Michelle Cirson (00:00)
Hi everyone, talking about unfair contract terms laws
good or bad that the unfair contract terms laws that were toughened in 2023 So it's an interesting topic because the government is not great with creating laws and then telling people about it. So I really think it would have been a much better regime had the government gone out and done like.
ad campaign like they did when they bought in security of payment laws in different states and territories so that builders and upper tier upstream parties actually know that these laws exist because what happened was in 2023 we already had unfair contract terms laws it's just that nobody really put any weight behind them or was worried or concerned about unfair contract terms laws
there wasn't the emphasis on this type of issue from a legal perspective. And the way that contracts are drafted by lawyers, they're drafted to automate in favor of the party that is having the contract drafted. And that's because lawyers have a duty, a professional duty to try to accommodate their clients' best interests as best they can and protect their clients from problems arising and further legal issues.
So the way lawyers draft contracts, they draft contracts to automate in favor of the upstream parties in most instances. And the other commercial reason that happens is because downstream parties don't often get the opportunity to give upstream parties their contract. So even if they went and invested in a really good contract document that reflected exactly the deal, they'd need to have some good bargaining power in that transaction to be able to say to the upstream party, Hey, I want you to sign my
contract or we're not moving forward with this deal. So in 2023 when unfair contract terms laws were toughened, it came to light that there are these fines that can apply to parties who have unfair contract terms in their contracts and it's $50 million for a company and $2.5 million for the human beings who aid or abet the unfair contract terms in those contracts.
And there are other criteria about whether or not unfair contract terms laws apply. So for example, it needs to be a standard form contract. that's not to say there can't be any special conditions or amendments to it, but if they're using a template contract for a project and giving it to multiple subcontractors, that would constitute a standard form contract. The deal needs to be given on a take it or leave it basis or the other party not.
being given the ability to negotiate on those terms. So there are other protections that people drafting contracts can use. So for example, if there's a genuine business efficacy reason that a contract term needs to be in a contract because you just simply couldn't do business that way unless that contract term was in there. So a really good example, I've been working with a caravan manufacturer recently who can't actually go and
register a caravan, like a van or a chassis, go and register it for it to be able to be transported on the road legally without designating who the owner is. So when title passes under that contract, it needs to coincide with they get paid before they pass title over and hand the goods over and basically let the customer run off into the sunset with the product. Genuine business efficacy reason there, those people need to be paid in full before they hand over the goods.
So that's another way that you can defend yourself from unfair contract terms is if there's a genuine business efficacy reason. What I would say about that is that the context of the negotiation can really help colour that and explain what the genuine business efficacy reason is. So that when you are drafting a contract, it might be that you need to have a very one-sided term to protect you from whatever the circumstances.
going wrong are that you're predicting are going to be an issue or from the upstream party being completely unable to protect themselves or take any action to mitigate loss if something goes pear-shaped. So circling back to the unfair contract terms laws that were toughened in 2023, people started to become aware that there are fines, you can actually, there can be fines that you can be, have imposed on you if you've got these unfair contract terms.
And then there was a lot of training around and available towards the end of 2023. And I personally provided some information sessions to subcontractors and accounting firms and things like that on for their clients on unfair contract terms. So that people were aware that this is now going to be enforced. Now the ways in which the court has enforced
unfair contract terms, provisions is interesting because some of the cases don't have anything to do with construction. In fact, most of them don't have anything to do with construction. So it's difficult for us to be able to say, have they made a difference in the construction industry? I would go so far as to say it doesn't matter whether or not the courts have actually imposed any penalties or find any upstream parties in construction. The real test, I think, is
Are downstream parties able to negotiate contract terms now? And are the parties actually having genuine conversations that are leading to better deals being done? And also I would say too that rather than having a really one-sided nasty contract that puts the upstream party in the ultimate position of power and basically requires the downstream party to perform with a knife to their throat, the unfair contract terms
push towards fair and balanced negotiation and people being able to enter into deals, taking into account the business efficacy and the needs of the contract and the deal at hand has actually led, I think, to great outcomes for the construction industry because the negotiations that I'm involved in on a daily basis between subcontractors and builders, but also...
the conversations that subcontractors are now able to have with staff of building companies where it's come to light the staff of building companies are not happy with the terms in the contract either. they, you know, it's, well, I'm not, I'm a CA. I'm not in a position to be able to go and change those clauses, but I'm not happy about them either. I don't like them. And I wish we didn't have to have these in our contract as well. So it's allowed the parties to actually talk about the deal at hand.
