Upcoming Mallesons seminarsAll parties who are involved in the preparation, completion and administration of construction contracts
What do you need to do?If you would like to discuss these cases further, please contact Scott Budd
Scott Budd
Partner
T +61 7 3244 8054
Government proposal
The Commonwealth Government is proposing amendments to the Trade Practices Act and the ASIC Act to prohibit unfair contract terms in standard-form contracts. The draft Bill has the effect of rendering any ‘unfair’ term void and may also expose the drafting party to pecuniary penalties.
What contracts may be affected?
The draft Bill will apply to all standard-form contracts (other than contracts of service such as employment contracts), and there appears to be little limitation placed on the types of transactions caught by the laws or the parties who may have the benefit of the protection.
This means that the Bill will apply to standard-form contracts for matters such as construction, professional services, procurement, property purchases, as well contracts that are either a financial product or a contract for the supply, or possible supply, of services that are financial services.
What is a standard form contract?
The draft Bill does not as yet define a ‘standard-form contract’.
The Australian Consumer Law Consultation on Draft Provisions on Unfair Contract Terms suggests that drafting an express definition could have the consequence of providing a contracting party with the opportunity to arrange their contracts in a manner which enables it to avoid the application of the draft Bill.
As a result, it would be dangerous for anyone to adopt a simplistic view that a standard-form contract is a contract which is non-negotiated and attempt to exempt their contract from the amendments by instigating ‘sham negotiations’ or presenting the other contracting party with a choice of options which essentially are ‘meaningless’.
It is unclear as to the depth of negotiation that would be required to legitimately define the contract entered into as one which is not ‘standard-form’ and the draft Bill creates a presumption that a contract is in standard form unless the relevant party can prove otherwise.
To assist the Court in determining whether or not a contract is in standard-form, the draft Bill sets out a non-exhaustive list of factors which 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 either to accept or reject the terms of the contract
- whether an opportunity to negotiate terms was provided, and
- whether the terms of contract take into account the specific characteristics of another party or of the particular transaction.
What constitutes an unfair term?
The Bill provides an ‘unfair term’ as one which would cause a significant imbalance on the parties’ rights and obligations arising under the contract and is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term. Again there is a reversal of the onus of proof here. The Bill contains a presumption that a term of a standard-form contract is not reasonably necessary to protect legitimate interests unless the party seeking to rely on it proves otherwise.
The draft bill includes a non-exhaustive list of terms which may now be considered as ‘unfair’. The current list of such terms includes certain clauses commonly included in Australian standard construction contracts such as permitting one party (but not another) to terminate the contract or to vary the contract.
In determining whether a term is unfair, the Court must take into account:
- the extent to which it would cause, or there is a substantial likelihood that it would cause, detriment (whether financial or otherwise) to a party
- the extent to which the term is transparent (expressed in reasonably plain language, is legible, presented clearly and readily available to any party affected by the term), and
- the contract as a whole.
If the term is ‘unfair,’ the new laws will provide protection to parties to contracts by declaring such unfair terms as void and of no effect. The contract will remain on foot to the extent it is capable of operating without the inclusion of the unfair term.
What constitutes a prohibited term?
The new laws will also declare certain terms in standard-form contracts to be ‘prohibited’. No assistance is yet given as to what may constitute a ‘prohibited term’, with the current definition simply proposing that it is a term of a kind prescribed by the regulations.
A prohibited term is not only void, but a pecuniary penalty may be imposed on a person who includes or purports to include, applies or relies on (or purports to apply or rely) such a term. However, the contract will remain on foot to the extent it is capable of operating without the inclusion of the prohibited term.
Potential effect of the new laws
These new laws are set to have a significant impact on the way in which the construction and resources industry does business. Standard contacts have long been the contractual mainstay of these industries and the imposition of an overarching unfair terms regime is likely to greatly increase the cost and complexity of contractual dealings.
Furthermore, in the current environment of global financial instability, these laws will provide an opportunity for parties to unfavourable contracts to escape liability. They are likely to lead to less contractual certainty, which is an undesirable result to say the least.
The new laws are proposed to apply to contracts entered into on or after 1 January 2010 or which are renewed or varied on or after 1 January 2010.
