Unfair contracts legislation grows teeth

Warning: Before signing on the dotted line with any contractor, every business owner should be aware of these recent court decisions. By PETER VITALE

By Peter Vitale

Warning: Before signing on the dotted line with any contractor, every business owner should be aware of these recent court decisions.

The Federal Magistrates Court has given the first indication of how the Howard government’s independent contractor legislation might be used.

In a decision that could have mixed consequences for small and medium sized businesses, the court decided that a contract between Riteway Transport and three of its owner-driver contractors was unfair.

The unfairness arose because the contract allowed Riteway to require the contractors to buy and use equipment that was materially different from that which they were already using. The court decided to vary the terms of the contract, opening the way for the contractors to claim damages for breach of the varied contract.

All three of the contractors were small companies that owned large prime mover trucks with single semi-trailers. The principals of the contractors drove the vehicles on a Melbourne-Sydney return route delivering loads that Riteway had been engaged to deliver.

The parties agreed that the contract contained provisions from an agreement negotiated between Riteway and the Transport Workers’ Union. The agreement included a provision that allowed Riteway to require the contractors to replace their vehicles at five year intervals, and to put into service only vehicles that met Riteway’s specifications. It did not require Riteway to pay additional consideration or compensation to the contractors.

Riteway demanded that the contractors replace their standard semi-trailers with larger and more expensive B-double trailers. The contractors tried to negotiate an increase in the price paid for a Melbourne-Sydney run, and while Riteway offered a moderate increase, it was not what the contractors had estimated would be necessary to meet additional costs such as lease payments, extra wear and tear on vehicles, insurance and fuel.

The contractors sued Riteway under the Independent Contractors Act 2006, claiming that the contract was unfair. The act allows the court to review the contract, as at the time it was made, and decide whether it considers the contract unfair, harsh or unjust.

As in this case, the court may then make an order to set the contract aside or vary it. The contractors in the Riteway case sought a range of variations to the contract, which were rejected by the court.

Examples of these claims were that the agreement should have contained a dispute resolution clause, that it should have been reduced to writing in its entirety, and that Riteway should have been forced to share its own calculations of cost increases associated with running B-doubles with the contractors.

The contractors also claimed that the requirement that Riteway pay them $20,000 in “goodwill” upon termination of the contracts undervalued the contract and was therefore unfair.

The court rejected the majority of the claims on the basis that they related to circumstances that had arisen after the contract came into operation – the act specifically prevents the court from considering whether such circumstances make the contract unfair.

While the act reflects in some respects the little-used independent contractor provisions of the pre-WorkChoices Workplace Relations Act, it was the approach of the court in the Riteway case that is of most interest to business.

In coming to a decision, the court considered and applied the reasoning from a large number of decisions made by the NSW Industrial Relations Commission under that state’s own unfair contracts legislation.

The approach of the NSWIRC had expanded the jurisdiction rapidly into commercial disputes, rather than employment-like contractor situations. It had become the jurisdiction of choice, for example, for highly-paid executives, many of whom obtained large damages payments, despite having a contract in place that had been agreed by them without any suggestion that they had done so under undue pressure.

The jurisdiction became a notoriously difficult one for employers, and more generally for business. The NSW Parliament amended the legislation at least twice to try and limit the intrusion of the NSWIRC into the commercial arena and to limit those who had access to the jurisdiction. The NSW Supreme Court also handed down a number of decisions restricting the IRC from considering what were essentially commercial disputes.

What is of concern in the Riteway case is that the Federal Parliament clearly had a view to the difficulties of the NSW jurisdiction and built limitations into the Independent Contractors Act, for example that claims can only be made by individuals or by small companies, where the directors or their family perform the work.

Notwithstanding these concerns, and the findings in this case, the court’s reasoning indicates that had the contractors led more detailed evidence about a range of matters, it may well have made findings that the contracts were unfair on a number of grounds. The case leaves open the possibility that the court may substantially interfere with a contract that has been freely entered into by the parties. The court’s decision included the following observations:

• Unfairness may arise because of the terms of the contract, or because of the circumstances of the negotiation of the contract.
• The court must assess whether there is unfairness based on an assessment of negotiating power in making the contract.
• The court should not interfere with a contract where a party is not being exploited or a party was not disadvantaged by reason of relative bargaining strength, or because “undue influence, pressure or unfair tactics had been brought to bear” in the negotiations.

The lessons for business:

1. SMEs may find both relief and anguish in future decisions of the courts under the Independent Contractors Act.
2. Small family companies may be able to exploit the act to vary or avoid a wide range of commercial or labour contracts.
3. Companies that deal with contractors that are small family companies should exercise caution before including terms in a contract that might be seen as providing an unfair advantage.

Peter Vitale is the principal of CCI Victoria Legal