Are Standard Form Contracts Fair? 20

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Wednesday, August 12th, 2015
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Most players in the engineering space are familiar with standard form contracts (SFC), whether they are the local Australian Standard versions or the international FIDIC suite of contracts.

Most players also know that these contracts are skewed in favour of the upstream entity, often to the detriment of the downstream contractor/subcontractor.

However, notwithstanding that life itself is neither balanced nor fair, the parties to a standard form contract always have the choice of not accepting the terms and conditions, and walking away from the contract if the other entity refuses to budge. This is basically the position adopted by our Superior Courts, so no change there.

This means that if you’re currently in one of those skewed standard form contracts, you’ve basically accepted the risks attached to the terms and conditions, most of which have the potential to bankrupt you, and some of which might actually succeed.

Relevant to the current time period of 2015, here in the engineering space in Australia, the Federal government is seeking to amend the Australia Securities and Investment Commission Act 2001 (ASIC Act) and the Competition and Consumer Act 2010 (CCA) to include small businesses in protecting them from unfair contract terms, along the existing lines of protection available to consumers. Not unexpectedly, big business is fighting back against these changes.

A term will be considered unfair if it:

  1. Causes significant imbalance in the rights and obligations of the parties
  2. Would cause detriment, either financially or otherwise, to a party if enforced
  3. Isn’t reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term

I suggest that there could be no argument that all three of these points apply to a standard form contract.

As the changes are an extension of the current consumer protection, the examples currently provided in the existing provisions provide some guidance on what may be found to be unfair. These examples include terms that:

  • Permit one party, but not another, to terminate, vary or renew the contract unilaterally
  • Permit the price payable to be varied by one party without the need for agreement or right to terminate by the other
  • Levy excessive fees or penalties for termination or impose excessive penalties on outstanding payments
  • Create an automatic rollover of the contract
  • Affect or limit a party’s ability to recover for a breach by the other party.

Referencing the existing terms within the CCA, again each of these individual points is applicable to a standard form contract.

So one could be excused from thinking that finally, 800 years after the original Magna Carta was signed to bring fairness in all contracts to the land from the evil monarchy and despotism that prevailed, our Federal government has woken up to the reality that the industries affected by standard form contracts need to be protected. The reality, unfortunately, is somewhat different.

Firstly, should these changes become enshrined in law, they will only capture small businesses of fewer than 20 employees and for contracts that are less than $250,000 over a 12-month period. Whilst we should be extremely happy for these small businesses, what about the rest of the industry?

Furthermore, for any party to protect their rights and interests under law, even under the proposed new laws, they have to engage in litigation through the Courts. This is a very costly and time consuming exercise, and itself skewed very unfavourably toward the upstream entity, who most of the time is financially more robust than the contractor/subcontractor.

Would the industry not benefit more if the following were proposed?

  1. That the ACCC be appointed as the Arbiter of Contracts, much the same as the Fair Work Commission vets and approves EBAs
  2. That each and every construction contract, excluding maintenance and renovations below a specified amount, must be submitted to the ACCC for approval
  3. That each contract have a non-restrictive dispute resolution clause allowing for immediate access to alternative dispute resolution facilities, as well as the automatic right of any party to enforce their rights under the contract through the Courts.

Why should the government seek to protect one sector of the industry – the small business doing small projects – when the same risks and unconscionable terms and conditions are being imposed across the industries on all the players?

I respectfully submit that our industry has sufficient laws at the moment to bring reasonable fairness to all contracts for the time being. Amendments and fine tuning of existing law is already ongoing. What is sorely lacking is an independent regulator that in the first instance balances the playing field by approving or rejecting standard and other form contracts, and then enforcing the rights of the parties without the need to resort to litigation.

As always, risk safely!

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Discussions
20
  1. David Chandler

    Mervyn I accept the reasoning for your proposals. Most construction contracts are unfair and allocate risk inequitably. The FWC would not be much better just look at the EBAs they rubber stamp. Construction contracts in their current from are close to their use by dates. The rapidly emerging trends in Modern Construction will challenge the bargain that head contractors have long dictated, especially the risk adverse Tier 1's. as more construction moves off site and much of that moves off shore the processes for certification, payment and warranty will need a rethink. The risk adverse nature of the industry has so disaggregated the warranty under writes that sit behind performance, conformance and delivery are now so disjointed that no industry customer should sleep at night. While some believe the balance sheet of the head contractor is sufficient cover they should think again. The compromises to work quality and inconsistent certification standards across the industry render the box ticking processes used by contract administrators these days as useless. No a different solution is needed.

