An engineer-turned-construction lawyer breaks down what engineers need to know about upcoming changes to laws governing contract terms.
Engineering firms operate at the cutting edge of technology, working on projects of ever-increasing complexity. But when a venture doesn’t go as planned, your firm might find itself disadvantaged by unfavourable contract terms.
To avoid a cash flow crunch, engineering firms, particularly small and medium enterprises (SMEs), frequently enter contracts where the risk is not always balanced with appropriate opportunity.
When things go wrong, these same companies are sometimes dissuaded from contending claims because disputes take up resources, time and energy that is maybe better spent pursuing new business.
This is more often the case when the contract provides the other side with an unfair advantage.
These are among the issues the Australian Government attempted to tackle in passing the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (UCT Amendments). This will reinforce the existing UCT regime embedded in the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth).
These laws come into effect on 10 November 2023 — here’s what engineers need to know to be ready for the change.
What contract term is considered unfair?
A term of the contract is unfair if it satisfies the following (the UCT Elements):
- It would cause a significant imbalance in the parties’ rights and obligations under the contract
- It is not reasonably necessary to protect the legitimate interests of the advantaged party
- It would cause detriment (financial or otherwise) to a party if applied
What are common examples of UCTs?
Common terms that might be UCTs include:
- Unilateral right to vary, e.g. a clause allowing the principal to vary the contract price without allowing the consultant to object or negotiate
- Unilateral termination right, e.g. allowing the principal to terminate the contract at their convenience without appropriate payment rights
- Unreasonable risk allocation, e.g. a consultant providing drafting services for a completed heat exchanger project should not have to indemnify the other party if that heat exchanger explodes
Whether a term is a UCT or not will depend on the specifics of the contract. For instance, the above examples may not be a UCT if they are necessary to protect a party’s legitimate interests.
What contracts fall within the UCT regime?
Generally standard form contracts with small business and consumers are subject to the UCT regime. Standard form contracts are contracts that are prepared by one party and presented to the other party with little or no opportunity to negotiate.
Are there monetary thresholds for the contract?
No. The maximum contract price threshold has been abolished by the UCT Amendments. That is, the UCT regime will apply to a standard form contract irrespective of the contract price.
What is the threshold for small business?
The UCT Amendments effectively expand the jurisdiction of the UCT regime so it now applies to a small business contract if one of the parties is a business with under 100 employees (previously less than 20) or under $10 million in annual turnover in the previous income year.
Importantly, a business only needs to meet one of these conditions to qualify as a small business.
How is the number of employees determined?
The number of employees is calculated on a full-time equivalent basis at the time the contract is executed. Part-time employees are to be counted as an appropriate fraction of a full-time equivalent.
What happens to the contract if it contains a UCT?
Where a term is found to be unfair, that term is deemed void and therefore non-binding.
However, it is not unusual for a contract to contain clauses that allow the remaining contract terms to bind the parties (a severability clause), so that the other contract terms remain enforceable if, without the voided term, the contract remains operable.
This is for the courts to determine, as they have authority to void, vary or refuse to enforce a contract.
Are there penalties for contravention?
Yes. Penalties will be imposed against an individual or a business that proposes, uses or relies on UCTs in a standard form contract. The maximum monetary penalty for a company under the new UCT regime is the greatest of:
- $50 million
- Three times the value of the “reasonably attributable” benefit obtained from the conduct (if it can be ascertained by the courts)
- 30 per cent of adjusted turnover during the breach period (if the benefit is not ascertainable)
These maximum penalties apply for each contravention, so they could mount up quickly.
When do the UCT Amendments come into effect?
The UCT Amendments apply to standard form contracts and small business contracts that are entered into, renewed or varied on and after 10 November 2023.
Contracts currently on foot will be unaffected provided they are not renewed or varied on or after 10 November 2023. It is not clear, but a variation of scope will probably not bring the contract within the reformed UCT regime.
What are the practical ways to avoid penalties?
Review your list of counterparties to contracts, including customers and suppliers. Are any of them considered small businesses? If you do not know, ask.
Review the terms of your standard form contracts (including your purchase orders and terms of engagement). Among the questions you should keep in mind are:
- Is it drafted in plain, easy-to-understand language?
- Does it contain jargon that could confuse or mislead the other party?
- Are all the contract documents (schedules, appendices, et cetera) made available to the other party?
- Does it contain one-sided clauses?
- If so, what legitimate interest is that clause going to protect?
The questions above should give you some indication of whether your contract term is at risk or not.
Review each term of your contract and consider whether any of them can satisfy the UCT Elements. Consider removing or amending clauses that overly tilt towards your interest if it is not necessary to protect your legitimate business interest.
The above statements are guidance and not to be taken as legal advice. What constitutes a UCT can vary from case to case. If in doubt, seek advice from a qualified legal professional.