Who’s in charge? Independent contractors and the unfair terms in small business contracts reforms.

On 12 November 2016, what has been described as “the single biggest change in the way Australian enterprises do business for decades.”[1] took place.

Judging from the lack of registrations at one industry association workshop[2], there may be reason to think that it might have passed in some sectors of the recruitment and contracting industry without too much notice[3]. That is a pity because, amongst the seven industry sectors that the ACCC has been viewing closely as it prepares to administer the reforms, is the independent contracting sector.

The Commission’s understanding of the sector extends to include “freelancers and consultants”. According to the Commission:

Approximately one million people in Australia qualify as independent contractors.[4]

Independent subcontracting is common in areas such as design, engineering, architecture, information technology and surveying.

The Commission explained that it selected the contracting sector as one that warranted special scrutiny:

…due to concerns raised by industry associations in submissions to the Treasury’s Extending unfair contract term protections to small businesses consultation process about the imbalance in bargaining power between the independent contractor and the other party.

If you want to get a picture of how this might now play out, it could be worthwhile going back to that consultation process and checking out some of those concerns that were expressed by the industry associations. They might be associations to which some of your contractors belong!

Alternatively, you might think that the ACCC has saved you the trouble, because in its November report, the Commission has set out four types of provisions that are likely to be challengd under the new laws.

The Commission sandbox-tested the new laws with the co-operation of three businesses that used standard form contracts with their contractors. It identified common problems and, in most cases, was able to negotiate a satisfactory fix.

Common problems and fixes

Based on this exercise, some common problem clauses and fixes seem to be:

  • Unilateral variation provisions – that allow the larger business[5] “to vary any term in the contract, or aspects of it, including policies, procedures or key performance indicators”. A challenge to these provisions will reduce the control that a contracting agency may exercise over its contractors. Here, the fix seems to be to allow sufficient time before any variations take effect so that your contractor can terminate without penalty if the contractor does not accept the changes. You can possibly see how this aims to restore the balance between the parties.
  • Limited liability and wide indemnities – there are no surprises here. “Hold harmless” causes have long been a subject of concern and challenge. The fix seems to be to amend the contract to ensure that the larger business remains liable for loss or damage to the extent that it has caused or contributed to it.
  • Termination clauses – here the Commission identified clauses that provide an “inappropriate right to terminate the agreement” as the focus of its concern. “Inappropriate” is a loose description that can cover many things; but the Commission appears to have had in mind termination:
    • on notice that is of unreasonably short duration;
    • for trivial or insufficient reason – e.g. where the larger business merely formed a view (not qualified by any requirement of reasonableness, objectivity or subject to any due process) that the contractor’s conduct had an adverse impact on its reputation;
    • for reasons of a more substantial nature – e.g. contractual breach in circumstances where the contractor was given no opportunity to remedy the breach.

The fixes seem to be to:

-make sure that notice periods are reasonable;

-avoid “absolute discretion” type reasons for termination;

-provide for a type of due process or better still, dispute resolution;

-provide opportunity for the contractor to remedy any breach if it is capable of remedy.

Misleading statements about legal rights – this was more contentious.

The Commission has a view that “four walls” or “entire agreement” clauses can potentially mislead contractors about the scope of legal rights and remedies. That’s important because you need to know that misleading a person about the existence or exclusion of any right or remedy is a serious contravention of the Australian Consumer Law that can result in enforcement action and civil suits for a wide range of court orders.

The orthodox legal view is that entire agreement clauses may be useful to clearly establish the boundaries of the contractual agreement made by the parties and that parties should be free to use them if they wish to do so. The orthodox legal view would be that such clauses speak only of the contractual rights between the parties, do not exclude any rights or remedies that cannot be contracted away, and are therefore not misleading or likely to mislead. And there is perhaps some justification for that view, where the parties are businesses and not domestic consumers.

This will be a more difficult problem to fix, because it represents a challenge to the parties’ right to contract rather than to the fairness of the terms on which they contract.

It is possible, though I say so with respect, that the ACCC may be taking too tough a line in this case. Certainly, one business that played in the sandbox tests seems to have thought so and did not put forward an alternative clause that satisfied the Commission.

One fix that had some appeal to the Commission would have been to limit the operation of entire agreement clauses so that they only “superseded all previous written agreements”.

That seems a bit too forced for my liking; and it fails to meet the contractual purpose of the provision, which is to scope the parties’ agreement. The Commission’s fix seems to leave the scope of the agreement too uncertain.

Now, although I’ve previously expressed doubt about the value of these clauses in contemporary employment services dealings, I’ve done so for a different reason. My own view is that these clauses are the legacy of three centuries of enclosure that have shaped our thinking about what is normal for work relationships.

Think about it. When we are setting up work agreements, we are often thinking in terms of locking in, tying up, tying down, and making water-tight a set of rights and obligations that are capable of judicial enforcement.

But that thinking is incongruous with more contemporary views of the work relationship – especially as it takes shape in situations, where the person who performs the work is conducting their own business and is performing the work in that business.

So, rather than having find ways to compromise “entire agreement” clauses, we are now looking for ways to charter co-operative relationships that are sufficiently elastic to accommodate disruption and change and yet firm enough to support productive engagements. And that, I think, is a superior fix to any problem that entire agreement clauses may cause. It is one that is more consistent with the purpose for which the reforms have been enacted and perhaps recognises that, in the dynamic area of work relationship contracting, we will perhaps never reach “entire agreement”.


Andrew C. Wood

[1] Robert Gotliebsen, “The Unfair Contract Legislation is a Big Deal”, The Australian, 12:56pm August 10, 2016.

[2] https://twitter.com/ITCRA/status/793679099214585856

[3] However, that will shortly be addressed https://twitter.com/ITCRA/status/798026453057204224

[4] Australian Bureau of Statistics, ‘6333.0 – Characteristics of Employment, Australia, August 2015’, released 31 August 2016, available at www.abs.gov.au/ausstats/abs@.nsf/mf/6333.0.

[5] Although the ACCC speaks in terms of the more powerful business being the “larger” business, that need not necessarily be the case. Once a small business is involved on either side of the transaction, it seems that the new laws will apply. This is so even if both parties are “small businesses”.

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