And when we look at some of these really extreme contract terms, it's really difficult for upstream parties to justify those. So one thing that has really been getting under my skin lately is the clauses in contracts that say that if an early payment, an early payment is made by an upstream party, then the downstream party allows a 5 % discount on the invoice and that
they're effectively allowed to clip the ticket by saying, we'll pay you early. Well, there are very few subcontractors out there who are being paid early. They're all being paid in arrears and they're having retentions held. Same thing with builders too. So I don't want to put builders out in the cold with that comment, but this early payment discount thing, I think is 100 % an unfair contract term. allows the upstream party to effectively say,
I'm going to pay you one day before the due date and then I can unilaterally impose a 5 % discount. So, and that is entirely within the control of the upstream party as to when they make that payment. Now, I don't want to get too far down a rabbit hole, but I did have a conversation with a pretty high art manager in a building company recently who has, has this in their contract.
And I'm friends with this person so they're able to give me the inside scoop on how this stuff works in the background. And I always suspected that the financiers that are paying these payment claims early. So what happens is there is a little financing company that is separate, like a little bank, that is paying the subcontractors invoices. And then the builder will then pay that company within.
the by the due date, but they effectively finance the payment claim in the intervening period between when the invoice is given and when the due date comes around. And I always knew that the builder would get a kickback for that because that financier is effectively receiving some money from the transaction. It's a loan. Of course, they're not just going to give money out and try and get it back or take the risk for free. Now, there's a time and a place for a bank from a
business values, ethical perspective, and maybe I'm a little bit too naive and pie in the sky or, you know, Lily White in terms of my feelings, but I don't think that you can justify paying someone late. we pay subcontractors and builders get paid in arrears and have retentions held. So downstream parties get paid in arrears.
it encourages them to pay them late so that they can receive a monetary kickback so that a bank is needed so that they can bridge the gap in cashflow in the meantime. That to me just doesn't seem right or ethical or something that our industry should be promoting. Go one step further and the upstream party is allowed to decide at their discretion.
that they're able to impose a 5 % discount on that invoice. The subcontractor gets paid 5 % less. And if they do it on every single progress claim, it's a 5 % haircut on the contract sum so that they can pay them one day less in arrears than already in arrears. And in most states and territories, it's around 25 business days. But I know ACT have recently changed their security of payment laws so that the latest you can pay a subcontractor is 15 business days.
So this is a real issue, this cash flow in construction. And I genuinely think that would fall within the category of an unfair contract term, particularly where there's a third party that is getting paid a cut of the subcontractor's invoice. And then the builder is also getting paid a cut to or being paid rebates or a kickback of some kind, or at least getting a 5 % discount on the subcontractor's invoice.
Now, some of you watching this will be saying, well, that's because the builder's got to pay the bank to pay the subbie early. So all the builder is doing is going out and organizing the subcontractor some finance so that they don't go broke while they're waiting to get paid. And to that, I would say, I don't think that the building companies are doing that solely for that purpose. Why would they bother? Why would they bother? If they've got retention, sometimes builders profit from subcontractors going broke because
They've got the value of the work, a bird in the hand, and they've got the retention as well. So I just don't buy that. I don't want to get too much on my soapbox about this issue, but this is a really good example of where our industry in construction has some really curly, interesting, unique contract terms and traditions and ways of doing things that just would not fly in any other industry. So in terms of the unfair contract terms laws, have they made things better?
I think they have made things better. They've made things better because people are negotiating. There is not many builders left who haven't received a departure schedule from a subcontractor now and haven't gone, ⁓ what, what's this? Now we've got to go through this process. That's not to say that there are no builders that don't just come back and go, how dare you try and change my contract? If you want this job, then you should basically bend to my will and sign whatever I put in front of you.
that does still happen, but it happens a whole lot less. There is an Australian supplier payment code with the business council of Australia. And so there are some other things that have been in the mix. This is actually predates the tougher unfair contract terms.
My understanding is that this was brought out in 2021. So the Australian Supply Payment Code from October 2021. this was already in the mix. Business Council of Australia had already started a narrative about this and there are some upstream main contractors who have signed up to this payment code. But
And this is not a criticism because I want to acknowledge that people are trying to make steps in the right direction. It doesn't seem to me from reading the code that this is symbiotic with security of payment laws and the unfair contract terms laws, which obviously the unfair contract terms laws came about, were already in existence prior to this coming about,
The supply payment code is obviously a good positive step in the right direction, but it doesn't seem to have been synchronised with the existing legislation and the existing regimes and the rules around due dates for payment. some of the bigger tier contractors, the reason I want to make this point is because some of the bigger tier contractors have signed up to this payment code and they have dedicated websites talking about how they will give small businesses better contract terms.