The Mallesons Construction team is proposing to conduct a workshop in respect of the new laws to explore more fully the impact these laws will have in Queensland. If you are interested in attending, please register your interest with Susan Netscher and an official invitation will be circulated to you. |
Authors
Scott Budd, Partner
Kimberley Aplin, Solicitor
Puerto Galera Pty Ltd v JM Kelly (Project Builders) Pty Ltd [2008] QSC 356
This case considered the issue of whether a superintendent under a building contract required a licence under the Queensland Building Services Authority Act 1991 (Qld) (QBSA Act), and if such a licence was required but not held, were the determinations of the superintendent under the contract void and unenforceable?
The dispute in question related to the contractor’s entitlement to payments for variations and extensions of time. The disputes were referred to arbitration, however by the consent of the parties, the issue about the validity of the superintendent’s actions was referred to the Supreme Court for determination.
The Court was asked to decide whether a person appointed under the building contract as superintendent carried out, or undertook to carry out, ‘building work’ within the meaning of sections 42(1) and/or 42(2) of the QBSA Act as in force as at 5 February 2004.
Section 42(1) of the QBSA Act provides “…a person must not carry out, or undertake to carry out, building work unless that person holds a contractor’s licence of the appropriate class under this Act”. Whilst ‘building work’ is defined in schedule 2 of the Act, its meaning and scope is extended by section 42(2)(b) and (c) which states “(b) a person carries out building work whether that person carries it out personally, or directly or indirectly causes it to be carried out; and (c) a person is taken to carry out building work if that person provides advisory services, administration services, management services or supervisory services in relation to the building work”.
It was accepted by the parties that the superintendent in this case did not hold a licence issued under the Act. It was argued by the contractor that the superintendent, in exercising his functions under the building contract, was in fact carrying out or undertaking building work as defined by the extended definitions in section 42(2). Consequently, the contractor argued, the superintendent’s determinations made in accordance with the conditions of the contract were ineffective and void.
The Court held that the performance of the superintendent’s role fell outside the scope of section 42 and agreed with the Court’s decision in PJS Development Pty Ltd v Tong (2003) QSC 337 where it was stated that “Where a person is not an actual builder, but is simply engaging a builder to build, it seems curious that the Act would require that person to be the holder of a contractor’s licence”.
The superintendent in the current case had a role in the “adjustment of contractual rights” between the parties for the purpose of achieving the performance of the contract, but the superintendent’s role was not to build and that he did not carry out building work in the manner which a building contractor would do.
The Court also dismissed the argument that the superintendent was caught by section 42(2)(b) which served to extend the scope of activities which require a licence. The Court held that these activities extend to ‘the building work’ as already previously identified and referred to at section 42(1).
The Court also found it relevant that there was no class of licence applicable to the role of superintendent. The Court determined that there was as there no applicable licence, section 42 should not be construed so that the superintendent commits an offence by performing his role without a licence which does not exist.
Finally the Court considered the consequences under the building contract if the superintendent had in fact contravened section 42(1). The Court held that the Act does not “impliedly prohibit the contract made between the parties” nor does it impose any penalty “by way of invalidating a contract made in contravention of the statute”. Rather it imposes a criminal sanction of a fine for any contravention.
The Act did not prevent the appointment of the superintendent in this case and if he had contravened section 42 it did not have the consequence of vitiating the rights of the parties by the actions of the superintendent in the exercise of his role.
It must be mentioned that section 42(2) of the Act has since been repealed in 2007, which narrows the meaning of building work to that provided by section 42(1) and the definition provided at Schedule 2. The Court recognised that the amendments were not retrospective and not relevant during the performance of the contract and arbitration on foot.
A superintendent is not required to have a license to perform their role under the contract. |
Authors
Scott Budd, Partner
Kimberley Aplin, Solicitor
Tailored Projects P/L v Jedfire P/L [2009] QSC 32
The Court in this case, had to consider whether the wording of the contract had supplanted the time limit provided under the Building and Construction Industry Payments Act (BCIPA) for delivering a payment schedule and whether two payment claims in relation to the same reference date should be treated as one made for different dates under the BCIPA.
