Final Submission to the Attorney-General of Contract Law Reform

Submission to the Attorney-General
on Australian Contract Law
July 2012
Inquiries in relation to Submission to
Julie Abramson
Deputy CEO National Telephone: 03 9851 9900

TABLE OF CONTENTS
Recommendations 3
1.0 General Introduction
1.1 An Introduction .................................................................................................... 4
1.2 The Civil Contractors Federation ........................................................................ 4
2.0 Response to Question 1 .................................................................................. 5
2.1 What are the main problems experienced by users of Australian contract law 5
2.1.1 Too much regulation .......................................................................... 5
2.1.2 Lack of standardisation in contracts and contractual terms and
conditions ......................................................................................... 6
2.1.3 The need for certainty ....................................................................... 6
2.2. Which drivers for reform are the most important for contract law
Are there any other drivers for reform that should be considered .................... 7
2.2.1 The importance of contractual law as a driver of economic
productivity ........................................................................................ 7
2.2.2 Contract law in setting standards of behaviour ................................. 7
2.2.3 Sustainability for small and medium sized businesses .................... 8
2.2.4 Harmonisation ................................................................................. 9
Recommendation 1 .......................................................................... 9
3.0 Some particular issues in contract law relevant to the civil construction industry
3.1 Australian Standard Contract Series AS 4000 - 1997 ......................................... 9
3.2 A standard form contract which is anything but standard ................................... 10
Recommendation 2 ............................................................................................. 10
3.3 Lack of consistency in the use of Contracts based on Australian Standards ..... 11
3.4 Specific clauses in the standard form contract.................................................... 11
Recommendations 3 ........................................................................................... 11
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3.4.1. Conditions relating to when payments are due ................................ 11
3.4.2 The role of the Superintendent .......................................................... 12
3.4.3 Retention of payments and Bank guarantees and issues in relation to
practical completion ........................................................................... 13
3.4.4 Wet weather conditions of contract ................................................... 14
4.0 Over regulation - the regulatory burden on business ................................... 15
Recommendation 4 ............................................................................................. 16
5.0 Conclusion ......................................................................................................... 16
Annexures to this Report
Appendix 1 - Key Principles Best Practice Guide to tendering and contract management.
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RECOMMENDATIONS
Drivers for Reform – Question 1
1 The important role that contract law plays in the Australian economy and productivity in
particular should be recognised as a specific driver for reform.
Costs, difficulties, inefficiencies or lost opportunities – Question 2
2 In relation to the Australian Standard AS 4000 – 97 General Conditions of Contract:
(a)
Standards Australia should be asked to examine whether there should be monetary
limit below which Australian Standard AS 4000- 97 should not be amended. This
should be related to Risk.
3 That the Australian Standard AS 4000 -1997 General Conditions of Contract be specifically
reviewed as to ensure that:
(a)
(b)
(c)
(d)
(e)
Payment provisions reflect the Security of Payment regime by excluding damages
and other claims from the calculation of progress payments.
Payment schedule should be amended so that certification is required within 7 days
of a claim being submitted and payment by the Principal within 7 days of certification.
The provisions dealing with Superintendents are strengthened to further support the
role of the Superintendent in being fair and impartial by imposing a positive duty to do
so.
There should be a strengthening of the clause which provides for retention of
payments and/or bank guarantees to ensure prompt return of retention payments
and/or guarantees occurs in practice.
What constitutes practical completion under the definition section and in particular
paragraph (c) of the contract needs to be rewritten to reflect the fact that not all of the
documents and information is under the control of the contractor.
Costs, difficulties, inefficiencies or lost opportunities – Question 2 and Reform Options – Question 6
4 We support reviews by the Productivity Commission into:
(a)
the red tape burden associated with Australia’s contract law with a view to assisting
business facilitation.
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(b)
Undertaking a stocktake research report which sets out all State and Territory
legislation which affects contracts to determine the utility of current law, identify
duplication between State and Territory law and also identifies how that duplication
adversely effects productivity.
as proposed by the Master Builders Association 1
1 General Introduction
1.1 An introduction
The Civil Contractors Federation welcomes the opportunity to contribute to this Review “ Improving
Australia’s Law and Justice Framework: A discussion paper exploring the scope of reforming
Australia’s Contract Law.”
Contract law is a fundamental corner stone of commerce and accordingly the form, terms and
conditions, application and interpretation of this area of law has a significant impact on economic
efficiency and productivity in Australia.
