Unfair Contracts - PowerPoint Presentation

Slide1

Unfair Contracts

Presents:

KELVIN KEANE Senior Associate 6 SEPTEMBER 2016Slide2

CONTENTS

The Legislation

Unfair Contract Laws will Affect the Construction Industry.What is a Small Business Contract? Standard Form Contracts

What is an Unfair Term?

Examples of Unfair Terms.

How Do the Unfair Contract Terms Affect the Construction Industry?

Consequences if a Court finds that a Term is Unfair.

How the New Laws Can Affect You. Slide3

New

legislation commencing on 16 November 2016 will prohibit unfair terms in Standard Form Contracts with small

businesses.The changes are being made in the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 and they will amend the Australian Securities and Investment Commission Act 2001 (ASIC Act) and the Competition and Consumer Act 2010 particularly Schedule 2 Australian Consumer Law (ACL).The ASIC Act applies to financial services or products and the ACL applies to the supply of goods and services other than financial services or products.

The LegislationSlide4

The reform is an extension of unfair contract legislation which currently applies to financial services and consumer contracts where consumers are protected from unfair terms in circumstances where they have little or no ability to negotiate the terms of their contracts.

The

reform is part of an initiative to extend the protections given to consumers to small businesses which are also vulnerable to unfair terms in Standard Form Contracts provided on a “take it or leave it basis”.The effect of the reform is to render unenforceable, terms of the contract which a Court determines unfair.

The LegislationSlide5

The

aim of the legislation is not necessarily to make all onerous clauses void but to ensure that were there are onerous clauses they are transparent and the small business has the opportunity to negotiate or be aware of its risks.

The freedom to contract on your own terms is still preserved. The LegislationSlide6

Unfair Contract Laws will affect the Construction IndustrySlide7
Slide8

How?

The new unfair contract laws

may have a serious impact on the construction industry and the construction supply chain, and are likely to affect Standard Form construction contracts such as Subcontracts, Supply Agreements, Consultancy Agreements, Minor Works Agreements and Purchase Orders with small businesses.The terms that will face most scrutiny are terms containing time bars, variations, delay claims, liquidated damages and termination.Slide9

What is a Small Business Contract?Slide10

A contract is a small business contract if:

The contract is for the supply of goods or services, or a sale or grant of interest in land; and

at least one of the parties is a “small business”(a business employing fewer than 20 employees); and either of the following applies:the upfront contract price payable under the Contract does not exceed $100,000 or $250,000 for Contracts which are 12 months or longer.

A casual employee is not to be counted unless he or she is employed by the business on a regular and systematic basis.

Added to ACL s23 Schedule 2

Small Business Contracts Slide11

Standard Form ContractsSlide12
Slide13

Standard Form Contract

Standard form contracts automatically attract the legislation

23 Unfair terms of consumer contracts              (1)  A term of a consumer contract or small business contract is void if:                      (a)  the term is unfair; and                      (b)  the contract is a standard form contract.              (2)  The contract continues to bind the parties if it is capable of operating without the unfair term.              (3)  A consumer contract is a contract for:                      (a)  a supply of goods or services; or                      (b)  a sale or grant of an interest in land; to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption. Slide14

Standard Form Contract

The law does not define a ‘standard form contract

’ however gives a broad outline:27   Standard form contracts              (1)  If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise.              (2)  In determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account the following:                      (a)  whether one of the parties has all or most of the bargaining power relating to the transaction;                      (b)  whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;                      (c)  whether another party was, in effect, required either to accept or reject the terms of the

contract (other than the terms referred to in section 26(1))

in the form in which they were

presented

;

                     (d)  whether

another party was given an effective opportunity to negotiate the terms of the

contract

that were not the terms referred to in

section 26(1)

;

                     (e)  whether

the terms of the contract (other than the terms referred to in

section 26(1))

take into

account

the specific characteristics of another party or the particular transaction;

                      (f)  any other matter prescribed by the regulations.

S27 Schedule 2 ACLSlide15

What are Unfair Terms?Slide16

Examples of Unfair Terms

ACL s25

  Examples of unfair terms              (1)   … the following are examples of the kinds of terms of a consumer contract that may be unfair:                      (a)  a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;

                     (b)  a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;

                     (c)  a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract; Slide17

Examples of Unfair Terms

(d)  a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract; (e)  a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;

(f)  a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;

(

g)  a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;

(

h)  a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;

                    Slide18

Examples of Unfair Terms

i

)  a term that limits, or has the effect of limiting, one party's vicarious liability for its agents; (j)  a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party's consent;

(k)  a term that limits, or has the effect of limiting, one party's right to sue another party;

(

l)  a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;

(

m)  a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; Slide19

Unfair Terms

A Court, however, will consider a term to be unfair if the term:

would cause a significant imbalance in the parties’ rights and obligations arising under the Contract; andis not reasonably necessary in order to protect the legitimate interests of the party would be advantaged by the term; andwould cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.Slide20

