BY KAI SINOR

This article provides a summary of the golden rules for good contracts, and should be read together with our Healthy Contract Checklist available here.

 

General commentary

The golden rule for agreements is that terms should be capable of clear interpretation as to their meanings in an ordinary and natural sense of the word (or words) in the context of the clause in which they appear. Words or noun phrases that have special meaning should be defined in a dictionary to the agreement. Are there any terms intended to have a meaning which is specific to how the word is used by a particular trade or group of persons? 

To ensure clarity and certainty of terms within the agreement, consideration should be given to syntactic ambiguity.  Do any words have multiple ordinary meanings which are affected by syntax or context? Are there any phrases which describe a quality of continuous variation and which may require assessment of whether a given set of circumstances are within or outside the contractual stipulation – for example, although day and night are antonyms, there a range of graduations in the transition from day to night, such that it is difficult to say where one stops and the other begins.

Does the contract define ‘rules’ for how to interpret it? For example, it is common for clauses within the agreement to clarify what a particular terms mean by identifying what is “included” within the meaning of that term.  A question then arises whether if what is listed as being “included” is exhaustive (nothing else is included) or if other things that fall within the natural meaning of the term (or phrase), in context of the particular contract, are also included.  Note that where the word “means” is used to define what a word or phrase means, the definition given is exhaustive.

 

Nature of relationship (contractors providing services)

Where applicable, ensure the agreement specifies it is the express intention of the parties that there is not an employment relationship. This is important because if an employment relationship exists, the contracting party has obligations under the National Employment Standards and employment legislation.

Remember that even where such a relationship is specifically excluded by words within the agreement, courts will examine the substance of the agreement and the relationship between the parties outside of the contract.  Care should be taken to clarify matters such as, who provides tools and equipment, who is responsible for defects in the work performed, who has control over hours, time and place of work, whether subcontractors can be used, and whether the contractor can undertake other work or engage in other business activities.

 

Restraint of trade and non-compete (contractors)

Where applicable, consideration should also be given to risk for the business if the other party works with a rival competitor during the term of the agreement, or within a specified period of time after the agreement ends.  Similarly, the business may also need to ensure that the contractor does not ‘poach’ clients or employees, interfere with the business or engage in a competing business.

These kinds of clauses require careful drafting. If a restriction is too broad it may be unenforceable or it may indicate to a court that in substance, the parties are in an employment relationship.

Where the agreement is to engage a contractor, any clause that attempts to prevent the contractor from ‘engaging in’ or working for a competing business should be considered carefully.  Generally, a contractor is free to pick and choose who they work for. If there is a requirement that the contractor works exclusively for one party, this may impact how a court assesses the contractual relationship.  If the substance of the engagement (which include the written terms of the agreement) is deemed to bring the parties into an employment relationship, the hiring party has obligations and duties under employment law.

 

Agreement to other party’s policies

A contracting party may require that the other party comply with its policies for such things as anti-bribery, human trafficking, conflicts of interest, data protection or safeguarding of vulnerable persons.

The party requesting compliance usually retains discretion to update such documents and the obligations of any updated versions will apply. If the agreement states that the party is required to comply with such documents “as updated from time to time” or words to that effect, consider including a requirement for the requesting party to notify the other party prior to policy change, be consulted on changes that increase the burden of compliance in a material way or to terminate the agreement if there is a material change in policy.

 

Assignment and subcontracting

Consider, is there a need to limit or prevent a party to the agreement from subcontracting or assigning its obligations and rights under the agreement?  Are the risks and consequences of a subcontractor not performing their duties significant?  Remember that where the agreement engages a contractor, limits on the right to subcontract may indicate an employment relationship between the parties.

 

Risk: liability, indemnity and insurance

Scope of parties’ liability

Some agreements attempt to impose obligations and liabilities “jointly and severally” to all parties.  This may happen explicitly, or by referring to parties, a group of entities or persons collectively, and in doing so, create or extend rights and obligations under the contract. Where these clauses are included, consideration should be given to whether this enlarges the parties’ rights and obligations beyond those provided by the operative provisions of the agreement. When interpreting contracts, courts are cautious of attempts to impose secondary liability as an additional safeguard to primary liability of the principal party to whom the obligation (under the agreement) belongs. If such a clause is capable of being applied to the agreement in more than one way, it may be applied in a way that serves its purpose rather than in a way that extends parties’ obligations beyond what is contemplated in the operative clauses of the agreement.

