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Commercial & Corporate

Are you at risk of being penalised for “vague” and “onerous” contractual terms?

Key Takeaway Points: • There has been increasing scrutiny over the use of standard form contracts containing unfair contract terms. • Unfair contract terms are those that (a) cause a significant imbalance in the parties' rights and obligations; (b) are no reasonably necessary to protect a party’s legitimate interests; and (c) would cause detriment to the other party if given effect. • New and increased penalties (which could be up to $50 million) will start applying from 10 November 2023. On 4 April 2023, the Australian Securities and Investments Commission (ASIC), filed a case in the Federal Court against Auto & General Insurance Company Limited (Auto & General) over a contractual term which is alleged to have aided in Auto & General being able to unfairly reject consumer claims. Under the contract in question, customers were required to notify Auto & General “if anything changes about [the customers] home or contents”. ASIC came to the view that the clause: • imposes an obligation on customers to notify Auto & General if ‘anything’ changes about their home or contents, which would have been too onerous, vague and/or impractical; • suggests that Auto & General has a broader right to refuse claims or reduce the amount payable under claims if the customer does not meet the notification obligation, than is available under the Insurance Contracts Act 1984; and • could mislead or confuse the customer as to their true obligations and rights under the contract. Accordingly, ASIC alleges that the contract term is unfair under the Australian Securities and Investments Commission Act 2001 (ASIC Act). What are ‘unfair contract terms’? An ‘unfair contract term’ is unenforceable in an Australian court. Whether a term is “unfair” is determined by applying a 3-limbed test set out in the ASIC Act or the Australian Consumer Law (contained in Competition and Consumer Act 2010) (ACL) as follows: 1. The term will cause a significant imbalance in the parties’ rights and obligations under the contract; and 2. The term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and 3. The term would cause detriment (whether this be financial or otherwise) to a party if the term was applied or relied on. The ACL specifically protects consumers and small businesses from unfair contract terms contained in ‘standard form contracts’. ‘Standard form contracts’ refer to those where there is an imbalance in parties’ bargaining powers, the contract is based on a template with little scope for negotiations or amendments, and/or are presented on a “take it or leave it” basis. There is a presumption that a contract is a standard form contract, in that the person who prepared the contract has the onus of proving that it is not. Recent amendments to the unfair contract term provisions The Auto & General case follows recent amendments which significantly expand the ambit of the unfair contract terms provisions contained in the ACL and the ASIC Act, both of which demonstrate the government’s focus on enforcement (and in turn the need for businesses to review their legal documentation). A key change is the introduction of civil penalties under the ACL and ASIC Act for breaches of the unfair contract term prohibition, reinforced by significant increases in maximum penalties for breaches under the ACL. These penalties will take effect from 10 November 2023, and addresses the issue of the unfair contract terms provisions having largely been “toothless” until now. A brief summary of the key changes to the law can be seen below: Current Law New Law The unfair contract terms protections apply to a small business contract where one party is a business employing less than 20 persons and the upfront price payable under the contract is under $300,000, or $1 million for contracts lasting more than 12 months. Under the ACL, the unfair contract terms protections will apply to a small business contract where one party is a business employing fewer than 100 persons or has a turnover for the last income year of less than $10,000,000. Under the ASIC Act, the protections will apply to a small business contract if the upfront price payable does not exceed $5,000,000, and one party employs fewer than 100 persons or has a turnover for the last income year of less than $10,000,000. No pecuniary penalties. For corporations, increased penalties up to the greater of: • $50,000,000; • 3 times the value of "reasonably attributable" benefit obtained; or • 30% of the corporation's adjusted turnover during the period it engaged in the conduct. $2,500,000 for individuals. Where a court determines a term in a standard form contract to be unfair, it is automatically void. The court can also make orders for the whole or any part of a contract or collateral arrangement, including that the contract is void. The orders can only be made when a person or class of persons has suffered, or is likely to suffer, loss or damage. The court can make orders for: • a whole contract or collateral arrangement, including to void, vary or refuse to enforce the contract, if this is appropriate to prevent loss or damage that is likely to be caused (i.e. there is no need for actual loss or damage). • on the application of the regulator, preventing a term that is the same or substantially similar in effect to a term that has been declared as unfair, from being included in any future standard form small business or consumer contracts; • on the application of the regulator, to prevent or reduce loss or damage which is likely to be caused to any person by a term that is the same or substantially the same in effect to a term that has been declared unfair. How does this affect you and how can we assist? Sarah Court, the Deputy Chair of ASIC, stated that: ‘Contract terms need to be proportionate, transparent and clear, so any obligations are easily understood and able to be realistically adhered to by customers. They must accurately describe the actual rights and responsibilities of the parties under the contract.’ It is not long until the amendments kick in. As such, we strongly recommend that you review your standard form contracts to ensure no issues arise regarding any unfair contract terms. Please contact us if you are unsure whether your contracts are standard form contracts containing unfair contract terms.

