Laws prohibiting unfair contract terms in small business construction contracts continue to apply to parties impacted by the COVID-19 pandemic.

Small business contracts

Any provision in a standard form ‘small business contract’ entered into on or after 12 November 2016 that is ‘unfair’ is void and unenforceable under the Australian Consumer Law (ACL).

To the extent that the contract can continue to exist without such unfair provisions, the remainder of the contract will continue to bind the parties.

Before a party seeks relief under contractual provisions relating to variations, suspension of work, extensions of time and compensation due to the impact caused by the COVID-19 pandemic, they need to consider if their contract is a small business contract under the ACL and whether the relief they are seeking is set out in an unfair contract provision which is prohibited by that law.

The prohibition under the ACL against unfair contract provisions in small business contracts applies to contracts for the supply of goods or services if each of the conditions below is satisfied:

• The contract is a standard form contract. For example, a precedent contract prepared by one party and offered without a reasonable opportunity for the other party to negotiate its terms.
• The contract was executed on or after 12 November 2016. Alternatively, if the contract was executed before 12 November 2016, but any terms were varied after that date, the prohibition applies to those varied terms.
• At the time of entering the contract, at least one of the parties is a small business (i.e. a business that employs less than 20 employees on a systematic basis)
• The contract price is less than $300,000, or $1 million if the contract has a duration of more than 12 months.

It should be noted that Courts are yet to consider whether a defects liability period will be included for the purposes of calculating the duration of a contract.

Unfair contract terms

A contract term will be ‘unfair’ if it:

• Creates a substantial imbalance between the parties’ rights and obligations
• Is not reasonably necessary to protect the interests of the party who would be advantaged by it
• Would cause a significant detriment (financial or otherwise) to the party burdened by the provision if it were relied upon by the advantaged party.

The ACL provides a non-exhaustive indicative list of terms that may be unfair. These include, in a construction context:

• Termination clauses allowing one party (but not the other) to terminate the contract at any time ‘for convenience’ and without reason or default by the other party
• Variation provisions which allow one party to unilaterally vary the terms of the contract or the scope of works
• Time bars which impose onerous timeframes and notification procedures for contractor parties to claim for variations or extensions of time
• A term that penalises, or has the effect of penalising, one party (but not the other) for breach or termination of the contract
• Indemnity clauses that excessively extend liability to a contractor party beyond what would reasonably be necessary to adequately protect the other party against loss or damage
• Liability clauses that exclude or disproportionately limit the liability of a head contractor party or principal party, even if they are partially at fault
• A term that limits or has the effect of limiting one party’s rights to sue another party
• Clauses which purport to give a head contractor or principal party the exclusive power to determine certain terms of the contract, for example, whether a term has been breached or whether work is considered defective.

What should contractors do now?

As many of these clauses would grant relief to parties impacted by the pandemic in response to supply delays or the inability to resource or access construction projects, it is imperative that parties to construction contracts consider whether the ACL prohibitions against unfair contract terms applies to their contract before taking any action.

It is also a timely reminder for construction contractors to review the terms of their standard contracts to ensure they have the necessary protections to seek the relief they need when dealing with small businesses.

The above content is commentary rather than legal advice and was prepared on the basis of applicable legislation, government programs and initiatives that were in place as of the date of publication. Given the ongoing evolution of both the COVID-19 pandemic and frequent consequential changes to the various laws and programs within all Australian states and territories, readers should seek legal advice on the current situation as applicable to their specific circumstances before taking any action in relation to the above.