UCT 102: Master Agreements entered into before 9 November 2023 – are SOWs, POs and other instruments issued after 9 November 2023 immune from changes to the unfair contract terms regime?

Welcome to the first article in our new ‘UCT 102‘ series, designed to assist businesses in preparing for new reforms to the unfair contract terms (UCT) regime under the Australian Consumer Law (ACL)¹ introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Act). From that time, civil pecuniary penalties, which have also increased significantly as part of the reforms, will apply for breaches of the UCT regime. See here for more information about the changes to penalties.

In our ‘UCT 101‘ series, we discussed the preliminary foundational questions associated with the application of the UCT regime, examining the various threshold tests which apply under the regime. With the groundwork laid down in UCT 101, we now turn to look at some of the more nuanced questions relating to the UCT regime and its application to different types of contracting arrangements.

In our first article of UCT 102, we begin with an important question that has been on the mind of many businesses – namely, what is the position relating to ‘Master Agreements’?

What is a Master Agreement?

For the purposes of this article, we will use the term ‘Master Agreement‘ to refer to those agreements that govern overarching arrangements between two or more contracting parties (often called master services agreements, master supply agreements, head agreements, umbrella agreements, etc.).

While not strictly required, one of the main functions of a Master Agreement is to set out a pre-defined process for acquiring further goods or services from time to time, generally triggered by the issue of a purchase order, hire schedule, work order or the execution of a statement of work. We will use the term ‘Instrument‘ in this article to refer to these types of documents.

What is the potential issue with Master Agreements?

A question that arises with Master Agreements in relation to the UCT regime is, if a Master Agreement is executed before the date that changes to the UCT regime are to come into effect on 9 November 2023, but an Instrument is issued after such date, is the Instrument subject to the new UCT regime?

In order to consider this question, it is necessary to set out the underlying legislation, and some of the case law that has considered issues of this nature.

When does the new UCT regime apply to a contract?

As a result of the changes introduced by the Act, the new UCT regime will apply to a contract made on or after 9 November 2023 (New Contract), but not to any contract made before that date (Existing Contract). However, the new UCT regime will apply to an Existing Contract where:

• The Existing Contract is renewed on or after 9 November 2023 (Renewed Contract), as renewed, on and from the date of renewal; or
• The Existing Contract is varied on or after 9 November 2023 by varying or adding a term (Varied Contract), but only in relation to those terms that have been varied or added (Varied Terms), on and from the day that the variation takes effect and as if the contract as varied had been made on the date of the variation.

Application of the new UCT regime at a glance

Are Instruments made under a Master Agreement New Contracts, Renewed Contracts or Varied Contracts?

An Instrument made under a Master Agreement will ordinarily not create a Renewed Contract or Varied Contract, unless the parties use express drafting in the Instrument to achieve a renewal or variation of the Master Agreement. This is unusual, however, as the purpose of an Instrument is generally to agree on the supply and acquisition of specific goods or services in accordance with the terms set out in the Master Agreement, not to renew it or vary it.

The more probable question is whether an Instrument creates a New Contract.

Depending on the contractual framework of the Master Agreement, and the drafting used in relation to the mechanics of the Instrument, there is potential for an Instrument to create a New Contract. The specific wording used in the Master Agreement is critically important to this analysis. For example, there are some Master Agreements that will specifically state that the issue of, for example, a purchase order, will create a new contract incorporating the terms of the Master Agreement. In other cases, it will be far less clear, and determination of this issue will come down to interpretation of the drafting.

What does case law say about this?

Unfortunately, there is a lack of case law to clearly resolve the issue. There is, however, some case law that may provide general guidance, despite not neatly aligning with the specific legal risks set out in this article. Two such cases are summarised below:

1. Acciona Infrastructure Australia Pty Ltd v Holcim (Australia) Pty Ltd [2020] NSWSC 1330: In this case, the NSW Supreme Court was required to consider whether some 12,500 purchase orders executed under a head contract were each considered separate contracts, as part of determining whether the applicable security of payments legislation would apply to the benefit of a contractor (given that the legislation only allowed a person to make one payment claim in respect of a ‘construction contract’, singular). The head contract in question included clauses which stated:²2(b):… Upon the issue of a Purchase Order a separate contract will come into existence between [the parties] on the terms set out in this Agreement.2(f): This Agreement sets out the terms and conditions governing the… Purchase Order, which will be read as incorporating the terms of this Agreement to the exclusion of all other terms and conditions set out in the Purchase Order or incorporated by reference into the Purchase Order“.

   The Court held that the above terms suggested that each time a purchase order was issued, a new contract came into existence, governed by and incorporating the terms of the head agreement.

