If your existing contracts (and standard form precedents) were prepared more than a couple of years ago, it may be time to review and update them to reflect recent legal developments and to ensure that they contain the necessary protections and reflect current market conditions.1
It makes good sense to standardise contracting approaches wherever possible in order to minimise the involvement of lawyers and other professionals. However, standardised contracts and standard form precedents prepared by industry associations may not be sufficient to fully protect your interests or may not be tailored to a particular activity or work location.
We have summarised below several recent legal developments and some key commercial considerations which are particularly relevant to our industry.
Work health and safety laws
If you work outside of Western Australia, you should update and strengthen your current contracts and precedents to reflect the new uniform WHS laws including, for example: the employer’s obligation to consult with workers who may be affected by a health and safety matter and to consult with others who share responsibilities for the same health and safety matter. Your contract must also address the appointment of the ‘principal contractor’ under the various State Acts.
Different health and safety regimes apply for Western Australian mine sites and for offshore activities on oil and gas projects.2 You should be aware of these regimes and ensure your contracts are consistent with the applicable requirements.
“Reasonable endeavours” and “best endeavours”
Commercial contracts commonly contain obligations on one or both parties to use “reasonable endeavours”, “best endeavours” or similar phrases. The law in Australia is still unsettled, although a recent decision by the High Court of Australia suggests that the phrases probably do have the same or a substantially similar meaning.3 To avoid doubt, you may wish to clearly articulate what types of actions will be included and excluded from your obligation to use reasonable or best endeavours (particularly if you are working offshore as these concepts may be applied differently by the courts of other countries).
It is very common for parties to attempt to exclude liability for consequential loss as they are concerned about potential liability for loss of profits and other types of damage arising from a breach of contract. However, recent legal decisions4 have highlighted that the meaning of “consequential loss” remains unsettled in Australia, so you should avoid using that term unless you clearly define what it is intended to mean or alternatively you should expressly state the specific types of losses which are intended to be excluded.
Unenforceability of payment obligations
Based on a recent decision of the High Court of Australia5 it appears that any payment under a contract could potentially be read down if it constitutes an unreasonable penalty (in the sense that the payment exceeds the actual loss or damage suffered by the other party), including termination fees, take or pay clauses, indemnities and liquidated damages. The conventional wisdom prior to this decision was that payments could only be read down for being a penalty if they related to a breach of contract and did not amount to a genuine pre-estimate of loss. Careful drafting is essential, as the High Court did indicate that clauses drafted as appropriate performance options are not likely to be void and unenforceable.
The “prevention principle” under construction law
There are a number of specific legal requirements in relation to construction contracts, so it will be in all parties’ interests to ensure that the contract contains the appropriate protections. For example, the application of the prevention principle means that the contractor cannot be penalised if it is prevented by the actions of the principal from completing the works on time. Contracts must address the principal’s unilateral power to extend time for delays it may cause to overcome the prevention principle and avoid having the time to complete the works set at large, in which case the principal may not be able to claim against the contractor.
Security of payments legislation
All Australian States and Territories have introduced security of payments legislation which establishes a process for resolving payment disputes for construction work outside of the terms of the contract. The provisions of such legislation vary from State to State and certain types of construction (e.g. for mining activities) are exempted from the legislation.6 There have recently been significant changes to the NSW security of payments legislation which are discussed in detail here.
Personal Property Securities Act 2009 (PPSA)
Depending on when they were developed, your existing contracts (and standard form precedents) may not include any provisions relating to the PPSA and this could have unintended consequences for you or other parties to the contract. The PPSA commenced on 30 January 2012 and implemented a single national law creating a uniform approach to personal property securities.7
If you did not register your security interest before the transition period expired on 31 January 2014, you may lose priority to other secured creditors or lose your interest in the secured property altogether if the other party becomes bankrupt or is placed into administration or liquidation. You should assess whether your contract creates a security interest which requires registration under the PPSA.
You will also need to carefully consider whether you wish to entirely exclude the rights and remedies contained in the PPSA or vary some of its procedural requirements (e.g. to give certain notices). You may also want to include representations and warranties that there is no security interest created under the PPSA or that, if created, such interests will be properly maintained.
As mentioned above, there are important differences in the law of each Australian State and Territory of Australia, for example in relation to occupational health and safety, construction law and employment law. So, if you are contracting in more than one State or Territory it may be necessary to modify your precedents to take account of local laws.
Obviously, if you are working offshore, your contracts will also need to take account of local laws and business conditions. For example, the laws of other countries often require the use of local labour, local materials and local currencies and they may prohibit the import of certain materials. There can also be significant differences in the types of legal and property interests which can be created under a contract in other countries. The creation and enforcement of your intellectual property rights under the contract also requires particular consideration and it is also important to carefully choose the applicable law (and dispute resolution forum) because it can be very costly and difficult to enforce judgements in relation to overseas projects.
Bribery and corruption
Many Australian resources companies work in countries and regions where bribery and corruption are commonplace. Although certain types of “facilitation payments” may be permitted by law, great care must be taken otherwise you and your company could be prosecuted under the anti-bribery and corruption laws of Australia, Great Britain and the USA, which all have “extra-territorial” effect, regardless of the country where the illegal conduct occurred.8 Your contracts should be carefully structured to ensure that any payments made to public officials comply with legislative requirements and you should ensure your arrangements with contractors and consultants prohibit the making of illegal bribes in connection with your project.
All parties hope that they will never need to call on the contract, but disagreements do arise, particularly if there has been a significant change in market conditions, as has occurred in the last couple of years. The law is also constantly evolving and there are also some important differences in laws of each State and Territory of Australia, let alone in the laws of other countries.
It is important to ensure you are using the right tool for the job: i.e. contractual terms which can be quickly and cost-effectively implemented to achieve your business objectives, while still appropriately managing legal and commercial risks, having regard to the type of activity and the place where the work is to be performed.