New protections for small businesses are here. On 12 November 2016, a new regime as enacted under the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (the Act) came into effect. This new regime brings with it a number of protections for small business operators, such as subcontractors, who employ fewer than 20 people. The effect of the new regime being that the method in which you negotiate with small businesses in executing contracts may expose you to risk.
The purpose of the Small Business and Unfair Contact Terms regime
The regime targets the imbalance of power often found when large and small businesses negotiate and execute contracts. For the construction industry, this will have its greatest influence on contracts that are presented to subcontractors or small business operators on a ‘take it or leave it’ basis. The new regime aims to shift the power from larger business operators to small business owners by affording them the opportunity to void clauses of contracts that are oppressive or uncommercial. The ultimate effect of the new regime is that the terms of the contract you have with a small business may be altered in a way that substantially affects your right of enforcement.
The criteria for the new regime
Broadly, the new protections will apply where:
- There is a ‘small business contract’;
- A term of that contract is considered ‘unfair’; and
- The contract is deemed a ‘standard form contract’.
Where all three criteria apply, it may be the case that clauses in the contract can be declared void.
What is a ‘small business contract’?
Small business contracts have the following features:
- The contract is for a supply of goods or services, or a sale or grant of an interest in land; and
- At the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 person; and
- Either of the following applies:
- The upfront price payable under the contract does not exceed $300,000;
- The contract has duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
What makes a contract term ‘unfair’?
A term is unfair if it:
- causes a significant imbalance in the parties’ rights and obligations;
- is not reasonably necessary in order to protect the legitimate interests of the party who is advantaged by it; and
- causes financial or other detriment to the other party.
What is a ‘standard form’ contract?
Broadly, where a contract is prepared by one party with little to no negotiation of its terms and for the purpose of the specific transaction, it will be considered a standard form contract. This is commonplace in the construction industry, particularly for smaller operators who cannot afford the costs of a bespoke contract.
It should be noted that industry standard building contracts that are purchased from industry providers (such as Master Builders, Australian Standard, or QBCC etc.) may not fall within the category of ‘standard form contract’ for the purposes of the new regime because they have not been prepared by either party.
Whether your contracts are a ‘standard form’ contract for the purposes of the new regime will have to be assessed on a case by case basis.
How does the regime apply to my contracts?
In practice, any number of terms within most modern construction contracts may be vulnerable to the new regime. Key terms you should consider assessing prior to executing a contract include:
- Contractor warranties and entire agreement clauses
- Time bars
- Novation clauses
- Superintendent or principal discretions
- Unilateral variation clauses
- Payment terms
- Liquidated damages
- Dispute resolution
How can I protect my business?
The new regime will apply to all small business contracts entered into or renewed after 12 November 2016. This means you should prepare your business by auditing all contracts due to be renewed or entered into after that date, especially those contracts where you are dealing with a small business subcontractor. The safest way to avoid any negative impact from the new regime is to:
Audit contracts due to be executed or renewed.
Communicate openly with subcontractors to ensure they understand the full meaning of your contracts.