New unfair contract laws … what they are and how they will affect you
On 12 November 2016, new unfair contract laws come into force. They offer opportunities for contractors but also pose some risks.
The new laws apply to certain ‘standard form contracts’ entered into on or after 12 November 2016. The laws also apply to any terms of existing ‘standard form contracts’ which are varied on or after that date.
What is a ‘standard form contract’?
Surprisingly the term is not defined which makes it more difficult to know whether a particular contract or clause is or is not affected by the new laws. In general terms any contract that is provided on a ‘take it or leave it’ basis prepared by one party without any input from the other party or no genuine opportunity for negotiation, is likely to be covered provided it satisfies two other essential elements. These are the ‘upfront price payable’ test and that one of the parties has to have been, at the time the contract was formed, a ‘small business’.
Many construction contracts are presented to contractors and subcontractors as a “done deal”. Equally often, contracts are presented and input is sought but when requests for changes are made they are met with a flat refusal.
Under the new unfair contract laws, there is a presumption that a contract is a standard form contract with the result that where it is alleged to be the case, the party that prepared the contract has to prove that it is not.
There is no absolute or clear cut test and the only way to definitively find out is to a court or tribunal make a decision. Any court or tribunal asked to consider the matter can take into account any circumstance but must take into account whether the party to whom the contract was presented:
- had almost no bargaining power
- had no real opportunity to argue for a change to the terms
- was required to either accept or reject the terms as they were presented.
A court or tribunal must also take into account whether:
- the party who prepared the contract did so before there were any discussions about the transaction
- any specific characteristics of the party to whom the contract was presented, were taken into account when the contract was drafted.
‘Upfront price payable’
If the contract formation requirement has been met the next question is whether the ‘upfront price payable’ requirement is met. It will be if the contract is for a period of 12 months or less and the ‘upfront price payable’ is no more than $300,000 or, if the contract is for more than 12 months, the ‘upfront price payable’ is no more than $1 million.
So, what is the ‘upfront price payable’? This is a reference to the total of all amounts which are payable under the contract and clearly disclosed or ascertainable before or when the contract is signed. In the construction industry most times this will mean the price stated in the contract. It would seem that the maximum amount of a provisional sum or PC item is to be included when working out the ‘upfront price payable’.
One party a ‘small business’
In addition to the contract formation requirement and the ‘upfront price payable’ requirements being met, one of the parties to the contract must be a ‘small business’
A ‘small business’ is one that employs fewer than 20 people at the time the contract is entered into. This includes any casual staff employed on a regular or systematic basis. Obviously you will know whether your business has fewer than 20 employees and if so, this element will be satisfied. However, if your business has 20 or more in order to find out whether the unfair contract laws apply, you need to know how many employees the other party to the contract has. Sometimes, for example with a small subcontractor, this will be obvious. However that is not always going to be the case.
You should therefore incorporate into your contracting procedure, a method for determining how many employees the other party has. If in doubt, you should assume that the unfair contract laws will apply to a contract with your subcontractor.
What is an “unfair term”?
A contract term is unfair if it:
- would cause a significant imbalance in the parties’ rights and obligations under the contract; and
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The construction industry abounds with harsh and arguably unreasonable terms and obligations being “pushed down” to people at the bottom of the construction chain, typically subcontractors.
Examples of common unfair contract terms could include:
- termination for convenience clauses
- clauses that act as time bars for making certain claims (such as for seeking an extension of time) where the time for providing notice is too short
- clauses that limits one party’s right to sue the other party
- clauses which require a party to indemnify the other against risks that party has no control over.
What happens if a contract term is “unfair”?
If a term is considered to be unfair then it can be declared void and will no longer apply to the contractual relationship. The rest of the contract clauses will remain in force. Problems which are likely to arise include what is to happen where a particular clause has been declared void and struck out?
The answer is that if that is not clear from what remains of the contract, then a court or tribunal will imply into the contract such “reasonable terms” as it deems necessary. Most likely courts and tribunals will tend to favour the party who was disadvantaged by the unfair term. This could be significantly beneficial if that is you but if it is your subcontractor who has successfully argued that a clause you included in your contract is void, it could work against your interests.
What should you do?
Regardless of whether you are a ‘small business’ or not you should immediately:
- introduce into your contracting procedures for subcontractors and suppliers questions to ascertain:
- how many employees they have
- the ‘upfront price payable’ of each job, that is $300,000 or less or $1million dollars or less
- the term or timeframe for the job, that is,12 months or less or not
- review your standard contracts, such as those you use for your subcontractors checking for potentially unfair terms
- review any standard terms on your website for potentially unfair terms
- amend any questionable or potentially unfair terms to ensure that you have certainty, and
- have drafted, ready for use, a standard contract catering for the new rules.
For help amending existing contracts and contracting procedures or drafting new ones, call McKays. Alternatively, if you would like more information about the new unfair contract laws or any other matter affecting your business, please contact the McKays team.