2. Crossmark Asia v Retail Adventures [2013] NSWSC 55:In this case, the NSW Supreme Court was required to consider whether the parties had contracted on the terms of an existing contract, or on the terms of subsequent purchase orders placed in connection with the existing contract, as part of an overall ‘battle of the forms’ argument. While the facts and issues raised in this case were in the context of a battle of the forms argument, the principles of the judgment may have a broader application in the context of contract formation. In rejecting arguments that the purchase orders had ‘novated’ or ‘varied’ the existing contract, the Court said:³“If there were no underlying contract for sale, then acceptance of a purchase order might give rise to a contract on the terms stated or incorporated into the purchase order. In this case, however, there had already been an existing written contract to buy and sell the goods for a specified price, which set out the terms of the parties’ agreement in full. Therefore, the acceptance of a purchase order, by making a delivery, was nothing more than acceptance of an instruction to deliver on the terms of the underlying contract…

   “… The [purchase orders] were no more than steps in the administration or performance of the contracts that had been made. In each case, they are requests for, or directions to make, delivery of the stated quantities of goods… That is clear, particularly, in the [agreement, which] contemplated expressly that the obligation to deliver would be triggered by [purchase orders] from time to time. 

   Thus, the purchase orders did not create new contracts in this case, they were merely ‘administrative steps’ connected with performance of the existing contract. This decision turned on the fact that the parties had agreed ahead of time, under the terms of the existing contract, the goods that would be supplied and acquired, and the price that would be payable for those goods. According to the court, the primary function of the purchase order in this case was to specify the quantity of goods required by the purchaser, and other connected administrative matters (e.g. the date and location for delivery of the goods).

So, what should I consider when I look at my Master Agreement?

Check what your Master Agreement says in relation to the Instrument. There are some contract and case law principles which may indicate whether an Instrument creates a New Contract or not, which we have set out in this article and specifically in the summary below.

However, it is important to note that while the below points may be indicative in some cases, they are by no means determinative. Whether or not an Instrument creates a New Contract will ultimately come down to construction of the relevant clauses and the contract as a whole. There may be clauses which suggest that an Instrument creates a New Contract, and others which do not, making resolution of the issue quite complex in some cases. The Master Agreement must be reviewed holistically before a conclusion is made one way or the other.

Signs that an Instrument may create a New Contract include:

• A specific statement in the Master Agreement that each Instrument will create a new contract, e.g. “if the supplier accepts an order, a new contract is formed on the terms and conditions of this agreement”;
• Language that suggests contract formation, such as describing an ‘offer’ and ‘acceptance’ in relation to the issuing of the Instrument;
• Language that describes the Instrument as ‘incorporating’ the terms of the Master Agreement – the ordinary meaning of ‘incorporate’ might infer that the Instrument is a separate, distinct contract which is made up of terms taken from another contract (the Master Agreement); and
• A framework under the Master Agreement whereby an Instrument will introduce new terms and conditions to the arrangement, either legal terms (such as amended or additional liability clauses) or commercial terms like pricing for goods or services.

Signs that an Instrument may not create a New Contract include:

• In contrast to the above, language that suggests the Instrument does not form a New Contract – e.g. the absence of ‘contract formation’ language, and the presence of language that describes the Instrument as being ‘governed by’ the Master Agreement, or words to this effect, rather than the Instrument ‘incorporating’ the terms of the Master Agreement;
• A definition under the Master Agreement that includes the Instrument as comprising part of the overall Master Agreement, or clauses which state that the Master Agreement includes or incorporates the Instrument; and
• A framework under the Master Agreement whereby an Instrument is merely an ‘administrative step’ in performing the Master Agreement, e.g. where the price mechanism for goods and services is already set out in the Master Agreement, and the effect of the Instrument is really just to direct the quantity of goods, the volume of services, or where the goods or services will be delivered or performed.

Next edition

In our next edition of UCT 102, we will delve further into some of the UCT nuances, looking at the difference between a contract term that is ‘unfair’ for the purposes of the UCT regime and a contract term that is merely onerous or just a ‘bad deal’. We will also consider some of the clauses and contracts which are exempt from the UCT regime under the ACL, including clauses which set out the ‘upfront price payable’ of a contract.

How can we help?

We have a dedicated contracting and consumer law team that can assist you with contract preparation and review and can provide you with advice on your rights and obligations under the ACL, particularly in light of recent reforms. We also routinely present to businesses on the Australian Consumer Law and the unfair contract terms regime. Please contact us if you would like more information about the services we provide.

This article was written by Teresa Torcasio, Partner and Zoe Vise, Associate.

¹ Competition and Consumer Act 2001 (Cth), Sch 2 (Australian Consumer Law or ACL).
² Acciona Infrastructure Australia Pty Ltd v Holcim (Australia) Pty Ltd [2020] NSWSC 1330 at [16].
³ Crossmark Asia v Retail Adventures [2013] NSWSC 55 at [1], [19], [23] – [26].