    • Mervyn Sher

      David, thank you for your considered reply.
      You've certainly raised a valid issue regarding warranties, particularly in the offshore manufacturing onshore assembly scenarios.
      Actually, the solution is staring everyone in the face, much like the solution to all the other engineering space risks, however entrenched culture is the hardest of all to change.
      Having had the benefit of involvement in the two mega projects in the O&G engineering sector over here in WA, I've noted both sharp operators as well as the dumb and desperate working side by side.
      Time will tell. Have faith!

  2. Sunday Chombe

    from personal experiences and use std. Contract are very fair, as alot of the clauses have been used/ tested & contested. And the parties to the contract are in familiar territory during its use.

  3. Chris Nixon

    I would suggest that internationally and independently derived standard contracts (FIDIC, NEC, etc) tend to be fair until "doctored" by Employers and consultants trying to shift risk.
    Other standard form contracts developed by some international organisations for their own use I find tend to be one sided (often contracts of adhesion).

    • Gavin Edwards

      Yes – but as Chris says the moment they are published the "doctors" move in as he says. Often the same guys who sit on the board that edits the standards – nice little earner RIP George Cole.

  4. Roland Finch

    I understood JCT has a unique status as a 'consensus' contract insofar as it has been 'negotiated' by representatives across the industry, unlike the majority of the forms from other publishers.
    That said, its often done by trade-off rather than agreed fairness in every single term which is why it is so easy to alter the balance by doctoring. Most contracts are slanted one way or the other, however hard the drafters try. But then so is the legislation that underpins them

  5. Peter Elliott

    Define fair. Some provide a balanced risk (NEC, FIDIC); some provide a defined risk (GC/works), some provide a confused risk (JCT) until many legal cases later. The standard contracts are workable. The variations are not.

    I suggest that Australia would benefit from a mandatory adjudication similar to that in force in UK. The other proposals appear overly bureaucratic.

  6. Barry Higgs

    Most standard forms of Contract are fair: until the legal profession take them to bits and add/subtract to the advantage of their client!

  7. Roland Finch

    Nevertheless, for all their faults, I'd sooner have a contract that I could refer to than not have one at all. Never cease to be amazed that there are still some which don't get signed.

    • Gavin Edwards

      Roland, and how many more are not signed until the services and/or works are well underway. I have seen so many where this happens and they get signed only under duress when the first invoice is used as a lever. A lot of this stems from the negotiations starting too late in the overall pattern of things.

  8. Sara Fox

    I'm not sure you can say whether a form is fair without knowing more about the parties and the project. It's easier to say, as this article notes, whether a specific term within a contract is fair and the guidelines match those adopted in the UK for consumer contracts.

    My 2015 survey of 100+ contract users shows only 36% of users find UK standard form contracts fair with many of the comments citing amendments by parties/lawyers (as noted above) affecting their fairness. 46% asked for a fairer risk allocation as one of their top three changes to current UK standard forms.

    • Gavin Edwards

      Sarah, interesting. On risk allocation, surely that is OK if everyone understands – for example – it is well known that a D&B contracts place most of the risk on the Contractor but providing he accepts that and the Client knows he will pay a premium for that risk transfer then it is still "fair"?

  9. Richard Millard

    Gavin hits the nail on the head. Where a party is expected to accept that it has responsibility for the risk it should also be entitled to an appropriate and reasonable cost for accepting and managing the risk. The difficulty arises where the Client wants to have its cake and eat it by placing most of the risk on the Contractor whilst refusing any corresponding increase in the price. This creates the potential for disputes down the line.

  10. Andrew Baker

    It is not that contracts in themselves are unfair, nobody is forced to enter into a contract. What can be unfair is how contracts are sometimes administered.

    • Gavin Edwards

      Andrew I think they can be unfiar – what about if the "Relevant Event" clauses for an Extension of Time are all deleted for example?

    • Andrew Baker

      Gavin. If one feels the contract is unfair do not agree to it, get it changed. If you have a reasonable client they will change, if they refuse to amend the contract and you agree to work to it you have to accept the consiquences!

  11. David Stone

    The basic standard forms start life honestly and fairly but after they are swamped by Special Conditions, all designed to favor the Employer and Engineer, they become melting pots for disputes and claims

    • Geoffrey Beresford Hartwell

      David, The Engineer should have no material interest in the Contract (other than his fee, that may be linked to the Contract Value). I don't see how the Special Conditions can favour the Engineer.

    • David Stone

      Geoffrey, The Special Conditions are manufactured by the Employer and Engineer / Consultant to put maximum risk and workload on the Contractor's shoulders and to reduce the work and responsibility of the Engineer during the construction phase of a Contract.

  12. Gavin Edwards

    I must say that whilst the role of Engineer/Contract Administrator in UK proejcts is normally understood as impartial, it does seem in many other countries he is expected to always act in the favour of the Employer/Client and that surely renders even a fair contract unfair?