Contract Clauses: Assignment

Contract Clauses: Assignment

Commercial Law

It is common to find an assignment clause seeking to allow one party to unilaterally and without consent assign its rights under the contract to a third party. Assignment allows the transferring party to assign its rights to a third party. Assignment does not extend to any assignment of liabilities or obligations, for which a novation agreement would be required.

Where an assignment clause is missing

Where there is no assignment clause, the parties must consent to an assignment by amending the original contract. In some circumstances this may be preferable i.e. where a party does not wish to give a counterparty to a contract the right to assign rights to a potential competitor.

Drafting consideration

The party should consider the extent to which they are comfortable with an assignment and include appropriate restrictions i.e. to ensure that the benefit of a contract does not end up with a competitor.

Contract Clauses: Reasonable Endeavours

Contract Clauses: Reasonable Endeavours

Commercial Law

It is common to find a clause that requires the parties to take reasonable steps to perform one or more of their obligations. A reasonable endeavours clause is typically used where the parties do not wish to commit themselves to a specific course of action or where the facts and circumstances in which performance is likely to take place not fully known at the time of contract formation.

The most common phrases that are used include best endeavours, reasonable endeavours, or all reasonable commercial endeavours.

The courts will take a commercially astute approach and generally find that a best endeavours clause will require a party to all it reasonably can in the circumstances to achieve the contractual objective, but no more. This the measure of reasonableness will be determined according to an objective standard and a party is under no obligation to act against its own commercial interests.

So when determining what is reasonable a court may consider the nature, capacity, qualifications and obligations of the parties viewed in light of the particular contract.

When a reasonable endeavours clause is missing

Where a clause requires performance in a set manner, as opposed to on the basis of taking reasonable endeavours, performance will be measured according to the manner specified. In some circumstances, this is preferable as it removes the potential for disagreement about what is reasonable.

Drafting considerations

Before deciding to use a reasonable endeavours clause, the parties should consider whether they wish to allow such versatility in the performance of a particular contractual obligation. Where possible, the parties should specify how reasonable endeavours is to be measured i.e. which circumstances are to be taken into account when measuring whether a party has complied with such a clause.

Contract Clauses: Severance

Contract Clauses: Severance

Commercial Law

Severance clauses are inserted into contracts with the intention of allowing a contract to continue to have effect where particular provisions or parts are held to be illegal or otherwise enforceable. In other words, they aim to avoid an entire contract being held to be void in the event that one of its terms is found to be unenforceable or illegal.

Severance clauses are commonly found in liquidated damages clauses, which stipulate an agreed sum is a genuine pre-estimate of loss to be paid by a defaulting party to the contract. Severance clauses are also commonly found in restraint of trade clauses which stipulate a restriction in time, geography, or in some other respect upon a party in the conduct of their trade, profession, or business. In this context, severance clauses aim to sever the unenforceable component of a restraint of trade clause so that the restraint remains in place.

Where a severance clause is missing

Severance clauses are preferable, particularly in the circumstances described above. Nonetheless, the party should ensure that they are not seeking to avoid otherwise applicable concepts of unenforceability or illegality by the use of severance causes.

Drafting considerations

The courts may refuse to enforce a severance clause where the void or unenforceable terms alter the fundamental nature of the contract.

When drafting a severance clause, the party should consider whether its operation will alter the fundamental nature of the contract. Severance clauses should be clear in their intended operation and effect.

 

Am I an Employee or a Contractor?

Am I an Employee or a Contractor?

Commercial Law, Employment Law

It is common to find employees called contractors when, in fact, they are not. Here we consider the significance of the distinction between employee and contractor and the tests that a court would consider when determining this question. 

The significance of the distinction

There are various differences in the rights of employees over contractors and there are significant differences in their respective classifications. An employer who purposely calls an employee a contractor can risk financial penalties under the Fair Work Act.

The implications of an incorrect ‘classification’ by a business can be significant. Employees are entitled to indemnification from their employer, they are entitled to various protections under the Fair Work Act, and they are entitled to superannuation.

