary to protect the legitimate interests of the party advantaged by the term, and it would cause detriment (whether financial or otherwise) to a party if it were applied or relied on. The court must take into account the extent to which the term is transparent and the contract as a whole, and may take into account any other matter it thinks relevant.
Section 25 sets out a list of examples of the kinds of terms that may be unfair in a standard form consumer contract or small business contract. The list includes a term that permits one party (but not the other) to avoid or limit performance, terminate the contract, vary the terms unilaterally, vary the upfront price without giving the other party a right of termination, vary the characteristics of the goods or services to be supplied, determine unilaterally whether the contract has been breached or how it should be interpreted, limit one party’s vicarious liability for its agents, assign the contract to the detriment of the other party without consent, limit the other party’s right to sue, limit the evidence the other party can adduce, or shift the evidential burden onto the other party.
Section 27 sets out the matters a court must consider in deciding whether a contract is a standard form contract. Section 28 sets out the categories of contracts to which the regime does not apply.
When the Unfair Contract Terms Regime Applies to Your Construction Business
The regime applies to standard form contracts with consumers and to standard form contracts with small business counterparties.
A small business contract is a contract for the supply of goods or services or the sale or grant of an interest in land where, at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 100 people, or has an annual turnover of less than $10 million for the previous income year. The pre-2023 thresholds (fewer than 20 employees plus upfront-price thresholds of $300,000 or $1 million over 12 months) no longer apply. The current 100-employee or $10 million turnover threshold means a much wider range of construction Subcontractors, suppliers and service providers fall within the regime.
A standard form contract is broadly a contract where one party has all or most of the bargaining power, the contract was prepared by that party before any negotiation, the other party was effectively required to accept or reject the contract in the form presented, and the other party was not given an effective opportunity to negotiate the terms. There is a positive presumption that a contract is a standard form contract. The party arguing it is not must prove otherwise.
In deciding whether a contract is a standard form contract, the court must consider whether the party who prepared the contract has used the same or a substantially similar contract before, and the number of times. The court must not give weight to an opportunity to negotiate minor or insubstantial changes, an opportunity to select a term from a range of options offered by the preparing party, or an opportunity to negotiate the terms of a different contract.
Why Construction Businesses Need to Take This Seriously
The headline risk in the Unfair Contract Terms regime is well understood for clients who issue Head Contracts and Purchase Orders to Subcontractors and suppliers. Where a Principal or Head Contractor presents standard form terms to a Subcontractor or supplier that meets the small business threshold, the Unfair Contract Terms regime applies and any unfair terms in those standard form terms expose the Principal or Head Contractor to civil penalties.
The less well understood exposure is on the contractor and large Subcontractor side. Contractors and large Subcontractors often put forward their own standard terms to clients, particularly on smaller Projects. Where the client meets the small business threshold (and many smaller Principals, including special purpose vehicles set up for a single development, do), the contractor or Subcontractor is the party putting forward standard form terms to a small business and is exposed to penalties if those terms are unfair. Contractors and large Subcontractors who insert their own Special Conditions, indemnity clauses, business integrity clauses or cybersecurity clauses into a client’s standard form contract may also be putting forward unfair terms in their own right.
The other operational point construction businesses miss is the renewal and variation trigger. The regime applies to all standard form contracts entered into on or after 9 November 2023, to existing contracts when they are renewed on or after that date, and to any varied term in an existing standard form contract from the date of variation. A construction business that has not refreshed its standard terms since 2023 but has continued to renew or vary contracts under those terms is exposed.
Three Examples of Unfair Terms in Standard Form Construction Contracts
The examples below show how the Unfair Contract Terms regime applies to typical construction standard form contracts. The scenarios are illustrative and do not constitute legal advice. Whether a particular term is unfair in a particular contract depends on the contract as a whole, the transparency of the term, the legitimate interests of the party advantaged by the term, and the detriment caused to the other party.
Scenario 1: Head Contractor Subcontract Suite Issued to Small Trade Subcontractors
A Tier 2 Head Contractor uses a standard form Subcontract that it has issued to over 200 trade Subcontractors across the previous two years. The Subcontract is in identical form for each Subcontractor with only the schedule and pricing changed. Most of the Subcontractors are trade businesses with fewer than 30 employees and annual turnover under $10 million, which means each falls within the small business threshold. The Subcontract is a standard form contract issued to small businesses, and the Unfair Contract Terms regime applies.
The Head Contractor’s Subcontract includes a clause that allows the Head Contractor to terminate the Subcontract for convenience on 24 hours’ notice with no compensation payable to the Subcontractor for demobilisation, lost overhead recovery, or work performed but not yet certified. The same Subcontract gives the Subcontractor no right to terminate other than for material breach by the Head Contractor, with a 30-day cure period. The same Subcontract also includes a clause that allows the Head Contractor to set off any amount it considers (in its absolute discretion) to be owed by the Subcontractor under any other contract between the parties or any related entity, against amounts due under the Subcontract.
The termination-for-convenience clause is likely to be unfair under section 24 ACL: it permits one party to terminate the contract but not the other (section 25 example), it goes well beyond what is reasonably necessary to protect the Head Contractor’s legitimate interests, and it would cause clear financial detriment to the Subcontractor. The unilateral set-off clause similarly permits one party (but not the other) to determine, in its absolute discretion, an entitlement to set off. Both terms are exposed.
