Avoiding unfairness in NSW council contracting

The application of the Unfair Contract Terms (UCT) regime under Part 2-3 of the Australian Consumer Law (ACL) was significantly broadened in November 2023. These reforms brought contracts with many small and medium-sized businesses into the UCT regulatory net, the same SME businesses that governments at all levels encourage to participate in their procurement processes.

We have previously written extensively about the 2023 reforms to the UCT regime. Here, we will examine how the UCT regime applies to contracting by New South Wales (NSW) local government.

Recap: outlawing ‘unfair’ contracts

The ACL has sought to combat ‘unfair’ contract terms since the establishment of the UCT regime in 2010. Initially, the UCT simply made ‘unfair’ terms void. However, the 2023 amendments actively prohibited the inclusion, use, or reliance on such terms, introducing the prospect of significant fines and pecuniary penalties. 

We have provided a detailed analysis of the amendments here. In summary, the key elements of the UCT prohibition in s 23 of the ACL are:

• the contract is a ‘small business contract’, which means a contract:
  • for the supply of goods and services or sale or grant of an interest in land, and
  • in which one party has fewer than 100 employees or turnover of less than $10m
• a term is ‘unfair’ and the person proposed the term, and
• the contract is a ‘standard form contract’.

Does the UCT regime apply to government?

The ACL functions as a uniform national scheme applied across each Australian jurisdiction through local enabling legislation. In NSW, it is received into law under s 28 of the Fair Trading Act 1987 No 68 (NSW) (FTA), while in the Commonwealth, it is through Part 11 of the Competition and Consumer Act 2010 (Cth) (CCA).

The FTA binds the Crown in NSW only if it ‘carries on a business’, either directly or by an authority of the jurisdiction concerned, under s 36 of the FTA. Certain activities that may be undertaken by the Crown (including granting / refusing authorisations) are expressly excluded from the definition in s 38 of the FTA. A similar position in relation to the Commonwealth is provided in s 2A of the CCA.

What about NSW councils?

NSW councils are treated differently. The UCT regime applies to these councils in the same way it applies to a body corporate, including a corporation.

Councils in NSW are established under Chapter 9 of the Local Government Act 1993 (NSW) (LGA). Under s 220 of the LGA, a council does not hold the status, privileges, and immunities of the Crown, as detailed in s 220(3).

A law of the State applies to a council in the same way as it applies to a body corporate (including a corporation) under s 220(4) of the LGA. The ACL in NSW stipulates that it applies to ‘bodies corporate incorporated or registered’ under the laws of NSW, as well as to ‘persons otherwise connected with this jurisdiction’ under s 32 of the FTA.

Recently, the NSW Court of Criminal Appeal applied s 220(4) of the LGA in the case of Environment Protection Authority v McMurray [2024] NSWCCA 160.   This case involved the operation of s 169 of the Protection of the Environment Operations Act 1997 (NSW) and found that this provision applied to the General Manager of Cootamundra-Gundagai Regional Council, as it was a law of the State applicable to corporation. You can read more about the decision here.

Due to s 220(4) of the LGA, the UCT regime applies to a council in NSW without the need to establish that it is ‘carrying on business’, which differs from the requirements for NSW or Commonwealth agencies.  The ACL also more broadly applies to councils in NSW, which can have particular impacts in relation to false, misleading, or deceptive conduct, including during commercial transactions.

How does UCT practically apply to council contracting?

For the UCT regime to apply, a council would need to be using a ‘standard form contract’.  There is no universal definition of ‘standard form contract’, although where a party alleges a contract is a standard form contract, it is presumed to be one unless the other party proves otherwise under s 27(1) of the ACL.  The court has discretion to identify relevant factors in determining if a contract is a standard form contract. Section 27(2) lists specific factors the court must consider, including the bargaining power of the parties and whether:

• the contract was prepared by one party before any discussions relating to the transaction occurred between the parties
• the party proposing the terms had made another contract in the same, or substantially similar terms and if so, how many such contracts that party made
• the terms were required to be accepted or rejected in the form presented
• there was an effective opportunity for negotiation of the terms of the contract, and
• the terms reflected the specific characteristics of the transaction or the other party.

NSW councils can contract directly with vendors (rather than by tender) in the limited circumstances set out in s 55 of the LGA, which includes lower-value contracts below the relevant procurement thresholds. The terms of such contracts can be:

• on a negotiated basis for higher value contracts
• on standard vendor procurement terms when required, or
• on standard council procurement terms.

The last option presents the greatest risk for UCT compliance, particularly for lower-value contracts that may be presented to vendors on a ‘take it or leave it’ basis.

What about tendering?

In many instances, NSW councils are required to invite tenders when undertaking procurement. The tendering process described in Part 7 of the Local Government (General) Regulation 2021 (NSW) (LGGR) is prescriptive. Councils typically provide a preferred form of agreement as part of the tender documentation produced in accordance with s 170 of the LGGR.

Respondents are allowed to propose deviations from the preferred form of contract in their tender proposals.  However, once a proposal is submitted, there is limited ability to vary or negotiate the terms under s 176 of the LGGR.  Consequently, councils must make a binary accept/reject decision in accordance with s 178(1) of the LGGR.  This creates a compliance risk of unfair contract terms for contracts that arise from tenders based on terms set by councils during the tender process. This risk would be significantly mitigated where Council resolve to authorise direct negotiations with any person following non-acceptance of tender proposals, as permitted under s 178(3)(e) of the LGGR.  More extensive negotiations are permitted in that scenario.

What about construction contracts?

Regarding construction contracts, these will typically be based on industry standard template suites. This may appear inherently ‘fair’, although in our experience that is often not the case. Councils must therefore consider:

• The process used to select template suites, considering the value of the project, the method of approaching the market and the legal, commercial, and technical risks inherent in the project. Selecting the wrong template for a particular project can elevate UCT risks, making it essential to have a good process in place around template selection.
• The balance of terms within each template often has a bias in one direction or another.
• The special conditions included by councils in its templates to address any bias, incorporate their own house views and preferences, or to respond to specific project risk issues.

How can NSW councils manage the UCT risk?

It is appropriate for NSW councils to adopt standard procurement terms that protect their legitimate interests and comply with the UCT regime. However, these terms should not be unbalanced without a valid reason. Not only is there a risk of those terms being ‘unfair’ under the UCT regime, but they are also unlikely to promote the best value-for-money position as vendors will factor in the risks associated with unbalanced terms into their pricing.

NSW councils need to have a clear understanding of the risk exposures they face when contracting and ensure that the proposed terms precisely and appropriately address these exposures without resorting to unnecessary extreme positions. To achieve this, councils should:

• Engage procurement, commercial, technical, and legal teams early during the planning stages of a major procurement to identify and document key contractual risks and mitigations.
• Develop robust policies and processes around template selection, particularly for projects.
• Dedicate time to tailor preferred contract terms in tenders to the specific risks of a project.
• Establish a comprehensive suite of BAU contract terms, ideally with drafting options, to address the risk and liability positions for a wider range of routine contracting situations.
• Include detailed drafting notes in template sets to assist template users in understanding the templates.
• Create a schedule to regularly review template procurement terms to ensure they remain appropriate for the council’s risk environment and current market conditions.

These factors highlight the critical role that council procurement teams play as subject experts in establishing procurement policy and guiding contracting processes.

If you would like to discuss any of the issues raised in this article then contact Phillip or Simon or one of our other specialist partners Darren Rankine, Naomi Simmons or Catherine Morton.