At the outset we should state that whilst we see merit in a review, we essentially see contract law and
business regulation as being important economic drivers for productivity and business growth.
Accordingly it is our view that such a review requires both a legal and economic focus.
Our main response in relation to this Discussion Paper is to Question 1 which asks what are the main
problems of the users of Australian Contract law and what are or should be the drivers for reform.
Additionally we have made some recommendations in relation to the Standards Australia AS 4000-
1997 contract used in the building and construction industry by way of illustrating some of the
practical problems in Australian contract law for our members.
1.2 The Civil Contractors Federation
The CCF is the member based representative body of civil engineering contractors in Australia
providing assistance and expertise in contractor development and industry issues.
Through our Federation we represent over 2000 small, medium and large sized contractors who in
turn work in an industry of more than 350,000 people.
Our members are involved in a variety of projects and activities including the development and
maintenance of civil or “horizontal” infrastructure such as roads, bridges, sewer, water and drainage
pipelines, dams, wharves, commercial and housing land development. Members are also involved in
the preparatory works for mining and other resource developments.
1 Masters Builders Submission to the Attorney Generals Review of contract law available at
www.masterbuilders.com.au
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Our members range from small scale contractors who rely on standard and printed form contracts to
those who enter into specialised contracts. We note the interests of small business that is specifically
referred to in the section on drivers for reform.
A major procurer of our members services are state and local governments and statutory agencies
like road authorities. Accordingly it would be an important policy principle from our point of view that
any reforms in relation to contractual law also applied to Government and Government Agencies. This
goes particularly to issues such as acceptable standards of conduct and harmonisation issues.
Our emphasis in this submission is by nature related to our views in relation to commercial contracts.
2 Response to Question 1
2.1 What are the main problems experienced by users of Australian contract law
The response to this question is contextual dependent on which segment of the contracting market is
the subject of inquiry.
For some members the issues relate to the balance of bargaining power between the parties, for
others it is the interpretation and management of the contract process especially in the public sector.
2.1.1 Too much regulation
However, overall for all our members the multitude of regulatory matters which now impact on
contractual law is a significant and serious concern. Our members are also subject to a range of
external legal obligations now being enforced through the procurement contract. For example the
requirements for National Greenhouse and Energy Reporting 2 data provision being a condition or
clause of a head contract.
These are issues which flow through the whole supply chain as the head contractor has to require the
sub-contractor to provide data, and so on, so that the legal obligations imposed by various
environmental laws can be met.
Compliance codes and local laws in excess of what is required can also add considerably to projects.
By way of example local government contracts commonly provide that contractors will “comply with all
local laws”. There are probably in excess of some 800 Local Governments and Agencies nationally –
with contractors working between councils and shires and interstate the compliance burden is
enormous.
2 National Greenhouse and Energy Reporting or NGER see National Greenhouse and Energy Reporting (NGER)
Act 2007
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2.1.2 Lack of standardisation in contracts and contractual terms and conditions
In our recent submission to the Productivity Commission Inquiry into local government as Regulator 3
we made the point that one of the major concerns of the civil sector is in relation to issues related to
standardisation or lack thereof
This a broad ranging issue as it starts with the tender and procurement process, includes the contract
process, technical specifications and on site management.
In terms of the contractual process, previous research has highlighted that anecdotally in one state
alone there are over 60 different general conditions of contract. 4
This adds complexity and cost to contractors as they need to be able to understand and interpret
complex contracts which can differ between even neighbouring councils, shires and authorities as
well as consulting engineers sometimes in relation to similar projects.
It should be noted that not all of this cost can be passed on which is another impediment to business
growth.
2.1.3 The need for certainty
Another major concern that members have in relation to any reforms to contract law is the need for
certainty. One of the real difficulties inherent in our laws is that parties contract on the basis of what
they understand to be the basis of their agreement only to find that later a different interpretation or
view is taken of a clause in the contract.
Whilst this is an inherent feature of a common law system which relies on the courts for interpretation
none the less the review of contractual provisions has to be balanced against the need for contractual
certainty.
Issues can especially arise in relation to contracts where there is a view that there is an imbalance of
market power. In general terms as noted we see these more as competition policy issues than legal
contractual matters. This is particularly the case when issues such as “fairness” are introduced into
the law
3 Our submission to the Draft Productivity Commission Report into Performance Benchmarking Role of Local
Government as regulator is available at www.pc.gov.au. The Commission has also now released its final
Report.
