Off-the-Plan Contracts: 'Take It or Leave It'?

01 Mar 2017

 

Saturday 12 November 2016 saw the unfair contract term provisions (UCT) of the Australian Consumer Law (ACL) extend to standard form contracts of small businesses. Although aimed to protect small business, the extension may end up becoming more challenging to small business developers intending to sell off-the-plan. Whilst the consequences of the small business protection for off-the-plan contracts is yet to be tested, any parties involved must be wary of the UCT provisions until a more definitive picture of their application has been painted by the Courts or the Legislature.

What are the small business Unfair Contract Term provisions?

Simply put, the UCT provisions apply to standard form small business contracts to render any unfair term unenforceable and in some cases, where the term is fundamental to the operation of the contract, it may render the entire contract void. Whether a term is unfair or not, and any consequences that follow from a positive determination of unfairness, can only be determined by the courts.

The first aspect of the UCT provisions is its' application to standard form small business contracts. The defining factors of these contracts are twofold.

  • Firstly, the contract must be considered a standard form contract.
  • Secondly, it must be a small business contract. A small business contract is a contract for the supply of goods or services, or for the sale or grant of an interest in land in which one party is a business that employs fewer than 20 persons. The small business contract must also have an upfront price payable that does not exceed $300,000.00 or, if the contract has a duration of more than 12 months, an upfront price payable that does not exceed $1,000,000.00. Most off-the-plan contracts are likely to fit into this definition.

If the transaction falls into the definition of a standard form small business contract it is then for the court to decide if the disputed term is "unfair". The ACL defines an "unfair term" as:

  • A term that would cause a significant imbalance in the parties rights and obligations arising under the contract;
  • not reasonably necessary in order to protect the legitimate interest of the party who would be advantaged by the term; and
  • A term that would cause detriment whether financial or otherwise to a party if it were to be applied or relied on.

To determine if this definition is met, the court must consider the transparency of the term (whether it is eligible and clear) and the context of the contract as a whole. In some cases, a seemingly unfair term is offset by another clause that provides benefit to that party.

If all these conditions are satisfied, the term is considered unfair and void. The contract will continue to be enforceable so long as it can operate without the unfair term.

Do the UCT provisions apply to off-the-plan contracts?

There is no case law or legislative definition of standard form contracts but they are generally understood as operating on a 'take it or leave it' basis - where one party sets the terms of the contract and the other party has minimal to no ability to negotiate those terms. To determine whether an off-the-plan contract is a standard form contract the courts must consider:

  1. Whether one of the parties has all or most of the bargaining power relating to the transaction;
  2. Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  3. Whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented 
  4. Whether another party was given an effective opportunity to negotiate the terms of the contract that were not the excepted terms; and
  5. Whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

The nature of off-the-plan contracts cannot be definitively pinned as standard form however cannot be excluded from such a categorisation either. With legislation requiring that these contracts be pre-drafted and must include certain prescribed documents before marketing the property can begin, one can easily make an argument that off the plan contracts are starting to look more like standard form.

It is important to also note that the UCT provisions presume a contract is in standard form if it is alleged to be. The onus is then placed on the respondent to rebut this presumption, which as abovementioned may be difficult in regard to off-the-plan contracts. Drafters should take precautionary steps to ensure no term is unfair and consider the recommendations of ASIC and the ACCC that any negotiations should be retained as evidence, keeping in mind standard form classification is contingent on the contributions made by each party to the contract terms.

Although an argument can be made that off-the-plan contracts are standard form, developers selling lots off-the-plan may find refuge in the counter argument that the claimed unfair term is reasonably necessary to protect the legitimate interest of the vendor. Many terms that may seem unfair to a purchaser, such as a developer's ability to change a lot size, are crucial to protect the legitimate commercial interest of developers. It is natural for construction plans to change and the developer needs flexibility in construction in order to complete the development in a timely and efficient manner. Further, the various other protections provided to consumers by law and equity, such as sunset clause provisions, have the potential to also counter the terms of a contract that are alleged to be unfair. In other words, consumer protection laws and the protection of the legitimate interests of the vendor may outweigh any imbalance or detriment to a purchaser arising from a claimed unfair term in an off-the-plan contract. 

For further information about this article, please contact mattarr [at] kempstrang [dot] com [dot] au (Roger Mattar), Partner.

I would like to thank Kemp Strang Law Clerk, Adeline Technitis for her contribution to this update.


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