“Fair” Thee Well: Expanded unfair contract terms laws affect construction and infrastructure contracts

Summary of unfair contract terms (UCT) regime

It is important that businesses in the construction and infrastructure sectors assess any standard form contracts to ensure that they are not imposing unfair contract terms onto small businesses.  Including such terms is prohibited at law and potential repercussions for doing so are now severe.

The unfair contract terms (UCT) regime has been expanded in scope and now applies to a broader range of businesses which were not previously captured by the test of “small business”.  Examples of UCTs could include indemnities, liability caps and time bars which are not reasonable and proportionate in the circumstances.

The UCT regime provides small businesses and consumers with the ability to:

• seek that UCTs be declared void and unenforceable in Court; and
• refer companies relying on UCTs to the regulator (the ACCC) who has the power to prosecute and impose large civil penalties.

Who does it apply to?

The UCT regime applies to:

1. standard form contracts entered or varied after 9 November 2023;¹
2. where one of the parties is a small business or individual.

There is no definition of “standard form contract” under the UCT regime.  Businesses need to make a case-by-case assessment for each contract to ensure that they do not contain UCTs.

As of 9 November 2023, the size of businesses regarded as a ‘small business’ has expanded under the UCT regime. A company will be a small business (thereby meaning standard form contracts with that company will be subject to the UCT regime), if the company:

• employs less than 100 people; or
• has a turnover for the last income year of less than $10 million.

The UCT regime applies extraterritorially (outside the borders of Australia). Specifically, the High Court of Australia recently held that clauses incorporated into a standard form contract by a company carrying on business in Australia contracting with US citizens under US law could still contravene the UCTs regime. This was because the company was carrying on business in Australia. Further information can be found here.²

Applicable test and contracts

The following types of contracts/agreements are examples of potentially standard form contracts:

• purchase orders;
• requests for tenders;
• terms and conditions in quotations;
• supply and install contracts;
• Australian Standard contracts;
• company-standard template agreements;
• framework agreements;
• consultancy agreements;
• subcontractor agreements; and
• deeds of novation.

When establishing if a standard form contract includes UCTs, the following will be considered:

• does the term cause a significant imbalance in the parties’ rights and obligations;
• does the term protect a legitimate interest of the party who would benefit from its inclusion in the contract; and
• would it cause a financial (or other) detriment to a party if the term were to be enforced or relied upon.³

Clauses that may be considered unfair contract terms

Examples of clauses in construction and infrastructure contracts which, depending on their formulation, may be UCTs include:

• termination for convenience clauses;
• unbalanced indemnity provisions;
• unreasonable liability caps;
• variation clauses without a right to fair payment and additional time;
• unbalanced payment terms;
• security clauses; and
• unreasonable time bar provisions.

Potential methods to avoid a term being a UCT include:

• evidencing that the clause was fairly negotiated by the parties;
• evidencing that the clause was capable of being fairly negotiated;
• evidencing the rationale for the clause being drafted the way it is (e.g. if passing down liabilities under a head contract);
• at an early stage, consider if the contracting entity intended to be used needs to be a small business; and
• considering if other extraneous documents are available to establish that both parties consider the terms to be fair.

The exact method to minimise the risk that a term is considered a UCT may differ (a) for each clause and (b) depending on the context in which the clause is proposed, included, or relied upon.

Potential commercial exposure / penalties

If the UCT regime is contravened, a small business can apply to the Courts which have the power to:

• void, vary or refuse to enforce a contract (if such an order is appropriate to prevent loss or damage to one party by a UCT);
• prevent the counterparty from applying the UCT or relying upon the UCT in an existing or future contract; and
• order that any other existing contracts including similar unfair terms are void or amended.⁴

In addition, the ACCC can impose penalties on a company or individual for merely including a UCT in a contract, or if such a term is used or relied upon, with each UCT being regarded as a separate contravention attracting a new penalty.⁵

If the contravening party is a corporation, the pecuniary penalties imposed may be (for each UCT) up to the greater of:

• $50 million.
• three times the value of the benefit obtained; or
• where the value of the benefit cannot be determined, 30% of the adjusted turnover during the breach turnover period.

If the contravening party is an individual, pecuniary penalties may be imposed up to $2.5 million per contravention.

As each time a contract term is found to be “unfair”, the company or individual receiving the benefit of the UCT in the contract will be potentially liable for a separate penalty, one contract containing many UCTs could potentially attract multiple penalties.

Relevance to the construction and infrastructure industry

“The Australian construction industry has the highest involvement of subcontracting in the world, representing between 80–85 per cent of all construction work.”⁶

In August 2023, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) published statistics looking at the number of small businesses by employment and turnover. These statistics show that 97.3% of Australian businesses across all industries have less than 19 employees. Only 2.5% of the total businesses have 20 to 199 employees. In terms of annual turnover, only 42,644 of the 2,569,900 businesses registered in Australia have an annual turnover of $10m or more. A vast majority of businesses, including in the construction and infrastructure space, will be small businesses and therefore subject to the UCT regime.

An investigation by the ASBFEO into the construction industry supply chain in November 2018 found:

• the subcontractors at the end of the chain were disproportionately small businesses; and
• the [then proposed] reforms seek to protect contractors and small businesses within the industry.⁷

“The test for whether a [standard form] contract term is unfair has not changed.”⁸ However, many infrastructure and construction projects will involve upstream and downstream companies which may now fall under the new definition of “small business” and fall under the ambit of the expanded UCT regime. Examples of potential small business contract counterparties may include developers, contractors, subcontractors, suppliers, and consultants. Of course, standard form contracts with individuals (for example, domestic building contracts) will be subject to the UCT regime.

Take aways

Companies in the industry should take time to:

• carefully consider their contracting approach to ensure that for standard form contracts they either (a) use separate templates depending on the size of the contracting entity; or (b) review each contract for terms which could potentially be UCTs, including for contracts made by companies carrying on business in Australia who are contracting small businesses or individuals located offshore;
• offer an opportunity to negotiate any terms which may be argued to be UCTs; and
• keep records of their contracting processes and positions to defend potential future UCT claims.

Please contact us if you are unclear on whether your contracts may include UCTs.

This article was written by Matthew Bliem, Partner, Patricia Oman, Senior Associate and Jashrin Whitehead, Solicitor.

¹Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth)

²Karpik v Carnival plc [2023] HCA 39

³ACCC, “Contracts”, online publication available at: Contracts | ACCC

⁴ ASIC, “Comprehensive Guide to the Unfair Contract Terms (changes in November 2023)”, online publication available at: Unfair Contract Terms reforms commence | ASIC

⁵ Section 12GBA(6) of the Australian Securities and Investments Commission Act 2001 (Cth)

⁶Subcontractors’ Alliance – Parliament of Australia, “Insolvency in the Australian construction industry“, Working Paper, 3 December 2015

⁷ ASBFEO, “Cascading deemed statutory trusts in the construction sector”, Working Paper, November 2018 (available online at: Microsoft Word – Working Paper Statutory Trusts.docx (asbfeo.gov.au))

⁸ ACCC, “Bigger penalties for unfair contract terms”, online publication available at: Businesses urged to remove unfair contract terms ahead of law changes | ACCC