Regulating contract terms is complex.

On one hand, parties should have the freedom to negotiate the terms that suit them without government rules and restrictions. On the other hand, history tells us that not all parties always have the ability to negotiate terms due to power imbalances.

For subcontractors in the construction sector, this is often the case. Time and time again, subcontractors are presented with unreasonable and unfair terms. These are typically presented on a ‘take it or leave it’ basis. Knowing that there will always be a business out there needing to win a job, leaves subcontractors with a difficult choice.

Furthermore, even if negotiation is possible, why should subcontractors have to spend thousands in legal fees to remove clauses that are objectively unfair?

To protect smaller businesses and those with less bargaining power, while ensuring a sustainable and healthy construction industry, some boundaries are needed.

What’s unfair?

In November last year, Commonwealth legislation prohibiting unfair contract terms was expanded significantly.  However at this stage, we do not  have much clarity about how this legislation will apply in the context of construction contracts, because to date there has not yet been any construction related cases which have tested this in court.

And whilst specific parameters are not yet known, it is generally accepted that types of clauses that will be unfair will include:

• unreasonable time bars
• indemnities for losses outside the parties’ control
• ability to direct acceleration or program changes without compensation
• linking subcontractor practical completion to head contractor practical completion
• unreasonable pre-requisites for making a payment claim and unreasonably long payment timeframes
• amendments to standard contracts that are not identified

It also needs to be acknowledged some state and territory legislation aim to achieve greater fairness in relation to certain contracts, including provisions that:

• apply a prohibition on ‘pay when paid’ clauses
• impose maximum payment timeframes
• provide statutory rights to make progress payments and seek rapid adjudication of payment disputes; and
• place restrictions on retention (e.g. maximum amounts, right to substitute for a bank guarantee)

Is further regulation needed?

Quite simply, yes. These changes have not gone far enough. There are still daily examples of construction subcontracts that place businesses at risk of failure or leave them vulnerable to the choices of a head contractor or client who may seek to enforce harsh and unjust provisions.

However, regulatory interference with freedom of contract is a complex issue. In attempting to deliver greater fairness, governments could easily produce an unworkable situation, resulting in lawyers being left to create complex workarounds.

What can be done?

In terms of actions, Master Electricians Australia believes that there are four areas of ‘low hanging fruit.

By acting in these areas, governments could provide greater fairness in construction subcontracts while policy-makers debate the parameters of unfair terms.

First, a requirement for any changes to ‘standard form contracts’ to be easily identifiable through means such as tracked changes, departures schedules or  special conditions. From there, any changes to a standard form of contract which are not identified through this process should be deemed to be unfair.

Next, subcontract practical completion should be determined based on what is within the control of the relevant subcontractor. They should not be linked to practical completion under the head contract.

Third, subcontractors should be compensated for delays that occur outside of their control to the extent that any impacts are not able to be reasonably mitigated. Governments can lead the way by requiring head contractors to do this on publicly funded projects.

Finally, states and territories could legislate that terms which are declared to be unfair under Commonwealth legislation will also be deemed to be unfair for all construction contracts under state law. This would capture state/territory government contracts and provide greater fairness for subcontractors not captured by federal laws.

Regulation of construction contracts is a complex matter.

By implementing a few simple measures, however, governments can make significant progress toward making contracts fairer for all involved for a more sustainable industry.