In contrast, the rights of a contractor are limited to protections specified in the contract of engagement and under common law and statute. A contractor is responsible for their own workers’ compensation insurance 

The fundamental difference

The fundamental difference between the two forms of engagement is that employees are employed under a contract of service (contract of employment) whereas contractors are engaged under a contract for services.  But determining this distinction in practice can be complex.

There is no statutory definition of employees however certain legislation will prescribe individuals to be employees for a specific purpose i.e. for the purposes of work health and safety protections and legislation or superannuation entitlements.

It matters not that an individual has signed a contractors agreement if in fact they are an employee. 

The tests to apply

When a court considers whether an individual is an employee or a contractor it will examine the relationship between the parties as a whole and consider whether control is capable of being exercised by the employer/principal. Where significant control is capable of being exercised it is more likely than not that the relationship is one of employment. There are other tests that a court will apply including the “integration test” where a court will focus on whether a person was part of the employer’s business.

There is no definitive list of factors that will determine if a relationship is one of employment. The table below lists a range of factors that have been considered, noting that the court will examine the relationship as a whole. 

Factors typical of an employment relationship Factors typical of a contracting relationship
The employer exercises, or has the right to exercise, control over the manner in which the work is performed, the place of work and/or the hours of work. The worker exercises control as to how, when and where to perform the work.
The worker works exclusively for the employer. The worker performs work on a number of different projects for different principals, or genuinely has the right to do so.
Any tools and equipment are provided by the employer. The worker supplies and maintains his or her own tools and equipment.
The worker cannot delegate, outsource or subcontract work to one or more third parties. The worker can delegate, outsource or subcontract work to one or more third parties.
The worker appears to be a representative of the employer (eg the worker wears a badge or uniform). The worker has separate places of work and/or advertises his or her services.
Income tax is deducted from remuneration and superannuation contributions are paid by the employer. The worker is responsible for business expenses such as income tax and insurance against work-related risks/liabilities.
The employer bears the risk of loss or an opportunity to profit from the business enterprise. The worker bears the risk of loss or an opportunity to profit from performing the work.
The employer pays the worker a periodic wage or salary. The worker is paid by reference to completion of tasks.
  Note: the FW Act recognises that pieceworkers (who are employees, not contractors) can be paid by reference to completion of tasks rather than a periodic wage or salary.
The worker is entitled to paid leave (ie annual leave, personal/carer’s leave). The worker has no leave entitlements.

Source: Australian Building and Construction Commission, Sham Arrangements and the use of Labour Hire in the Building and Construction Industry, Discussion Paper, December 2010, page 21.

Further information

The Australian Government has published an online tool designed to assist in the determination of employment/ contractor which can be accessed here. We note that the results of the tool are not definitive and should be verified by a lawyer who has experience in this area. 

Contract Clauses: Dispute Resolution

Contract Clauses: Dispute Resolution

Commercial Law

A dispute resolution clause can serve an important role in specifying alternative dispute resolution methods for the resolution of issues arising from a contract. Alternative dispute resolution can reduce the costs associated with disputes and provide the parties with greater certainty as to their rights and the steps to be taken to enforce those rights.

Typically, such clauses restrict the commencement of litigation until after the parties have exhausted the process specified by the clause. Such clauses also allow the parties to specify who they want as a mediator, expert, or arbitrator of disputes, opening up the possibility of using individuals who are familiar with the subject area of the relationship.

A further potential benefit of a dispute resolution clause is that a dispute can be resolved in private without public litigation and reported cases. This is particularly attractive where the parties wish to keep their relationship secret.

There are also disadvantages to dispute resolution clauses. These include the potential inability to appeal the decision of an expert- whereas a court’s decision can often be appealed on a number of legal grounds. Further, if a dispute involves complicated questions of law and fact, it may be more suitably dealt with by a court.

What if a dispute resolution clause is missing

If a dispute resolution clause is missing, the parties will need to look to negotiate or litigate the resolution of disputes arising from the contract. As noted above, in some circumstances this may be preferable.

