CONTRACTS

UNFAIR AND WHO DOES THIS AFFECT? The draft Bill has the effect
PROHIBITED TERMS All parties who are involved in of rendering any ‘unfair’
the preparation, completion and term void and may also
Scott Budd, Partner administration of construction
expose the drafting party to
Kimberley Thorne, Solicitor contracts
pecuniary penalties.
Mallesons Stephen Jaques, GOVERNMENT PROPOSAL
Brisbane The Commonwealth Government
is proposing amendments to
the Trade Practices Act 1974
and the Australian Securities
and Investments Commission
Act 2001 to prohibit unfair
contract terms in standard–form
contracts. The draft Bill has the
effect of rendering any ‘unfair’
term void and may also expose
the drafting party to pecuniary
penalties.
WHAT CONTRACTS MAY BE
AFFECTED?
The draft Bill will apply to all
standard–form contracts (other
than contracts of service such
as employment contracts),
and there appears to be little
limitation placed on the types of
transactions caught by the laws
or the parties who may have the
benefit of the protection.
This means that the Bill will apply
to standard–form contracts for
matters such as construction,
professional services,
procurement, property purchases,
as well contracts that are either
a financial product or a contract
for the supply, or possible supply,
of services that are financial
services.
WHAT IS A STANDARD
FORM CONTRACT?
The draft Bill does not as yet
define a ‘standard–form contract’.
The Australian Consumer
Law Consultation on Draft
Provisions on Unfair Contract
Terms suggests that drafting
an express definition could have
the consequence of providing
a contracting party with the
opportunity to arrange their
contracts in a manner which
enables it to avoid the application
of the draft Bill.
48 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #127 JULY/AUGUST 2009
As a result, it would be dangerous
for anyone to adopt a simplistic
view that a standard–form
contract is a contract which is
non–negotiated and attempt
to exempt their contract from
the amendments by instigating
‘sham negotiations’ or presenting
the other contracting party
with a choice of options which
essentially are ‘meaningless’.
It is unclear as to the depth of
negotiation that would be required
to legitimately define the contract
entered into as one which is not
‘standard–form’ and the draft
Bill creates a presumption that
a contract is in standard form
unless the relevant party can
prove otherwise.
To assist the Court in determining
whether or not a contract is in
standard–form, the draft Bill
sets out a non–exhaustive list of
factors which include:
• whether one of the parties has
all or most of the bargaining
power relating to the transaction
• whether the contract was
prepared by one party before
any discussion relating to the
transaction occurred between the
parties
• whether another party was, in
effect, required either to accept or
reject the terms of the contract
• whether an opportunity to
negotiate terms was provided,
and
• whether the terms of contract
take into account the specific
characteristics of another party or
of the particular transaction.
WHAT CONSTITUTES AN
UNFAIR TERM?
The Bill provides an ‘unfair
term’ as one which would cause
a significant imbalance on the
parties’ rights and obligations
arising under the contract and
is not reasonably necessary in
order to protect the legitimate
interests of the party who would
be advantaged by the term. Again
there is a reversal of the onus
of proof here. The Bill contains
a presumption that a term of a
standard–form contract is not
reasonably necessary to protect
legitimate interests unless the
party seeking to rely on it proves
otherwise.
The draft bill includes a non–
exhaustive list of terms which
may now be considered as
‘unfair’. The current list of such
terms includes certain clauses
commonly included in Australian
standard construction contracts
such as permitting one party (but
not another) to terminate the
contract or to vary the contract.
In determining whether a term is
unfair, the Court must take into
account:
• the extent to which it would
cause, or there is a substantial
likelihood that it would cause,
detriment (whether financial or
otherwise) to a party
• the extent to which the term
is transparent (expressed in
reasonably plain language, is
legible, presented clearly and
readily available to any party
affected by the term), and
• the contract as a whole.
If the term is ‘unfair,’ the new
laws will provide protection to
parties to contracts by declaring
such unfair terms as void and of
no effect. The contract will remain
on foot to the extent it is capable
of operating without the inclusion
of the unfair term.
WHAT CONSTITUTES A
PROHIBITED TERM?
The new laws will also declare
certain terms in standard–form
contracts to be ‘prohibited’. No
assistance is yet given as to what
may constitute a ‘prohibited
term’, with the current definition
simply proposing that it is a
term of a kind prescribed by the
regulations.
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #127 JULY/AUGUST 2009 49
A prohibited term is not only
void, but a pecuniary penalty may
be imposed on a person who
includes or purports to include,
applies or relies on (or purports
to apply or rely) such a term.
However, the contract will remain
on foot to the extent it is capable
of operating without the inclusion
of the prohibited term.
POTENTIAL EFFECT OF
THE NEW LAWS
These new laws are set to have
a significant impact on the way
in which the construction and
resources industry does business.
Standard contacts have long been
the contractual mainstay of these
industries and the imposition
of an overarching unfair terms
regime is likely to greatly increase
the cost and complexity of
contractual dealings.
Furthermore, in the current
environment of global financial
instability, these laws will provide
an opportunity for parties to
unfavourable contracts to escape
liability. They are likely to lead to
less contractual certainty, which
is an undesirable result to say the
least.
The new laws are proposed to
apply to contracts entered into
on or after 1 January 2010 or
which are renewed or varied
on or after 1 January 2010.
Scott Budd and Kimberley
Thorne’s article was previously
published in Mallesons Stephen
Jaques’ Brisbane Construction
Legal Update—June 2009.
Reprinted with permission.