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01/11/2023 – Amended Unfair Contracts Legislation – What’s in it for you?

Unfair contracts legislation (“UCL”) is not new. However, new provisions that commence operation from 9 November 2023 expand the reach of UCL in ways that benefit consultants who work in the parts of the construction industry where long and one-sided consultancy agreements are the norm.

The amendments to UCL (“Amendments”) apply to contracts entered into on or after 9 November 2023, but not contracts already in existence at that date. UCL law as a whole only applies to contracts for supply of goods or services, and that would be expected to include consultancy services agreements.

Who does the legislation apply to? (Important changes)

Until 2016, the protections of unfair contracts legislation (“UCL”) benefited only consumers who purchased goods or services of a kind ordinarily acquired for personal or household use. Then, in 2016, its ambit was extended to small businesses employing fewer than 20 staff and entering into contracts with an upfront price less than $300,000 (with the monetary threshold increased to $1m if the contract term exceeded 12 months). Of course, this meant that a great many businesses were still excluded.

The Amendments raise the threshold so as to bring many more businesses inside the protective umbrella of UCL. From 9 November 2023, UCL will apply to a contract for supply of goods or services where a “consumer” or “small business” is a party, based on the following new definition of “small business”:

    1. either fewer than 100 employees;
    2. or a turnover under $10 million in the previous year.

The UCL sets out rules for calculating number of employees, as well as turnover, which are outside the scope of this broad introductory article. The upper limit on the price of the contract has also been removed. The net result is that many more businesses can now take advantage of the legislation.

What contracts does the legislation apply to? (Minor clarification)

The same as previously, the UCL only applies to contracts in “standard form”. This means that bespoke, negotiated contracts do not attract the protection of the UCL. A contract is presumed to be in standard form unless the party relying on it proves otherwise. Some factors to look for as hallmarks of a “standard form” contract are:

  • Imbalance of bargaining power between the parties;
  • Contract was prepared by one party before any discussion occurred;
  • One party was required to accept or reject the terms of the contract (often on a “take it or leave it” basis);
  • Lack of an effective opportunity to negotiate the contract;
  • The contract is not tailored to the specific circumstances of the transaction and characteristics of the parties.

Consultants doing commercial and government work would find most of these factors familiar. Bear in mind, they are only indicators, and a contract does not have to tick off every one to be “standard form”.

For this aspect of the UCL, the only change the Amendments make is adding a clarification that a party being able to negotiate “minor or insubstantial changes” to a contract is not enough to prevent it being standard form.

The net result is to make it slightly easier to establish that a client-drafted contract met the standard form requirement.

When is a contract term unfair? (No changes)

This is another aspect that the Amendments do not change. To recap: the UCL does its best to give some definition to the subjective term “unfair”, but in a way that is not unduly limiting.

To be deemed unfair, a contract term must meet all three of these requirements:

    1. The term would cause significant imbalance in the rights and obligations of the parties;
    2. The term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the clause; and
    3. The term would cause financial or other detriment to a party if it were relied upon.

In deciding this, the court must also take into account the transparency of the term (was it written in reasonably plain language, legible and presented clearly?), while considering the term in the context of the overall rights and obligations of each party under the contract.

Terms that set the price of the good or service, and the “main subject matter” of the contract, are excluded from the UCL, so these cannot be deemed unfair. “Main subject matter” is not defined. What it means for consultants is unknown, but perhaps it encompasses the scope of services and other parts of the contract that describe what your client is purchasing. This exclusion means you cannot turn to UCL merely to get out of a bad deal.

What happens if a contract term is unfair? (The biggest changes of all)

To sum up, in order to trigger the protection of UCL (under the Amendments), you have to satisfy each one of these criteria:

  • The contract is for supply of goods or services;
  • At least one party is a “small business”;
  • The contract is in “standard form”; and
  • The term or terms complained of satisfy all three parts of the test for “unfairness”.

Until now, if you cleared all of these hurdles, you were entitled to only one remedy: you could apply to a court to get a declaration that an unfair term, or terms, within the contract were void. You would then be released from having to comply with the unfair, void term or terms, though you still had to comply with the remainder of the contract.

In addition to that, the Amendments now create a whole range of extra remedies:

  • The party who proposed the unfair term has now committed a contravention of the UCL and can have pecuniary penalties up to $50 million or more imposed;
  • Courts can make a wider range of orders, including declaring the whole contract void, or varying the contract;
  • Remedies also extend to other contracts used by the wrongdoer, who can be ordered not to use the clause in future contracts, or to pay compensation for other parties under the same standard from contract; and
  • Courts can even prohibit offenders from managing companies in future.

But how does this help me?

Is it likely that the ACCC will start prosecuting developers, builders or others who routinely use unfair contracts? Probably not, since previous prosecutions indicate their focus is on very large suppliers with great influence in a market (for example, ACCC unfair contracts prosecutions include one of the largest privately owned waste management companies in Australia, or one of the largest suppliers of serviced offices to small businesses).

The biggest hope is that the greatly expanded range of penalties will slowly start to change the culture of contracting, and incentivise contract drafters to soften some of the most egregiously one-sided clauses.

You can also:

  • Use UCL as an argument to assist in contract negotiations (some helpful PDF guides are available on the ACCC website here);
  • When told by a client that their contract is “take it leave it”, confirm those words in writing (e.g. a return email) so as to create a piece of evidence that the contract was standard form;
  • Use UCL to defend contract-based claims against you, if the clauses being used against you are unfair.

In all this optimism, remember that you can also be the bad guy under UCL if using unfair terms in your own standard form contracts with clients. For consultants, some of the most obvious risks here are low limit of liability clauses that are not transparent, or, in contracts with sub-consultants, broad indemnities, or lopsided termination rights.

Although our risk management team can’t provide advice on unfair contracts legislation, we are optimistic about its overall benefits and look forward to any improvement in the overall culture of contracting in the construction industry.

Wendy Poulton
Manager Risk Services
informed by Planned Cover

This article is only general advice in respect of risk management. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.

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