Drafting considerations

When drafting a dispute resolution clause, the parties should carefully consider the processes to be followed, the potential costs of each steps, the timelines involved, and the scope of the operation of such a clause. For example, a dispute resolution clause may be restricted to apply to particular disputes i.e. the pricing of components or to cost recovery as opposed to applying to all disputes however arising from or in connection to the contract.

Contract Clauses: Governing Law

Contract Clauses: Governing Law

Business Sale, Commercial Law

A governing law clause may include a:

1. choice of law clause, setting out the legal rules to govern the contract; and

2. choice of forum clause, setting out the judicial system with exclusive or non-exclusive jurisdiction to hear disputes.

The purpose of a choice of law clause is to avoid a dispute about the appropriate law to be applied. In most cases, in Australian courts, a choice of law clause will be upheld.

The purpose of a choice of forum clause is to minimise later disagreement about the place in which disputes arising under the contract should be litigated. Typically a choice of forum is made on the basis of the reliability and probity of the legal system chosen, the parties understanding of the rules of the court, and convenience.

Where a governing law clause is missing

Where a contract does not include a choice of laws clause, the principles of conflict of laws will apply. This can lead to unnecessary complexity and additional costs.

Drafting considerations

The parties should consider the consequences of a governing law clause. They are often included as ‘boilerplate clauses’ without proper consideration of their effect.

As noted above, relevant considerations include convenience, the extent of the party’s knowledge of the operation of the chosen laws, and the extent to which the chosen laws will modify the rights and obligations of the parties.

Contract Clauses: Indemnity

Contract Clauses: Indemnity

Commercial Law, Energy Law

Indemnity clauses are one of the key risk allocation mechanisms within contracts. An indemnity clause seeks to reallocate the risk of loss by one party to a contract by moving that risk to the other party.

There are generally considered to be four categories of indemnity clauses and these are:

a. Bare indemnities: where a party indemnifies the other against all liabilities or loss incurred in connection with a given event or circumstances without any express limitations.

b. Reverse indemnities: where a party indemnifies another against loss or damage arising out of a contract regardless of whether the loss was caused by the other party’s own acts or omissions.

c. Proportionate or limited indemnities: where a party indemnifies another against all loss or damage except that caused by the other party either through that party’s negligence, breach of contract, or wilful misconduct.

d. Third party indemnities: where a party indemnifies another for claims made by a third party.

The lack of an indemnity

In the absence of an express indemnity in a contract there are a limited number of circumstances where an indemnity may be implied. The most common example is where a co-guarantor seeks contribution from another co-guarantor where their joint liability has been met in full. Here, there is a common law right for the co-guarantor to obtain reimbursement.

Ordinarily, the lack of an indemnity will mean that common law and relevant statutory provisions apply.

Drafting considerations

The issues to be considered when drafting or reviewing an indemnity are complex. Readers may wish to consider this paper and should obtain legal advice on the operation of any proposed indemnity.

An indemnity is only as good as the party who provides it. This means that it is crucial that the party seeking an indemnity ensures that the indemnifying party has the capacity to enter into the indemnity and the means to honour it.

Contract Clauses: Termination for convenience

Contract Clauses: Termination for convenience

Commercial Law

A termination for convenience clause allows the benefiting party to terminate the contract for any reason. A termination for convenience clause removes the need to wait for a breach, repudiation, frustration, or some other stated termination trigger.

In Good faith

One unsettled issue is whether a party relying on the termination for convenience cause must act in good faith. Even where there is a duty to act in good faith, the scope of that duty is difficult to define.

A duty to act in good faith has been interpreted to include an obligation to cooperate in achieving contractual objectives, to comply with honest standards of conduct, and to comply with standards of conduct that are reasonable having regard to the interests of the parties. A duty of good faith does not require a party to act against its own interests.

In some circumstances a contract will specifically state whether the parties have a duty of good faith but where a contract is silent on the matter, the term may be implied where:

  • it is reasonable and equitable;
  • it is necessary to give business efficacy to a contract;
  • it is so obvious it goes without saying;
  • it is capable of clear expression; and
  • it does not contradict the express terms.