4 Our comments in this regard are picked up in the Final Report at page 105
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2.2 Which drivers for reform are the most important for contract law Are there any other
drivers for reform that should be considered
2.2.1 The importance of contractual law as a driver of economic productivity
We are disappointed that there is no reference to the importance of the economic impact of business
law generally in this section.
The policy settings in relation to business law like competition law can of themselves be an important
arm of micro-economic reform. In other words lessening the red tape burden on business has the
capacity to free up business owners to grow their businesses and hence add to the productivity of the
economy generally.
2.2.2 Contract law in setting standards of behaviour
We are also cautious in relation to the statements made about “setting acceptable standards of
conduct”. Prescriptive behavioural standards will not necessarily result in improved behaviours or
change the bargaining position between parties to a contract especially in a commercial matter.
It is the experience of our members particularly in relation to standard form contracts that it is not such
much the contract and it’s terms and conditions that are the problem (although they play their part) but
rather how it is implemented or its provisions enforced. This is dealt with at Section 3 below.
As noted in our introductory remarks a major procurer of our members’ services are state and local
governments and statutory agencies like road authorities. Accordingly it would be an important policy
principle from our point of view that any reforms in relation to contractual law also applied to
Government and Government Agencies.
Indeed such entities could do much by setting a standard of conduct in their own dealings on
contractual matters. This is also not a new or novel proposition given the Federal Government’s
involvement in the Building Code of Practice.
A good example of standard setting by self-regulation is the Best Practice Guide for tendering and
contract management which was published in October 2007 by CCF (Victoria) in conjunction with the
Institute of Public Works Engineering Australia and the Municipal Association of Victoria.
The Guide includes the best attributes of Codes from other states, the then current Victorian Code of
Practice for the Building and Construction Industry as well as work in New Zealand. 5
It reflects accepted best practice in tendering and management of contracts and focuses on efficient
delivery of projects through a collaborative approach between client and contractor. The Guide has
5 The New Zealand Transport Agency (formerly Transit NZ) has developed a methodology for evaluating non
price weighted attributes for certain contracts such as the PQM simple contract through a process known as
“non price attribute assessment”. See http://www.transit.govt.nz
7

een widely distributed to councils and relevant government departments and their agencies in
Victoria.
A copy of the salient parts of that Guide for the purposes of this submission is annexed at Appendix
A.
We see this approach as a practical way of driving reform in relation to contract and contract
management.
One of the other matters that we have also noted over time is the shifting of risk more and more onto
the contractor that is risk transference from the public sector to the private sector.
Notwithstanding the question of whether this is a desirable public policy, in practical terms this also
results in an additional compliance burden with contracts drafted to reflect such an approach.
2.2.3 Suitability for small and medium sized businesses
Power imbalance in bargaining is a feature of the civil construction industry as it is in a number of
other policy areas. However, we do not see this as being addressed primarily through contract law
although there may be a place in standard form contracts particularly with regard to Australian
Standards as noted in Section 3 of our submission.
One of the CCF’s principal concerns relates to the need for a competitive market. In our view the
market does not always operate efficiently due to;
• Procurement processes which are resulting in larger contracts and contract packaging which
impacts on the distribution of work across the market, disadvantaging smaller players who
may have no option but to subcontract; 6
• Tenders which reward only the lowest price and effectively stymie the ability of smaller
players to compete on other grounds for example, sustainable practices and environmental
management or innovation;
• Use of alliance contracts by some state government agencies in such a way that the principle
of the alliance contract i.e. shared pain and gain is not borne out in practice for
subcontractors...
6 Importantly improvements in procurement could lead to substantial and real savings. In the In 2007 Local
Government Procurement Policy prepared by Ernst and Young it was estimated that up to 15% benefits could
be achieved as a result of improved procurement processes. The Full Report is available at
www.dvc.vic.gov.au
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Accordingly, as a general principle we do not see general contractual law as providing an appropriate
redress for some of these issues although there may be much merit in relation to examining particular
types of contracts as noted below.
2.2.4 Harmonisation
The CCF supports harmonisation in principle and accordingly we are advocates for national uniformity
and consistency of regulation. As our members operate across state boundaries, separate regulatory
regimes and compliance obligations are a source of unnecessary regulatory burden, cost and
inefficiencies.
However, this in principle approach is not without substantial qualification. Our members “lived
experience” of harmonisation of late has been less than ideal. There have been significant and
substantive issues with the implementation of Business Names, Personal Property Securities and
particularly Workplace Health and Safety.
We do not support a harmonisation process which in contract law could have the potential to impose
upon our members the highest or most rigorous standard within an Act as the template position.