Indemnity clauses

Careful consideration should be given to clauses which seek to limit (or remove) liability for a particular party. Indemnity clauses may limit liability by restricting liability only to certain losses or setting a cap on the level of liability. If it is appropriate to include an indemnity clause, consider if a party should be required to indemnify against other third parties (i.e. subcontractors, agents, consultants).

Indemnity clauses should be considered carefully because they affect who bears risk. Other mechanisms for assigning or managing risk in a contract are to limit the form of damage that is compensable (i.e. to direct losses, not indirect or consequential loss), the quantum of damages payable, or to require the contractor to effect and maintain such insurance policies as are appropriate for the nature of the work to be performed.

Insurance

Unless specifically required under the agreement, each party is responsible for obtaining their own insurance. Consideration should be given to risks if either or both parties do not have insurance and whether there should be a contractual requirement to effect and maintain specific types of insurance to mitigate the financial impact of those risks.  If insurance is required, what is the scope or coverage of such insurance?

If performance of the agreement carries a high risk, consider including a requirement for the delivering party to effect and maintain insurance.  For example, where the contract involves producing or installing equipment or delivery of a service to third parties, and there is a potential for harm if not delivered or carried out correctly, it may be appropriate to include a requirement for insurance.  If insurance is required, what is the scope or coverage of such insurance?  Public liability insurance should be a minimum. Other insurances may include professional indemnity, workers compensation (if staff are engaged) or personal accident (for sole traders). Will each party bear their own costs or will this be shared?

 

Warranties

A warranty is not a guarantee; it is a mere promise that, if breached, may be enforced by an award for damages.  If a party has made a representation or undertaking about something that relates to performance of their obligations but which is not an essential condition of the agreement, consider if this should be included as a warranty. Warranties may be express or implied, so it is important to clarify whether only warranties stated in the agreement will apply. 

Where the agreement seeks to exclude non-contractual warranties, assess if warranties stated in the agreement are adequate and appropriate. Are there any important assurances or promises that were made about a contracting party’s qualifications, skills or experience? Are there any licenses, consents or permits that must be held or obtained? Are there any regulatory requirements or industry codes of practice that the contractor is expected to abide by?

Typically, the agreement will confirm that the parties have not relied on any representation or warranty, other than as expressly provided in the agreement.  Remember however, that some warranties, such as those under the Australian Consumer Law, cannot be excluded by contract. 

 

Ethical requirements

Where applicable, clauses dealing with relevant ethical issues should be included in supply contracts or contracts that anticipate a supply chain relationship.  These clauses are most suitable where the other party is part of a sector where compliance with ethical norms and standards is proscribed by regulation (such as aged care and the NDIS). For NDIS providers, this may include such things as compliance with the NDIS Practice Standards, respecting participant privacy and dignity, acting on and reporting abuse, neglect, violence and discrimination, and compliance with the NDIS Practice Standards.

 

Ending or suspending a contract

Termination

Ensure the contract does not have terms that give an excessively broad discretion to cancel the contract unilaterally. It is common for there to be key ‘material’ terms, a breach of which allows one party to terminate (with or immediately without notice).  There may also be events which bring the agreement to an end – such as insolvency or bankruptcy.

If there are specific ethical, cultural or other values that are important in the contracting relationship, consider including these as grounds for termination.  For example, if the contractor is convicted of an offence involving dishonesty, or the contractor’s personnel are subject to an adverse finding from a workplace investigation or regulatory inquiry.

Suspension (contract for services)

Typically, if something happens which materially impacts rights and obligations under the agreement, the impacted party has the ability to cancel or suspend delivery of the services.  Ensure that any such terms in the agreement are reasonable – that they only apply to matters which are significant to performance of the agreement. Consider including an option to enable fulfillment of the contract at a later date and any requirements for notice so that the impacted party has time to make alternative arrangements.

Force majeure

The COVID-19 pandemic highlights the importance of making allowances for unforeseen events.  In contractual terms, a ‘force majeure’ clause sets out who bears the risk of loss or damage if the agreement cannot be performed due to circumstances beyond the reasonable control of a party.  These clauses usually provide that neither party has liability or is deemed to be in breach for any delays or failures in performance which result from such circumstances.

For more information, contact Michael Pagsanjan (info@mpslaw.com.au) or Michael Pagsanjan (michael@mpslaw.com.au).