Where a termination for convenience clause is missing

The absence of a termination for convenience clause may mean that the parties need to rely on common law in order to terminate a contract. At common law, there must be a breach of an essential term, a sufficiently serious breach of an intermediate term, repudiation, or frustration for a right to terminate to arise. A termination for convenience clause gives the parties greater certainty in their ability to terminate the contract for any reason.

Drafting considerations

A termination for convenience clause should be clear and unambiguous. The consequences of termination in reliance on such a clause should be set out. Finally, the potential operation of an implied duty to act in good faith should be considered.

Contract clauses: Nomination

Contract clauses: Nomination

Business Sale, Commercial Law, Energy Law

A benefit under a contract may be nominated to a third-party nominee under a nomination clause. Here we look at nomination clauses in contracts relating to the sale of property. Commonly you may see a contract providing for property to be transferred to the buyer or their nominee.”

Á contract of sale may provide for a buyer and allow the buyer to nominate the property to an unnamed third party. A nomination clause is to be distinguished from a novation of the agreement as it is restricted in being a right for the benefiting party to direct a transfer to the nominee.

A nomination clause does not result in the nominee becoming a party to the contract. Consequently, the nominee can reject the nomination. The courts have held that such a clause will only be effective if it’s language and intention are clear and compelling.

Interaction with privity of contract legislation

Legislation exists in Queensland, the Northern Territory, and Western Australia which operates to allow a third party, who is not a party to a contract, to enforce a contract made for their benefit. The question then arises whether such a third party can sue to seek to enforce a nomination clause. In general terms, the third party must be identifiable under a contract to be able to seek to rely on those legislative provisions. This is obviously a complex area of law and legal advice should be obtained to understand its operation.

The lack of a nomination clause

The absence of a nomination cause will not necessarily preclude a buyer from directing a seller to sign a transfer in favour of a third party. However, a nomination clause is preferable as it can deal with the process to be followed and the costs incurred.

Drafting considerations

The first concern is to ensure that the parties intend on a nomination as opposed to a novation or assignment.

As noted above, a nomination clause must be clear and compelling. Words such as substitution can indicate a novation rather than nomination, and so should be avoided. The nomination clause should specify the process to be followed to give effect to the nomination; including timelines, notice requirements, and responsibility for costs.

Contract Clauses: Force majeure

Contract Clauses: Force majeure

Business Sale, Commercial Law

Force majeure is an expression derived from French law. Generally, depending upon the drafting, it will operate to limit the obligations of the parties while they are prevented from performance by a factor that is beyond their control.

The operation of force majeure can be distinguished from frustration in that force majeure is a contractual construct and typically operates to suspend performance, whereas frustration operates where the performance of the contract is impossible or radically different and termination results.

The inclusion of a force majeure clause is standard practice in particular contract types. There is a significant body of case law on the operational force majeure clauses, indicating that force majeure clauses are often characterised by poor drafting.

A risk allocation mechanism

A force majeure clause is a risk allocation mechanism used to limit the liability of a party for events which delay, restrict, or hinder the performance of the contract – where such events are beyond the control of the parties. The triggers of a force majeure event often include acts of God such as fire, storms, earthquakes, and floods, as well as civil unrest, strikes, riots, and acts of war or terrorism.

Where a force majeure clause is missing

Where a contract does not include a force majeure clause, a party prevented from performance would be required to rely on the application of the doctrine of frustration. The doctrine of frustration is limited to events beyond the control of either party and does not apply to all situations or where performance is merely more onerous but is still possible.

Drafting considerations

A force majeure clause may operate to displace rights that would otherwise be available to parties under the doctrine of frustration. This is because the ways in which risk are to be allocated have been agreed by the parties in the formation of the contract, and the courts will give effect to the parties’ wishes as expressed.

Consequently, it is important that force majeure clauses are carefully drafted to reflect the intentions of the parties. Oftentimes, force majeure clauses are included as boilerplate clauses leading to subsequent issues where risks materialise.

One of the key components of a force majeure clause is the triggers i.e. the events that give rise to the operation of the clause. Where the list of triggers or factors giving rise to the operation of the clause is too specific, it may be difficult for the parties to rely on the operation of the clause for an event which is related but not specified within the clause.