Commercial & Corporate

Security of Payment NSW - Know your right to receive progress payments for construction works and related goods and services

As a direct or indirect result of the COVID-19 pandemic and uncertainty in a global economy, various issues have been adversely impacting the construction industry, such as an increase in raw material price and supply chain disruption. Particularly, contractors and subcontractors are struggling with their cash flow due to their outstanding payments for the works carried out. Accordingly, security of payment legislation in each state has played a role in ensuring that anyone carrying out construction work, and supplying related goods and services under a construction contract gets paid promptly. This article discusses and explains your rights under the NSW Security of Payment Act, and each state has its own security of payment legislation, which may differ from each other in detail. Know Your Rights In New South Wales, the relevant security of payment legislation is the Building and Construction Industry Security of Payment Act 1999 (NSW) (“SOPA”). The significance of the SOPA is that it grants contractors rights to receive progress payment even if there is no formal written contract or even if a contract says that you are only allowed to receive a payment at the end of works, i.e., after the completion of works. Fundamentally, the SOPA entitles a person or a company, who carried out construction work or supplied construction related goods and services, to receive progress payment. A progress payment means a partial payment for works as the project progresses even if the assigned works are not completed. Therefore, the progress payment facilitates cash flow for contractors and suppliers in the construction industry. Under SOPA, the following rights are granted to you: A right to receive a progress payment at least on a monthly basis; Maximum time limits to respond to claims for progress payments; Maximum payment terms; A right to suspend work in the event of non-payment; No ‘pay when paid’ clause: No need to wait until a contractor you worked for gets paid by a head contractor or principal; and Interest rates applicable on unpaid progress payment. Who is entitled to receive a progress payment? A person or company who, under a construction contract or any other construction arrangement, has undertaken to carry out construction work or supply construction related goods or services in New South Wales is eligible to receive a progress payment under the SOPA.[1] The “construction work” is broadly defined, including construction, alteration, repair, maintenance or demolition of buildings or structures forming part of land.[2] The “related goods and services” also include various related goods and services such as materials for construction or plant for use in construction work, labour service, design or engineering service.[3] While the SOPA is drafted to cover contractors, subcontractors, suppliers and service providers as broadly as possible, it should be noted that there are also exceptions such as those engaged in the extraction of oil, natural gas or minerals. Payment Claims The procedure for receiving a progress payment is triggered by a person entitled under the SOPA (Claimant) making a Payment Claim in writing to the other person who is responsible to make a payment under a construction contract (Respondent) In making a Payment Claim, Claimants must ensure that the following requirements are met:[4] 1) The construction work related to the progress payment must be identified; 2) The amount of the progress payment must be indicated; 3) A statement that a Payment Claim is made under this SOPA must be inserted; 4) A Payment Claim must be served on the Respondent within 12 months after the construction work was last carried out; and 5) A Payment Claim is only made one (1) time in a month on and from the last day of each month in which the construction work was carried out. How to respond to a Payment Claim? The Respondent is required to respond to the Payment Claim by providing a Payment Schedule to the Claimant within 10 business days after receipt of the Payment Claim. By failing to do so, the amount claimed in the Payment Claim is fixed and Respondents are liable for such amount on the due date. In issuing a Payment Schedule, Respondents also are required to comply with the following requirements:[5] 1) A Payment Claim related to a Payment Schedule must be identified; 2) The amount of the payment the Respondents propose to make must be indicated; and 3) If applicable, reasons why the amount in the Payment Schedule is less than that in the Payment Claim and reasons for withholding payment must be identified. Maximum payment terms One of the most important benefits available under the SOPA is that there are statutory deadlines for a progress payment to be made.[6] If the Respondents fail to pay the progress payment by the deadline in the diagram below, such amount is deemed due and payable, and interest on the unpaid amount is also payable at the prescribed rate. Your rights to suspend works A Claimant also has a right to suspend construction work or supply of related goods and services if a Respondent fails to pay the amount by the due date for payment as described above.