Unfair terms in construction contracts: Know how to protect yourself

Unfair contract terms are now illegal in Australia following statutory amendments that took effect on 9 November 2023. The amendments, which impose stiffer penalties on those that use unfair contract terms (UCT) in standard contract forms for consumer contracts or small business contracts, aim to strengthen the protection of small businesses and consumers.

The new UCT regime is expected to have a significant impact on businesses that use standard contract forms, including the Australian construction industry where contracts are often complex and lengthy. Due to the complexity of the industry, construction disputes are one of the most common types of legal disputes in Australia.

What is an unfair contract term?

An unfair contract term is one that significantly tilts the balance of the rights of parties to favor the one who prepared the standard contract form. An unfair contract term is also one that is exploitative and financially detrimental for one of the parties.

Some terms that could be potentially unfair include:

  • Right to unilaterally terminate the contract without compensation to the other party
  • Limiting one party’s right to sue the other party
  • Right to assign the contract, without consent to the other party
  • Imposing unreasonable penalties on the other party
  • Limiting one party’s liability for breaches of contract
  • Too short notice period or too onerous notice procedure in time bar clauses

Unfair contract terms in the building industry

One example of a UCT in the building and construction industry is the non-disparagement clause – the prohibition by the other party from publishing or sharing negative reviews – found in standard form contracts of several Australian home builders.

In 2022, the Australian Competition & Consumer Commission (ACCC) raised concerns about the inclusion of the clause in the standard home building contract of Fowler Homes Pty Ltd, a residential builder that offers building services across the greater Sydney region, NSW.

In 2017, building company 101 residential Pty Ltd amended its standard home building contract which also contained non-disparagement clauses. In June 2018, the ACCC accepted a court-enforceable undertaking from home builder Wisdom Property Group Pty Ltd to remove unfair contract terms, including non-disparagement clauses, from its standard home building agreements.

Does the new UCT regime apply to you?

The regime applies to those who operate using standard contract forms with their supply chain or customers, where at least one of the parties is a small business.

A standard form contract is a type of agreement where the terms are predetermined by one party and presented to the other party on a ‘take it or leave it’ basis. These contracts typically involve minimal negotiation and are often used by businesses to streamline their operations.

The definition of “small business” is one of the amendments that took effect in November of this year. The term now encompasses a business that:

  • Have fewer than 100 employees employed on a regular and systematic basis
  • Has a turnover of less than AU$10 million in the previous financial year

Pre-2023 amendments, “small business” was defined as one having fewer than 20 employees and having a contract value under AU$300,000 or under AU$1 million where the contract had a duration greater than one year.

The new UCT regime now applies to all contracts with small businesses regardless of the value of the contract.

What do you do if you are the party subject to the unfair term?

If you are a business that falls under the “small business” definition and you think your standard form contract with a builder contains UCT, you may seek remedies from the ACCC or the courts. 

The ACCC may issue infringement notices. Regarding its concerns with Fowler Homes’ standard home building contracts, the ACCC obtained a court-enforceable undertaking from the home builder where it acknowledged that the non-disparagement clause could have prevented clients from speaking out about issues. The home builder further agreed not to include the non-disparagement clause in future contracts and to establish a complaints handling system.

The recent amendments also allow the ACCC to seek against corporations monetary penalties for breaching 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.

Remedies from courts may include an injunction or issuance of an order refusing to enforce the contract containing the unfair terms. Further, courts may find that part or all of, the contract is void.

How do you avoid unfair terms in contracts?

The new UCT regime is meant to protect the legitimate interests of small businesses, to be balanced with healthy competition within the industry.

To avoid unfair terms in contracts, the team here at Slater Byrne Recoveries suggest the following:

  1. Review the terms and conditions and identify onerous clauses
  2. Provide parties ample opportunities to negotiate the terms
  3. Use clear, transparent, and non-complicated language in the contract
  4. Seek legal advice to ensure compliance with the amendments

Unfair contract terms? Don’t let them destroy your construction business!

Some businesses may not be aware that they fall under the definition of a “small business” and so may not be aware of the additional negotiating power available to them via the revised definitions. If you are one of these businesses and have no idea what to do or how to leverage your rights under the new UCT regime, give our Slater Byrne Recoveries team a chat or an obligation-free call and we can discuss how the recent amendments can help you improve your business.

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