Practical tips for construction businesses navigating the unfair contract terms regime

Significant changes will occur to Australia’s unfair contracts regime in November 2023 which will increase protections for consumers and small business.  Builders, architects and other construction industry participants need to be aware of these changes and revisit your contracting process to ensure you comply with the changes.

The unfair contracts regime will apply to a greater number of contracts made in the construction and building industry as a result of these amendments.  If you run a small business or start-up in the Australian construction and building industry you should read the below summary of these changes. For expert legal advice, our construction lawyers can help with your specific matter.

Which contracts are covered by unfair contracts regime?

"Consumer contracts" and "small business contracts" that are "standard form contracts" are covered by the unfair contracts regime.  Note if you yourself run a small business you are still caught by this regime when your customer is another small business (or consumer).

What are the major changes to the unfair contracts regime?

More parties can rely on the unfair contracts regime because the law is expanding the definition of “small business contract” and “standard form contracts”.

According to the amendments, a "small business contract" is defined as a contract for the supply of goods or services, or a sale or grant of an interest in land, where at least one party satisfies either or both of the following requirements:

• the party makes the contract in the course of carrying on a business;

• the party's turnover for the party is less than $10 million; and/or

• the party employs fewer than 100 people (excluding casual employees, unless employed on a regular and systematic basis);

This revised definition of "small business contract" may include residential construction contracts, commercial construction contracts, design consultancy agreements, supply agreements, and other subcontracts entered into by public and private sector businesses.

The amendments to the unfair contract regime state that a contract may be deemed to be a "standard form contract" even though a party may negotiate insignificant or minor adjustments, choose a term from a variety of possibilities, or negotiate the terms of another contract.

When is a contract term unfair?

A term is "unfair" if it:

1.    causes harm to a party;

2.    causes a material imbalance in the rights and obligations of the parties; and

3.    is not reasonably necessary to protect the legitimate interests of the party who benefits from it.

Examples of unfair terms include unilateral rights to:

• modify the specifications of the goods or services to be provided.

• avoid performance of the contract; and

• modify the upfront price payable under the contract without the right of another party to terminate the contract.

This sample list is not all-inclusive and simply serves as a general indication of the kinds of terms that might be considered unfair.

You need to carefully consider what clauses you include in your contract.  Ask yourself whether you are actually going to rely on the clause in reality, and if not consider removing it.

What should I do to make sure I don’t get penalised by the unfair contract regime?

You need to consider:

Do you rely on a standard form contract?  If you do consider either:

Getting it reviewed to consider if any of the terms are unfair and should be amended.  If so, talk through with your lawyer about alternative ways the contract could work to adequately protect your interests as well as your customer’s interest; or

Change your contracting process to move away from standard forms.  This requires you to give the customer a chance to negotiate the terms of engagement (e.g. send them a draft contract and give them time to review and ask for changes, ask queries).  You will need to weigh up the pros and cons of this approach over time.  If your customers are asking for a number of significant changes and you’re needing legal review each time then it may be in your interest to revert to standard forms.  Otherwise, you may find that customers don’t seek to negotiate contracts or request simple amendments.  In that case it’s still worthwhile discusses your contracting process with your lawyer to get comfortable you’ve got sufficient evidence that the customer knew they could negotiate the contract and chose not to.  

What are the consequences of having unfair terms in my contract?

If a clause is deemed unfair it will be void and you cannot rely upon it.  A court may also issue declaratory orders under the amended law to redress, in whole or in part, loss or damage that has been caused, or to prevent loss or damage that is likely to be caused.

What unfair contract laws are actually changing?

The above-mentioned changes are being effected by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022  (Cth), which takes effect on November 10, 2023.

Get help

Do you need help from an Australian lawyer to review your building and construction contracts?  Speak with a team member from Dexterity Law by clicking on this link.