[7] At least two (2) business days prior to the suspension, the Claimant must serve on the Respondent a Notice of Intention to Suspend Work in writing. As the date on which the Notice is given is not counted, the Claimant is eligible to suspend work on and from the fourth day of the Notice. Please see the above diagram. Once the work is suspended under SOPA, the Claimant is not liable for any loss or damage suffered by the Respondent as a result of such suspension. However, once the whole outstanding amount is paid, the Claimant must resume the work within three (3) business days from the payment date. Don’t wait until a head contractor gets paid The SOPA expressly prohibits and invalidates any clause in a construction contract that the payment of money is contingent on a milestone or an event in other contracts including a head contract.[8] A common example of these clauses is that a payment under a subcontract is made upon the payment by a principal under a head contract or upon the practical completion of a head contract. Such clauses are deemed unenforceable under the SOPA, and you have a right to claim the progress payment regardless of the operation of other contracts. Adjudication A person eligible under the SOPA also can start an adjudication process for unpaid or disputed progress payments. Adjudication is an informal and independent process which an issue or issues are determined by an independent adjudicator regarding the payment claims. The adjudicator’s determination can be enforced as if it is a judgment rendered in a Court. However, the Claimant must file an adjudication application in writing by the following deadlines:[9] Type Deadline When: 1) Respondent issues a Payment Schedule, and 2) the amount in a Payment Schedule is less than the amount in a Payment Claim Within 10 business days after a Payment Schedule is issued When: 1) Respondent issues a Payment Schedule; and 2) Respondent fails to pay the amount in the Payment Schedule by the due date Within 20 business days after a Payment Schedule is issued When 1) Respondent fails to issue a Payment Schedule; 2) Respondent fails to pay the amount in a Payment Claim by the due date; 3) Claimant serves written notice of intention to apply for adjudication of the payment claim on Respondent within 20 business days from the due date; and 4) Respondent has been given an opportunity to provide a Payment Schedule within 5 business days after receiving notice of intention to apply for adjudication of the payment claim Within 10 business days after the end of the 5 business days for Respondent to provide a Payment Schedule after receiving notice of intention to apply for adjudication of the payment claim Detailed procedures, requirements for adjudication and enforcing the adjudicator’s determination will be discussed in future articles. Payment Withholding A subcontractor who has made an adjudication application for a progress payment is also entitled to request a principal contractor to retain money owed to a head contractor to cover the claimed amount.[10] This is called a ‘payment withholding request’. Upon receipt of the payment withholding request, the principal must retain the amount of money to which the payment claim relates.[11] When a successful outcome is given in the adjudication process, a subcontractor is able to recover the withheld money from the principal through the procedures set out in the Contractors Debts Act 1997 (NSW). How can we assist If you are involved in construction work in New South Wales, the SOPA entitles you to claim the progress payment and have protections accordingly. However, your rights under SOPA may vary depending on your satisfactory fulfilment of requirements and on whether you took proper actions in a timely manner. Although the SOPA sets out a statutory regime for prompt payment for construction work, there are still a number of disputes arising from unpaid progress payments in a construction contract, which ends up with unsatisfactory outcomes for unpaid contractors and suppliers. If you are unsure what rights you have in your construction payment issues, H & H Lawyers will be happy to review your case to check whether it might fall within a case protected under the Security of Payment Act or other relevant laws. We can further assist in finding a way to enforce your rights. Disclaimer: The contents of this publication are general in nature and do not constitute legal advice. The information may have been obtained from external sources and we do not guarantee the accuracy or currency of the information at the date of publication or in the future. Please obtain legal advice specific to your circumstances before taking any action on matters discussed in this publication. [1] SOPA ss4 and 8. [2] SOPA s5 [3] SOPA s5 [4] SOPA s13 [5] SOPA s14 [6] SOPA s11 [7] SOPA s27 [8] SOPA s12 [9] SOPA s17 [10] SOPA s26A [11] SOPA s26B

