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27 Jan 16
Get ready to play fair in 2016 - new unfair contract terms regime starts!

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WHO SHOULD READ THIS

  • Industry participants in the construction and procurement sector that contract with small businesses.

THINGS YOU NEED TO KNOW

  • The new regime takes effect on and from 12 November 2016. Industry participants in the construction and procurement sector need to become familiar with the regime and its potential impact on their business and day-to-day contracting.

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) has extended the existing unfair term protections to small businesses. The new regime takes effect on and from 12 November 2016.

How does it affect you?
Contracts that are entered into or renewed, or terms of existing contracts that are varied, on or after 12 November 2016 will need to comply with the new regime. If a term is found to be unfair, the term may be declared void. 

Does the regime apply to construction and procurement contracts?
The new regime appears to apply to common industry construction and procurement contracts (providing the relevant thresholds under the regime are satisfied). This includes, for example, supply contracts (for either supply of goods or services), consultancy agreements, hire agreements, works contracts and other similar procurement contracts.

Will the new change apply to me?
The new regime will apply to a standard form contract entered into or renewed on or after 12 November 2016, where:

  • it is for the supply of goods or services or the sale or grant of an interest in land;
  • at least one of the parties is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis); and
  • the upfront price payable under the contract is no more than $300 000 or $1 million (if the contract duration is for more than 12 months).

What terms are unfair?
A term is unfair under the new regime if it:

  • would cause a significant imbalance in the parties’ rights and obligations;  
  • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by it; and
  • would cause financial or other detriment to the other party.

Examples of terms that may be considered to be unfair under the new regime include:  

  • only permit one party (but not the other party) to avoid or limit performance of the contract;
  • only permit one party (but not the other party) to vary, renew or terminate the contract;
  • penalise only one party (but not the other party) for a breach or termination of the contract;
  • permit one party to assign the contract to the detriment of the other party without that other party’s consent; or
  • limit one party’s right to sue the other party.

Getting ready for change – key steps to take!
Since the changes commence on and from 12 November 2016, it is important (as early as possible) to start preparing for change. Recommended steps that industry participants should take in the lead up to 12 November 2016 are set out below.

Step What you should do
Check if you contract with ‘small business’ 

Check whether you contract with ‘small business’ (a business up to 20 employees or less). If you are not certain whether you contract with a small business, consider (to the extent it is appropriate in the circumstances) asking the relevant counter-party how many people it employs (but please note that under the new regime, there is no obligation for a party to confirm its employee head-count).

If you are tendering work to small businesses, you may consider including a requirement for tenderers to confirm their employee head-count.

Review and amend your ‘small business’ contracts

If you determine that you contract with ‘small business’ for the purposes of the new regime, you should:

  • familiarise yourself with the regime;
  • for your small business contracts, check the contracts for any unfair terms; and
  • appropriately amend any unfair terms in your small business contracts.

Check if your business is a ‘small business’

Check if your business is a ‘small business’ (20 employees or less). To determine the employee head-count for the purposes of the new regime, add the number of your full-time employees, part-time employees and casual employees who work on a regular and systematic basis.

It is important for you to determine whether your business is a ‘small business’ for the purposes of the new regime (you can use the new regime as a bargaining tool if it applies to you).

Check contracts which you intend to renew or vary after 12 November 2016 Check your contracts for any unfair terms which you intend to renew or vary on or after 12 November 2016. The new regime will apply to existing contracts which are renewed or varied on or after 12 November 2016.

Train staff

You should provide appropriate training to your staff involved in negotiating contracts to ensure that they are aware of the new regime. 

 

 

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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