Scenario 2: Principal’s Standard Form Consultancy Agreement Used Across Multiple Projects
A property development group with a parent entity over the small business threshold sets up a series of special purpose vehicle entities for individual Projects. Each SPV has minimal employees and minimal turnover at the time it enters into contracts. The development group’s standard form Consultancy Agreement, used by the SPVs to engage architects, engineers and other consultants, contains a clause that allows the SPV to vary the scope of services unilaterally on written notice to the consultant, with the consultant required to perform the varied scope at the rates in the original contract regardless of how the scope changes. The Consultancy Agreement also contains an indemnity clause requiring the consultant to indemnify the SPV against all losses arising in any way connected with the consultant’s services, including losses arising from the SPV’s own negligence.
Where the consultant employs fewer than 100 people or has an annual turnover under $10 million (which most consulting practices do), the consultant is a small business counterparty. The Consultancy Agreement is a standard form contract used repeatedly by the development group across multiple SPVs and Projects, and the Unfair Contract Terms regime applies.
The unilateral variation clause is likely to be unfair: it permits one party to vary the characteristics of the services to be supplied without the consent of the other party (section 25 example), and the requirement to perform varied scope at original rates is detrimental and not reasonably necessary to protect the SPV’s legitimate interests. The indemnity clause that requires the consultant to indemnify the SPV against the SPV’s own negligence is likely to be unfair: it goes well beyond what is reasonably necessary to protect the SPV’s legitimate interests, and pushes risk that the SPV created onto the consultant.
Scenario 3: Specialist Subcontractor’s Own Standard Terms and Conditions Issued to a Small Builder Client
A specialist mechanical Subcontractor uses its own standard Terms and Conditions on every Project where the client does not present its own form of contract. The Subcontractor presents these Terms on every quote and on every Purchase Order. Across the previous three years, the Subcontractor has issued the same Terms on over 500 Projects. The Terms include a clause that allows the Subcontractor to increase the contract price by up to 20% on written notice without the client’s consent if the cost of materials, labour or installation rises during the Project. The same Terms include a clause that limits the Subcontractor’s liability to the value of the contract, excludes all consequential loss and excludes any liability for defective workmanship after a 90-day defects period.
The Subcontractor’s client on a particular Project is a small residential builder with 12 employees and annual turnover of $4 million. The builder meets the small business threshold. The Subcontractor’s Terms are a standard form contract used repeatedly by the Subcontractor, and the Unfair Contract Terms regime applies.
The price-increase clause is likely to be unfair: it permits one party (but not the other) to vary the upfront price payable under the contract without giving the other party a right to terminate (section 25 example). The aggressive limitation of liability is also exposed: a 90-day defects period for mechanical workmanship is well short of industry standard and the Defects Liability Periods in most head contracts, and the broad exclusion of consequential loss and of liability for defective workmanship is likely to be assessed as going beyond what is reasonably necessary to protect the Subcontractor’s legitimate interests.
In this scenario, the Subcontractor is the party at risk. Many specialist Subcontractors do not realise that the Unfair Contract Terms regime applies to them when they put forward their own terms to a small business client.
What Construction Businesses Should Do
Construction businesses with standard form contracts should treat the Unfair Contract Terms regime as an active compliance area, not as a problem that can be left to a Lawyer to address once a dispute arises.
The first practical step is to identify which of the construction business’s contract counterparties fall within the small business threshold. For a head contractor or principal, that means the Subcontractor and consultant base. For a Subcontractor or supplier, it means the smaller clients and builders to whom the business puts forward its own standard terms.
The second step is to identify every standard form contract the construction business uses with those counterparties. The list almost always includes the standard Subcontract, the standard Purchase Order, the standard Supply Agreement, the standard Consultancy Agreement and any standard Service Agreement. Many construction businesses also have standard Special Conditions, standard indemnity clauses, standard cybersecurity clauses and standard business integrity clauses that they insert into client-issued contracts, and these are exposed in their own right.
The third step is to engage an experienced Commercial Lawyer to review the standard form contracts and identify any terms that are likely to be unfair under section 24 ACL. The Commercial Lawyer should review the contract as a whole, consider the transparency of each term, weigh the legitimate interests of the construction business against the detriment to the counterparty, and recommend amendments that bring the contract within the regime without losing commercial protection.
The fourth step is to put in place a process for reviewing any existing standard form contract before it is renewed or varied, on the basis that the renewal or variation triggers the regime as if the contract were entered into on the date of renewal or variation.
Where a construction business is putting forward its own terms to a counterparty that may meet the small business threshold, the safest approach is to assume the regime applies and to draft the standard form contract accordingly.
Where to Get Help
Blaze Business & Legal advises construction businesses across Australia on the Unfair Contract Terms regime, including review and amendment of standard form Subcontracts, Purchase Orders, Supply Agreements and Consultancy Agreements, and review of Special Conditions and indemnity clauses inserted into client-issued contracts. The work is delivered by Rachelle Hare, an experienced Construction Lawyer with 25+ years of experience across Tier 1 contractors, Commonwealth construction clients and private practice.
To talk through how the Unfair Contract Terms regime applies to your construction business and your standard form contracts, call Rachelle on (07) 3063 3373 or email enquiry@blazebusinessandlegal.com.au.