Commercial & Corporate

Freedom of Contract: Can parties contract out a statutory limitation period? The High Court says yes.

One of the basic principles of Australian contract law is freedom of contract: parties are free to enter into an agreement on whatever terms they choose. With that principle, a question always arises as to what extent parties can limit or exclude the operation or effect of statutes. In Price v Spoor [2021] HCA 20, the High Court of Australia concluded that a statutory limitation period under the Limitation of Actions Act 1974 (Qld) can be contracted out by an agreement between parties as it is not contrary to public policy. This case made a clear authority in dealing with the boundary of the freedom of contract to the extent of the statutory limitation period. However, caution should be taken in applying it. Background In 1998, Price as a mortgagor and Spoor as a mortgagee entered into two mortgage agreements, but a loan of $320,000 and interest were not repaid to Spoor when due and payable in July 2000. In 2017, Spoor brought proceedings in the Supreme Court of Queensland against Price to recover the principal sum and interest as well as for possession of the land secured under the mortgages. Price by way of defence and counterclaim argued that Spoor was statute-barred from bringing the action pursuant to the Limitation of Actions Act 1974 (Qld) (Limitation Act). In response, Spoor asserted that pursuant to clause 24 of the mortgage agreements, Price agreed not to plea a defence of limitation period. The Limitation Act relevantly provides that an action for breach of contract and that for the recovery of land shall not be brought after the expiration of 6 years and 12 years respectively. In the present case, Spoor brought the proceedings around 17 years after the repayment due date under the mortgages. Clause 24 of the two mortgages provides that: "The Mortgagor covenants with the Mortgage[e] that the provisions of all statutes now or hereafter in force whereby or in consequence whereof any o[r] all of the powers rights and remedies of the Mortgagee and the obligations of the Mortgagor hereunder may be curtailed, suspended, postponed, defeated or extinguished shall not apply hereto and are expressly excluded insofar as this can lawfully be done." Then, the main question before the High Court was, among others, whether the parties can effectively agree in a contract that either party would not rely on the statutory limitation defence. In other words, the question is whether parties can ‘contract out’ the statutory limitation period. The High Court’s Decision Earlier High Court cases already dealt with the effect of statutory limitation, discussed in Price v Spoor. In The Commonwealth v Mewett (1997) 191 CLR 471, Gummow and Kirby JJ said that a statutory bar in the case of a statute of limitations does not go to the jurisdiction of the court to entertain the claim but rather to the remedy available, and therefore to the defences which may be pleaded. In Westfield Management Ltd v AMP Capital Property Nominees Ltd (2012) 247 CLR 129, it was held that a person can waive or renounce its right conferred by a statute unless it would be contrary to the statute to do so. The High Court further went on to say that a contract will be ineffective or void where it operates to defeat or circumvent a statutory purpose or policy according to which statutory rights are conferred in the public interest. Accordingly, the above can be summarised as the following principles: 1. a limitation period is a right conferred on a party seeking to enforce the defence; and 2. a person is allowed to agree to abandon a statutory right conferred on them if that statute does not prohibit them from doing so or if that is not contrary to public policy. The High Court first found that there is no express prohibition against ‘contracting out’ of a statutory defence in the Limitation Act. Then, it went on to decide that while a statutory purpose of imposing a limitation period in the Limitation Act is to promote the finality in litigation, i.e. speedy resolution of disputes, the right conferred is rather an individual benefit which can be elected to utilise as a defence, and it does not intend to remove jurisdiction of the court even if a limitation period has ended. Further, the High Court found that clause 24 of the mortgage agreements effectively gave up the benefit provided by the Limitation Act, on the grounds that the parties intended that clause 24 has wide operation including provisions in the Limitation Act by making reference to its text, context and purpose as well as to the understanding of a reasonable businessperson. Steward J agreed with Kiefel CJ and Edelman J’s reasons but further emphasised that the inclusion of clause 24 is a legitimate adjustment of the private statutory rights by exercising their freedom of contract and noted an important attribute of contract law stated in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656: “Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed." Implications It is important to note that the High Court in Price v Spoor clearly rendered the decision that the parties can contract out the statutory limitation defence under the Limitation Act as such conduct is not contrary to the public policy. While bearing in mind this precedent, due regard should also be given to applying this to cases arising in different circumstances. The High Court in reaching its conclusion in Price v Spoor indeed considered the interpretation and the purpose of the Limitation of Actions Act 1974 (Qld) as well as the interpretation of a relevant clause in the contract. Each state in Australia has its own legislation governing statutory limitation period, and the policy reasoning behind each legislation may differ from state to state. Further, whether or not the parties effectively agree to contract out the statutory limitation period is ultimately dependent upon the construction of contract clauses. Therefore, it is worthwhile to note that parties intending to contract out or vary the statutory limitation period in their contract must obtain prior legal advice so as to ensure that such intention is effectively incorporated and enforceable against a breaching party. Finally, it should be noted that a term that purports to waive rights under a statute which serves a public purpose will not be enforceable. For example, an employment contract that purports to waive or renounce employee’s rights such as minimum terms and conditions under the Fair Work Act 2009 (Cth) will be unenforceable. Disclaimer: The contents of this publication are general in nature and do not constitute legal advice. The information may have been obtained from external sources and we do not guarantee the accuracy or currency of the information at the date of publication or in the future. Please obtain legal advice specific to your circumstances before taking any action on matters discussed in this publication.

Yukio Hayashi

Kenneth Hong

John Kim

Tin-Lok Shea

James Jung

Shaun McGushin

Peter Shaw

Daisuke Ueda

Ian Hutchinson

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Erica Lee

Bella Cho

Laura Oh

Are you at risk of being penalised for “vague” and “onerous” contractual terms?

Security of Payment NSW - Know your right to receive progress payments for construction works and related goods and services

Freedom of Contract: Can parties contract out a statutory limitation period? The High Court says yes.