'Fair Play' - New contract laws to impact procurement from small business

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By Scott Higgins, Partner

The ‘Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015’ (Cth) (“the Act”) commenced on 13 November 2016.  It will have implications for any company that engages directly with small businesses.  

Procurement teams and in-house legal counsel in the property and construction sectors should be ensuring their standard-form contracts such as purchase orders, subcontracts and supply agreements do not contravene the legislation.  This article will examine how the new laws will impact these types of contracts and the key considerations for those tasked with compliance.

For some years now, protections have existed for consumers against unfair contract terms.  The new legislation extends these same protections to ‘small business contracts’ via changes to the ASIC Act and Australian Consumer Law.

The unfair contract amendments in the Act are notable because they represent an incursion into the sanctum of ‘freedom of contract’ – the common law principle that commercial parties are at liberty to strike whatever bargain they choose.  With renewed political focus[1] on protecting an expanding category of ‘vulnerable’ groups such as small businesses and subcontractors, the new laws may be part of a broader interventionist trend from the legislature in this area.

For now, however, Australian companies need to grapple with the practical impact of the new laws.  This article examines the application of the laws to companies in the property and construction industries.

What is a ‘small business contract’?

Under the new legislation, a contract will be deemed to be a ‘small business contract’ if:

  • the contract is a ‘standard form’ contract for the supply of goods or services;
  • at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
  • either of the following applies:
    • the upfront price (excluding contingent amounts and interest payments for contracts regulated by the ASIC Act) payable under the contract does not exceed $300,000; or
    • the contract has a duration of 12 months (or more) and the upfront price payable under the contract does not exceed $1,000,000.  

The Act states that factors that are required to be taken into account by a Court when assessing whether a contract is a ‘standard form contract’ or not, include:

  • whether one of the parties has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was, in effect, required to either accept or reject the terms of the contract in the form in which they were presented (i.e. ‘take it or leave it’); and
  • whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

From the above, it is clear that the specific circumstances surrounding the preparation, presentation and negotiation of contracts will be a relevant factor for companies to consider in terms of compliance and avoiding practices which might unwittingly bring a contract within the scope of the Act. The above provides a framework for Courts, however, it is not prescriptive and some uncertainty of application will remain until we start to see the first judgments in respect of claims brought under the Act.

Notably, the legislation also establishes a presumption in favour of the contract being a ‘standard form contract’ if a claimant so alleges. The onus is placed on the respondent to seek to rebut this presumption by proving otherwise. This reversal of the burden of proof might encourage some claimants to ‘test the waters’ in 2017 by making claims.

What is an ‘unfair’ term of a ‘small business contract’?

A term of a ‘small business contract’ will be void for being unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations;
  • is not reasonably necessary to protect the legitimate interests of the party benefitting by the term; and
  • causes a detriment (whether financial or otherwise) to the other party if it were to be relied on.

The new legislation provides specific examples of terms that may be unfair, including terms that permit only one party (usually the party putting forward the term) to:

  • avoid or limit performance of the contract (including liability);
  • arbitrarily vary or terminate the contract;
  • renew or not renew the contract;
  • assign the contract without consent;
  • arbitrarily vary the characteristics of what is to be supplied;
  • arbitrarily vary the ‘upfront price’ payable under the contract without the other party being able to terminate the contract;
  • limit the other party’s ability to dispute issues, sue or adduce evidence in proceedings in relation to the contract;
  • limit its vicarious liability for its agents;
  • having consequences for non-material breaches or non-conformances;
  • determine if a breach has occurred, determine the meaning of an ambiguous term or discrepancy in contract documents; or
  • impose a penalty for a breach or termination (in the construction context, liquidated damages might be susceptible for challenge on these grounds).

Many clauses of standard-form agreements which are offered to small businesses in the property and construction industry may indeed reflect some of the above positions. This is because they are drafted, naturally, to have a very favourable risk profile towards the party who prepared the contract. A review of these contracts is imperative for compliance purposes.

The battle of the forms

In a procurement context, it is common for two parties to an agreement for the supply of goods or services to each attempt to impose their own terms for the supply of those goods or services upon the other.

Regrettably, terms are not always negotiated or consolidated into a single contract and the party procuring the goods or services simply issues a ‘purchase order’ and the party providing the goods or services issues a term sheet, supply agreement or some other document containing its own terms and conditions.

In this context, whether one set of terms is to be preferred over the other has been found to depend upon which party provided its standard terms of the transaction to the other the latest.

In this regard, Lord Denning memorably said ‘in some cases, the battle is won by the person who fires the last shot. He is the person who puts forward the latest terms and conditions; and, if they are not objected to by the other party, he may be taken to have agreed with them’.[2] This is commonly referred to as the ‘last shot’ doctrine.

Purchase orders and supply agreements often contain standard terms applicable to all procurement that the business may engage in on a daily basis, and these sorts of contracts are often not negotiated – particularly by smaller businesses that are on the receiving end. It follows that these contracts may indeed be caught by the Act and certain terms could be susceptible to being declared void.

The Act is also likely to apply where the parties have sought to exchange contract terms, but one parties’ terms has usurped the other’s via the operation of the ‘last shot doctrine’. The unfair contracts legislation may now be able to give the party who lost the battle of the forms some relief against any unfair terms that may have been imposed on it (knowingly or otherwise).

Practical implications

It is commonplace in the property and construction sectors for procurement managers, head contractors, sub-contractors and suppliers to use standard form terms and conditions for the procurement of minor trades and goods (such as preliminaries, PC items or general building supplies) and to seek to impose such terms without negotiation or amendment wherever possible.

In order to avoid the operation of the unfair contract terms legislation altogether, parties should:

  • review their standard template contracts likely to be issued to small businesses and amend any terms likely to be considered ‘unfair’ (having regard to the criteria set out above);
  • wherever possible, ensure that contracts take into account the specific characteristics of the other party and the particular project or transaction (rather than being a purely generic template contract);
  • look to identify which of your suppliers regular commercial trading partners are likely to be small businesses. The number of staff employed by the company will be the simplest and clearest indicia. The Act may capture a lot of companies in the construction industry because many businesses have low employee headcounts and rely heavily on subcontractors. Consider amending RFPs and other like documents to include questions that target this information; and
  • whenever possible, avoid providing terms on a ‘take it or leave it’ basis and avoid a ‘battle of the forms’ scenario by signing a contract or by at least confirming with the other party which terms are intended to govern the procurement before the transaction takes place. If such a situation does arise, ensure that you actively disclaim any liability for another parties’ terms that are issued after you have issued your own set of terms.

Our team of experienced lawyers at Mills Oakley are able to provide advice and assistance to ensure your contracts are compliant with the new legislation and to ensure that your internal practices and procedures are well suited to the new regime.

[1] See for example the self-initiated inquiry from the Australian Small Business and Family Enterprise Ombudsman into Payment Times and Practices due to report in March 2017 http://asbfeo.gov.au/inquiries/payment-times-and-practices a possible precursor for national legislation and possible fines for late payment:  http://www.afr.com/news/politics/late-payments-the-silent-killer-of-small-business-20161115-gsplx6  See also proposed legislation in Queensland to regulate the timing and security of contractual payments to subcontractors in the construction industry: http://statements.qld.gov.au/Statement/2016/11/27/building-and-construction-subcontractors-to-get-improved-payment-security

[2] Butler Machine Tool Co. v. Ex-Cell-O Corp. (1979) 1 WLR 401


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