Whether it’s assumption of excessive liability, unrealistic time bar clauses or onerous tendering processes, small architecture practices in Australia can find themselves subject to harsh contractual terms when dealing with larger parties with whom they have little bargaining power.
Now, however, protection of sorts may be at hand.
Courtesy of changes enacted last year, the unfair contract protections enjoyed by consumers under the Competition and Consumer Act 2010 have been extended to cover small businesses. This means that subject to certain conditions, contractual terms to which small business including small architectural practices are forced to agree which are considered to be ‘unfair’ may be found to be void. Where this happens, architects will cease to be bound by such conditions.
The conditions include that:
- The contract was entered into on or after November 12, 2016 (when the law came into effect).
- The contract was a standard form contract prepared by one party and presented to the other (the architect) on a ‘take it or leave it’ basis with little room for negotiation of the terms.
- The architect/architecture firm is a small business employing fewer than 20 regular workers.
- The upfront price payable under the contract is no more than $300,000 in the case of a contract which is less than twelve months in duration or $1 million if the contract duration exceeds twelve months.
In order to be ‘unfair’ the term needs to create a significant imbalance in the rights and obligations of contracting parties and cause detriment to a party it is implied or relied upon. The term must also not be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (i.e. the client or head contractor).
It should be noted that the new protections do not apply either to terms which define either the subject matter of the contract or the upfront price payable. In other words, the law will not offer protection in cases where architects simply agree to a price which is not sufficient for them to be able to earn a reasonable return from their work performed.
The new law also does not apply to terms which are either required or allowed for under state or territory law. As noted below, this is likely to have implications for an architect’s ability to strike out terms which require them to contract out of proportionate liability in some states where the law expressly allows for this to occur.
The introduction of the new law prompts questions about the types of terms from which architects can gain protection and the strategies which they should adopt in response.
According to Isla McRobbie, who previous practised as an architect for over 10 years and is now a partner (construction team) at Perth-based law firm Jackson McDonald, exactly what types of terms will be covered is not yet certain. Nevertheless, she says there are a number of terms in respect of which the law could potentially apply.
First, there are liability related clauses. Under one common type of clause, architects are required to indemnify their contracting party for any loss or damage that party might suffer irrespective of who is responsible for that loss. Whilst it is not unreasonable to expect architects to accept indemnity in respect of matters within their control, McRobbie says these types of clauses impose on architects liability for matters beyond their control (and potentially beyond their insurance cover) and are thus potentially unfair.
Furthermore, these clauses may not be necessary to protect the legitimate interests of the client or head contractor, who could otherwise claim damages against the party which actually caused the damage concerned. Accordingly, these clauses may run foul of the new provisions and be void.
Another type of clause requires architects to warrant the work of other consultants including sub-consultants. Whilst the issue of whether or not these will get over the line as being unfair remains to be seen, McRobbie says this is an area to watch.
A final area with respect to liability revolves around clauses which require the architect to agree to contract out of proportionate liability. In place throughout all jurisdictions across Australia, proportionate liability applies where damages occur for which more than one party is at fault and restricts the liability of each individual party - including the architect - according to the proportion of the damages for which they are responsible.
Where an architect agrees to ‘contract out’ of this regime, the principal or head contractor could potentially sue them for the entire amount of any damage caused irrespective of them being only partially at fault. It is then up to the architect to counter-sue in order to recoup the portion damages for which other parties were responsible. This is not only costly, but leaves architects exposed where those other parties in question become bankrupt or insolvent. In addition, since not every professional indemnity insurance policy covers ‘contractually assumed’ liability, it may also expose architects to liability beyond which they are covered by insurance.
Whilst these terms may well meet the criteria of being unfair, architects in New South Wales, Western Australia and Tasmania are unlikely to be protected from contracting out clauses. This is because the law in these states expressly allows for parties to contract out of proportionate liability, meaning that such clauses are likely to be excluded from the scope of the new protections. Queensland expressly prohibits contracting out, whilst the law in other jurisdictions is silent on whether or not contracting out is allowed.
Outside of liability, a further area of interest revolves around time bars. These clauses specify that architects are not allowed to bring claims later on where they fail to perform a certain type of procedure within a given time frame. An example would be a clause which permanently barred the architect from claiming a variation in a situation where they failed to notify the principal of any intention to claim within two business days of the event which gives rise to the variation – a very short time frame.
Whilst such clauses are almost certainly unfair, McRobbie says there may be cases on large projects whereby the architect is engaged by the head contractor rather than the principal and the head contractor themselves was subject to tight notice periods. Where this happens, the head contractor may try to argue that such clauses are necessary in order to protect their own legitimate interests and thus do not meet the definition of being unfair under the new law. Whether or not such a defence will succeed, McRobbie says, is not yet known as there are potentially arguments both ways.
Then, there are termination for convenience clauses, which enable principals or head contractors to terminate the architect’s services on a project for reasons which are genuinely beyond the control of the architect in question and where there may be no breach at all. Where such terminations are able to occur without reasonable compensation, McRobbie says these might fall under the definition of being unfair and may thus be void under the new protections.
One issue where architects may be disappointed revolves around tender processes which may be considered to be unduly onerous, such as those which require the architect to tender against a large number of parties or being required to deliver a significant portion of the design during to tendering processes without being paid for this.
Whilst initial hopes had been for these types of processes to be disallowed, McRobbie says the law covers contractual agreements themselves rather than processes which occur prior to the contract being entered into. Thus the only way in which these processes may be covered, she says, is where the parties entered into a contract with respect to the tender process itself as opposed to the process being merely being part of what happens prior to a contract being entered into.
In terms of strategies, McRobbie advises architects to first attempt to use the new law as a point of leverage in order to negotiate terms which may appear to be unfair upfront. Where this is not feasible, it may be possible to use the protections in any proceedings which may subsequently occur – either through the architect themselves taking action under the Act to have terms voided or where they try to invoke the new law as part of their defence in an action which is taken against them (for instance, where they were being sued and are trying to escape indemnity clauses).
Around Australia, small architecture firms can be subject to harsh contractual terms.
Going forward, they will enjoy some protection from the worst of these.