Unfair Terms

In determining whether a business contract is unfair, a Court must take into account the extent to which the term is transparent and the Contract as a whole.A term is transparent if the term is:

expressed in reasonably plain language; andlegible;presented clearly; and

readily available to any party effected by the term.Slide21
Slide22

How do the unfair contract terms affect the Construction industry? Slide23

Unfair Contract Terms

In a Standard form Construction Contract, there are a number of provisions that could foreseeably be considered to be unfair and are at risk of being

unenforceable including:Unilateral variation clauses which provide that a contractor is bound to execute variations to the Scope of Work if directed by a Principal;

Extension of Time and Delay claim clauses especially where Standard Form Contracts contain onerous and unnecessary preconditions or bars on claims for delay or for disruption caused by the Principal

;

T

ermination

for convenience clauses that only allow for one party to terminate the Contract;

Termination

clauses generally where powers are provided to the recipient of goods and services to terminate but more limited powers are conferred on the supply of those goods and services to terminate

.Slide24

Unfair Contract Terms

Example of onerous delay claim provisions:“The Subcontractor acknowledges and agrees that the Subcontract Sum includes all allowances for and the Subcontractor will not be entitled to recover any additional payment for any loss, expense or damage for any disruption to the Subcontractors execution of the work under the Subcontract including prolongation, delay, acceleration, lack of continuity, overtime, lack of co-ordination, overcrowding, industrial disruption or lack of access, whether or not they are attributable to the Contractor”.Slide25

Unfair Contract Terms

Time

bars or other conditions precedent to claiming Variations or Extensions of Time particularly when there are unreasonably short timeframes or provisions which deem that a party has foregone its entitlement to claim if a Notice of Claim is not provided within a prescribed time;Clauses which entitle a Principal or Head Contractor to exercise its absolute discretion against the interests of another party;Liquidated damages especially in the case of residential building work which underestimate the home owner’s loss due to delay caused by the builder or construction company; and

Clauses

which confer power to assign and/or novate that Contract to the detriment of the other party without that other party’s consent.Slide26

What are the consequences if a Court finds that a term is unfair?Slide27

The Consequences

Where a term is found by Court to be unfair, the clause will be void ab initio (as if the clause never existed) and will be unenforceable.

A finding by the Court that a clause is void and unenforceable does not necessarily mean that the whole of the Contract is unenforceable.If, however, the void clause goes to the heart of the Contract, there is a risk that the whole of the Contract can also be declared void and unenforceable.Slide28

How the new laws can affect you!Slide29

Y

Y

YContract NegotiationsSlide30

Key concern is for Principals and Head Contractors

The unfair contract legislation for small businesses has a significant implications for the construction industry from a risk, commercial and reputational point of view.

The key concern is that a term relied upon by a Principal or Head Contractor may be held to be unfair and declared void and unenforceable.This will mean that contractual clauses once relied upon by Principals and Head Contractors to defeat claims by Subcontractors may no longer be enforceable.Slide31

Recommended Action

Principals

and Head Contractors should, as a minimum:make enquiries in the early stages of engagement and prior to the letting of Contracts as to whether the other party is a small business;review Standard Form Contract

terms and either change to be balanced or put in place policies to ensure the terms are transparent and opportunity is given for the other party to review the terms;Slide32

Recommended Action

Contracts

will need to include effective severance clauses which allow for the Court to declare unfair terms void without affecting the rest of the Contract;consider preparing alternative Standard form Contract suites with one suite tailored and reserved for use when contracting with small business; anddevelop an internal

administrative and risk mitigation procedure to:

a) identify when and where there is a risk that the Act may apply;

b) review and adjust how Standard

Form

Contracts are negotiated with small business; and

c) where appropriate, dilute the harshest terms in Standard Form Contracts.Slide33

What happens if the terms are found void

If a term of the Contract is declared void by a Court, the decision of the Court will be published. This may

result in reputational damage for the Principal or Head Contractor if the Court makes findings that the Principal or Head Contractor have acted unfairly against a small business.Although only the Court has the power to declare that a term is unfair, the legislation does state that an unfair contract term is void if the terms are unfair and the contract is in a Standard Form

.Slide34

Implications for Security of Payment Claims

It

may also be possible that Subcontractors may seek to take advantage of the unfair contract laws in Security of Payment adjudications.Although only the Court has the power to declare that a term is unfair, the legislation does state that an unfair contract term is void if the terms are unfair and the contract is in a Standard Form.It will not be surprising if Subcontractors will seek the apply the unfair contract laws in Security of Payment adjudications to overcome harsh contractual terms such as time bars which could otherwise operate to defeat payment claims.

The legislation may also empower subcontractors to be more proactively engaged in the negotiation of the terms of the Subcontract.Slide35

Administration

The changes to the legislation will require changes to the way contracts are implemented and negotiated in an attempt to provide a transparent dialogue.

Contract administration therefore should involve:People who know what the contract terms contain;Plenty of time prior to execution in which to consider the contract;Warning of any amendments between updated versions;Consideration of any requested amendments;

Not unjustly penalised where a term is not amended.Slide36

AdministrationSlide37

Q & ASlide38

Thank YouSlide39

David Glinatsis

Director/Solicitor

David.Glinatsis@kreisson.com.au

Kelvin Keane

Senior Associate

Kelvin.Keane@kreisson.com.au

Our Number

: (02) 8239-6500

Our Fax:

(02) 8239-6501