Unfair contract terms - the noose tightens on bad practices

On 10 November 2023, new, far-reaching legislation was introduced to address the use of unfair terms in standard form contracts.

The Unfair Contract Terms Regime (UCT Regime) applies to consumer contracts and small business contracts. A small business contract is defined as a contract for the supply of goods or services, or sale or grant of an interest in land where at least one party to that contract:

• employs fewer than 100 persons (excluding casual employees, but including casual employees employed on a “regular and systemic basis”); or 

• has an annual turnover of the previous financial year of less than $10 million. 

A small business contract could include a building contract, a subcontractor agreement, a consultancy agreement or even a material/product supply agreement – all of which councils will enter into at times.

The UCT Regime impacts all participants in the building and construction industry, whether you are a principal, developer or head contractor, or whether you are a subcontractor or consultant.

A term may be declared unfair if it can be established that it:

• will result in a significant imbalance in the parties’ rights and obligations 

• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and 

• would cause detriment (financial or otherwise) to a party if it were to be relied on. 

If a term is found to be unfair: 

• a Court may make orders for loss or damage, or orders to prevent loss or damage (for example, it could find the term void and unenforceable) 

• a Court may restrain a party from entering into future contracts that contain the same or similar term 

• civil penalties may be applied to anyone proposing to include, applying, relying upon, or purporting to apply or rely upon, unfair terms. The penalties could be $50 million per unfair term or three times the value of the “reasonably attributable” benefit obtained by the breach.

Impact for construction contracts

There have been few Court decisions relating to unfair contract terms to date. However, that will likely now change. Clauses likely to be scrutinised in light of the UCT Regime include:

1. Disproportionate termination terms: A term that permits one party to terminate the contract in a far wider range of circumstances than available to the other party. Termination-for-convenience clauses may constitute unfair contract terms in certain circumstances.

2. Imbalanced limitation of liability and indemnity terms: These terms usually grant a one-sided limitation of liability or a one-way indemnity with very limited exceptions. 

3. Unilateral variation terms: These terms grant one party the unilateral right to vary key terms of the agreement or the product/ service description (for example, the scope of work to be undertaken, the timeframe for works, etc).

4. Unfair payment terms: These terms may require one party to pay costs and expenses on a full indemnity basis that the other party may incur in exercising its rights under the contract. It may also provide a unilateral right to withhold payment for work performed or services provided.

5. Unreasonable time bars: Such a term imposes an unreasonably short time for a party to make a claim, failing which, the claim will be barred.

All such terms should be carefully considered, with due regard to the facts of the project and circumstances of the parties, when drawing up contracts. In certain circumstances a term may be unfair, while in others it may be reasonable and appropriate. 

Practical tips for head contractors and subcontractors

While the expansion of the UCT Regime has not yet resulted in any Court decisions, we anticipate it will impact negotiation, contract administration and claims management in the construction industry in particular. The following checklist may be useful when entering new contracts.

Authors: Nicholas Kallipolitis, Matthew Singh & Mario Rashid-Ring

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