ACCC puts spotlight on the construction industry: the prohibition on unfair contract terms
If your business may be affected by the unfair contract terms prohibitions, we recommend that you take stock and review your template contracts
The ACCC has announced that one of its priorities for enforcement in 2018 will be competition issues in the commercial construction sector and ensuring that small businesses receive the benefits of the revised unfair contract terms law.
Given the construction sector will receive increased regulatory oversight in 2018, now is an excellent time to review any standard form or template contracts your business uses.
During the first year of operation of the expanded prohibition on unfair contract terms, there was one major prosecution by the Australian Competition and Consumer Commission in 2017 that is particularly relevant to the construction sector. Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd  FCA 1224 (JJ Richards case) which related to a waste management contract. This case now gives even clearer guidance on what terms to watch out for in standard form construction contracts such as subcontracts, plant hire and supply agreements.
Background to the JJ Richards case - the prohibition on unfair contract terms
From 12 November 2016, the Australian Consumer Law was amended to extend the prohibition on unfair terms to standard form contracts with a small business (not just those with a consumer). A small business contract is one where a party has less than 20 employees and the upfront value of the contract:
- is $300,000 or less or
- if the contract term is in excess of 12 months, is $1 million or less.
Unfair terms are those that cause a significant imbalance between the parties’ rights and obligations, where such terms are not reasonably necessary to protect a legitimate interest and the term causes detriment to the disadvantaged party.
Terms declared void in the JJ Richards Case
A range of terms in the standard form services agreement for waste management services were declared void (as a result of consent orders being made) in the JJ Richards case.
Of particular relevance to the construction industry were the following provisions which, amongst others, were declared void:
- Automatic renewal: the template agreement had an initial period of up to five years and was renewed for a further period of up to five years automatically, unless the customer exercised its right to cancel in a 30 day window prior to renewal. Given the other provisions of the contract regarding pricing, this was unfair as it did not protect a legitimate interest of the services provider.
- Price variation: the services provider was able to unilaterally increase the price it invoiced for its services (including to increase revenue), which was unfair and operated solely in favour of the services provider.
- Exclusivity: the services provider required an exclusive appointment during the term as the sole waste services manager of each customer. Given the automatic renewal and pricing uncertainty, this was an unfair requirement.
- Charges where services not performed: the services provider was still able to charge its customer where it attended to collect waste (which need not have been at the time agreed with the customer) and if collection was ‘prevented or hindered in any way’. This was an unreasonable term as it also applied where collection was prevented for reasons outside of the customer’s control.
- Indemnity: the template agreement contained a broad indemnity from the customer in favour of the services provider. The indemnity was not limited to breach by the customer, nor was it provided on a reciprocal basis, as such it was an unfair term.
In the construction sector, plant hire or supply agreements in particular may contain provisions similar to the above, where the term of the agreement may be automatically extended, prices may fluctuate and charges may be imposed where delivery of equipment or materials is attempted, but not performed. If such terms are to be used, then the context will need to be examined and the legitimate interest considered in order to determine whether they will be enforceable and whether such terms should be included in template agreements.
Construction industry practice
Since the expansion of the unfair contract terms prohibitions in the Australian Consumer Law were introduced, construction industry participants have become more aware of the requirements that standard form template contracts with small business must be fair. The requirement to be ‘fair’ in contract provisions may involve either making relevant provisions mutual or identifying the legitimate interest that needs to be protected and focusing the provision on protecting those rights.
While there is good general awareness of such requirements in the industry, the JJ Richards case highlights the need for ongoing review of template contract terms, particularly in light of the ACCC’s spotlight on the industry. It is worth noting that, in addition to the provisions that were declared void in the contract that was being considered in the JJ Richards case, the waste management services provider in that case was restricted from using the prohibited terms in small business contracts for a period of five years and was also required to implement and maintain a compliance program for a period of three years.
If your business may be affected by the unfair contract terms prohibitions, we recommend that you take stock and review your template contracts in light of the above decision and the ACCC’s announcement of its enforcement priorities this year. This is an important step for both the terms of the contract issued for tender, and the tender process itself (including whether the terms have been tailored to the specific project requirements or the supplier has a genuine opportunity to negotiate such terms). Each of these factors influence whether the contract is a standard form contract or not. You may also consider whether an unfair terms compliance program is appropriate for relevant sales or procurement staff in your business.
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