The contract provided for the submission of payment claims by the Contractor on a monthly basis, and on the Works reaching Practical Completion. Clause 14(c)(ii)(A) of the contract provided that if the payment claim was disputed by the Principal, written notice of the dispute was required within five days of the claim being delivered. Under the BCIPA, a payment schedule in response to a payment claim under the Act must be delivered within the earlier of 10 business days of delivery of the payment claim or any shorter time provided for by the contract.
The Contractor delivered a payment claim under the BCIPA. The Principal delivered a payment schedule challenging the claim after the five business day period required by the contract but within the 10 business day period required by the BCIPA. The Contractor argued that the payment schedule was therefore invalid, as it should have been delivered within the shorter contractual period.
The Principal argued that the contract did not effectively replace the 10 business day time period under BCIPA as there was no reference to the BCIPA in the relevant clauses of the contract and that there was no statement in the contract to the effect that the terms of the contract would override the BCIPA. Reliance was also placed on the fact that the contract referred to a notice “disputing the claim” and did not use the statutory term “payment schedule”.
The Court determined that there must be clear contextual support for a necessary implication that the contract has supplanted the 10 business day period provided by the Act. In this case there was no such support for this proposition. The contract did not usurp the Act and the statutory requirement for service within the 10 business days under the Act had been met.
The Contractor had also issued two payment claims in relation to the same reference date. The first was submitted on 26 May 2008 and the second was submitted on 28 July 2008, both of which were after the date of Practical Completion of 12 May 2008.
The Contractor argued that s.17(4) of the Act should apply so that the two claims were treated as one made for different reference dates under the Act, and that both should be paid. The Principal relied on section 17(5) of the Act, which provides that a claimant cannot serve more than one payment claim in relation to each reference date. The Principal argued in this case the only relevant reference date was the date of Practical Completion and only one payment claim could be served for this date.
The Court agreed that the relevant reference date was the Date of Practical Completion, and therefore the first payment claim made on 26 May 2008 would be referable to that date. This meant that the payment claim issued on 28 July 2008 was invalid.
The Court is hesitant to let parties to a contract negotiate out of their obligations imposed by the legislation. Clear and unequivocal wording should be adopted if you are attempting to adjust the regime provided by the BCIPA. |
Authors
Scott Budd, Partner
Kimberley Aplin, Solicitor
RJ Neller Building Pty Ltd v Kjerulf David Ainsworth [2008] QCA 397
In this case the Court had to consider an application to stay a judgment which sought to enforce an adjudication determination under the Building and Construction Industry Payments Act 2004 (BCIPA) and whether such judgments should be stayed in circumstances where the Respondent to the Adjudication has commenced legal proceedings against the Applicant for breach of contract.
The two parties, Ainsworth and Neller, had entered into a contract for Neller to carry out renovations to Ainsworth’s Noosa Heads property in October 2005. Ainsworth claimed that the works were defective and so withheld payment from Neller. Neller sought adjudication of his payment claims under the BCIPA, where it was adjudicated that Ainsworth owed Neller $50,771.74.
Ainsworth commenced an action against Neller seeking an order that the adjudication certificate be set aside as invalid and also seeking damages for breach of contract. Meanwhile, Neller registered the adjudication determination as a judgment of the District Court and obtained an enforcement warrant in relation to Ainsworth’s property in Noosa in relation to that judgment.
Ainsworth applied to the District Court to have this warrant set aside, however these claims were dismissed. Ainsworth then sought leave to appeal the decision to the Supreme Court.
Ainsworth argued that Neller’s execution warrant should have been stayed pending the determination of Ainsworth’s action for damages for defective work, because of the risk that his action may be rendered worthless by the possible inability of Neller to meet a judgment in his favour.
The judge, however, held that it is the intention of the BCIPA to assign this risk to the owner of the building, as the Act’s purpose is to preserve cash flow to builders. Accordingly, the Court dismissed Ainsworth’s application for a stay of the judgment. Furthermore, the judge also stated that he had grave doubts as to whether a stay of execution could have been granted by the Court in any event, however, given that court rejected the stay on other grounds, this question was not resolved.
This case illustrates the difficulty that a person against whom an adjudication determination has been awarded has in avoiding payment of the adjudicated amount. Other authority has suggested that such a stay may be possible where there is very clear evidence of the insolvency of the successful party, however this case would seem to indicate that even this may not be enough.
Authors
Scott Budd, Partner
Kimberley Aplin, Solicitor