and better payment terms in their contracts. But even when they have those websites promising those things, they have these caveats written in about what constitutes an invoice. And then there's all these preconditions to putting in an invoice. So the same trickery applies. And it seems to me to be a little bit like a lip service where they're just trying to be seen to be participating in big good blokes in the industry, but they'll always reserve their right to do what they want.
the end of the day. So unfair contract terms laws are not the be all and end all and the biggest problem with them is that there doesn't, I'm not aware of and I'm 99 % sure it doesn't exist, there's no administrative out-of-court way for you to enforce or pursue a particular clause in your contract or get any kind of relief without going to court with the unfair contract terms. So
probably could have said that simpler, you need to go to court to use the unfair contract terms laws. And that I think is the biggest pitfall. It's not the case that I'm aware of in terms of decisions by adjudicators using security payment regime. They can't yet use unfair contract terms laws because the legislation that governs the decisions that adjudicators can make don't talk about or tip in the unfair contract terms laws.
the Australian Consumer Law. So in a practical sense what we're seeing people get wins with by leaning on these unfair contract terms laws is requiring people to have deeds of release as a precondition to practical completion where you basically have to release the builder from any claim before you can put in your final claim. Having things like termination for convenience with no ability to recover overheads or
Retentions those types of clauses would almost definitely be unfair contract terms. They're incredibly one-sided The other party has no way out of the contract Because they don't have a termination for convenience clause themselves, but basically stuck under contract We're getting great success with being able to have better better more practical user-friendly clauses around variation procedures because subcontractors cannot decline a variation
So if you sign a contract with a builder, you're effectively giving them an unlimited credit limit simply by signing the contract. So unfair contract terms laws and the narrative and conversation around that has been incredibly helpful as well. One thing I would say is that it depends on the size of the contract that you're reviewing and you might be thinking, well, small contracts people should be more relaxed about, but it's actually the opposite. What has been happening is
If you're, say for example, a balustrade subbie and you sign 200 contracts a year between 50 and 150,000 with commercial builders, the builders don't want to talk to you because they're just like, don't give me a departure schedule for a 60 grand job. I don't even want to have to talk. Why are you wasting my time on a 50 grand job? And it's incredibly infuriating because if you flip that on its head and go, why did you give me a 400 page contract with special conditions time into the head contract with
never ending defects liability periods and directors guarantees for a 60 grand job. So, you know, you can always have the two sides of the coin argument in that regard, but the I think builders and staff of building companies are weary. They are weary with the departure schedule procedure. And to that, I would say you can give yourself a big hand and a head start.
because if you went through your contract and you just did this one thing, and that is removed any provision that would be void or unenforceable under some kind of law, that would be a great start. And the best example I can give you is tying practical completion and the defects liability period to the head contract. You're going to lose that argument in adjudication every day of the week. The leading case is a High Court case. It's from 2018.
And it is a pay when paid provision every day of the week. If you tie your defects liability period, your end of DLP retention or your PC retention to the head contract. And there are no rules on how long defects liability periods can be. So you could just very simply set a timeframe and still achieve the same outcome in a practical sense. And
This is what we propose to builders. We look we appreciate you want our warranties to marry up with your warranties You want to be able to call us back for a defect for the same period of time that you get called back for a defect We're cool with that. We just don't want to have no line of sight over some third-party contract that you could get your defects liability period extended because of something some other trade does And that has a bearing on when we get our attention back
So if you had that common sense practical approach, you're not only going to be protecting yourself from those hefty fines, the unfair contract terms laws, but you will find yourself, if you rely on those clauses and you want to die on that hill, then you will end up probably losing an adjudication on that point and having to pay adjudicators fees and then having to pay the subbie anyway. So that is one way that you can do fewer departure schedules.
and just get rid of the really arbitrary nasty clauses like if I pay you one day early, I'm taking 5 % of your invoice. That is ridiculous. And I can't see any way that you can spin that to make that sound like the builder's doing the sub of your favor in that situation. Bear in mind that there are those same financiers who are selling that service to builders also would sell that service to a subcontractor if they contacted them.
And then it's on the contractor, the subcontractor at the downstream party to make their own decision about whether they sign up to a loan agreement with a third party financier to have their invoices paid early or financed. If they decide to go and do that directly with that financing company, that is entirely a matter for them. But I just don't think it's ethical for builders to be paid a commission or a kickback or get some kind of incentive from a financier.
to pay subcontractors in arrears or more in arrears so that there is scope for a bank to pay the invoice in the intervening period. On that point, I'm going to wrap this up,
So hopefully you all have a fantastic day.