Our fundamental position is that we should be aiming at better regulation not more regulation.
Practically however we believe much can be done on harmonisation at a local government or local
authority level which is the point we made in our submission to the Productivity Commission. 7
Recommendation 1
The important role that contract law plays in the Australian economy and productivity in particular
should be recognised as a specific driver for reform
3 Some particular issues in contract law relevant to the civil construction industry
3.1 Australian Standard Contract Series AS 4000 - 1997
Standard form contracts are common place in the building and construction industry. The suite of
Australian Standards® for contract conditions (AS 4000) provides a guide to the general conditions of
contracts for a range of contractual agreements including design and construct, minor works, major
works and supply of equipment.
One of the contracts most commented upon by our members is AS 4000 – 1997 in the AS 4000
series. Top end or larger projects tend to be the subject of separate “be-spoke” contracts often
between parties with similar bargaining positions, the standard form contract still however plays a
significant role for some of our medium and smaller sized members.
7 Supra page 6
9

Whilst members in principle support the practicality and usefulness of standard form contracts some
practical difficulties do arise in relation to the interpretation, construction and workability of this series
particularly given modern developments.
It is noted that the AS 4000 contracts series commenced it’s life in 1997 (although it is noted that
standards are not static documents).
Whilst this issue is more specialised than this more general review the issues raised by members are
important to highlight as they go to an important area of economic activity and reflect practical and
lived experiences in relation to the operation of Australian contract law.
The concerns can be broadly articulated as follows:
3.2 A standard form contract which is anything but standard
Standards Australia should be asked to examine whether there should be monetary limit below which
Australian Standard AS 4000- 97 should not be amended. This should be related to Risk.
In some cases members report to us of contracts which purport to be AS – 4000 based contracts and
yet contain rafts of special conditions and exclusions which change the whole basis of the contract.
It is important to remember that the standard setting process is a consultative one and that in the case
of contractual provisions careful weighting is given to the rights of particular parties.
For smaller members without significant resources the practice noted in paragraph 2 above can be
problematic as they may have little bargaining power or ability to influence the contract negotiation if
they want the work the subject of the contract. We are also advised that risk, indemnity and insurance
provisions are commonly altered in favour of the procuring party.
In our view there should be some mechanism which ensures that if the contract purports to be the
Australian Standard it is in fact in substantial compliance with the standard.
We recommend that Standards Australia should be asked to examine whether there should be
monetary limit below which Australian Standard AS 4000- 97 should not be amended. This should be
related to Risk in other words the lower the contract value the less justifiable it is to substantially
amend the contract.
Recommendation 2
Standards Australia should be asked to examine whether there should be monetary limit below which
Australian Standard AS 4000- 97 should not be amended. This should be related to Risk.
10

3.3 Lack of consistency in the use of Contracts based on Australian Standards
One of the other issues raised by members is the fact that some infrastructure procurers are using
contracts which pre-date the AS 4000 – 1997 standard. This causes additional issues as parties
amend it to meet what they see as more appropriate contractual conditions.
In our view there should be a point at which it should not be possible to use old form contracts which
have been superseded and claim these once again to be in accord with a standard.
3.4 Specific clauses in the standard form contract
For ease reference our recommendations for this section are noted at the beginning of our
commentary.
Recommendations 3
That the Australian Standard AS 4000 -1997 General Conditions of Contract be specifically reviewed
as to ensure that:
(a)
(b)
(c)
(d)
(e)
Payment provisions reflect the Security of Payment regime by excluding damages and other
claims from the calculation of progress payments.
Payment schedule should be amended so that certification is required within 7 days of a
claim being submitted and payment by the Principal within 7 days of certification.
The provisions dealing with Superintendents are strengthened to further support the role of
the Superintendent in being fair and impartial by imposing a positive duty to do so.
There should be a strengthening of the clause which provides for retention of payments
and/or bank guarantees to ensure prompt return of retention payments/and or guarantees
occurs in practice.
What constitutes practical completion under the definition section and in particular
paragraph (c) of the contract needs to be rewritten to reflect the fact that not all of the
documents and information is under the control of the contractor.
3.4.1 Conditions relating to when payments are due
As might be expected issues arise as to when contract payments are due and when works are
certified for payments. This is also a heavily litigated provision.
There are three matters we raise in this regard:
Firstly, in our view further consideration has to be given to the interaction between terms and
conditions of payment in standard contracts with Security of Payment legislation.
11

This legislation was first introduced in Australia in 1999 and has now been enacted in all States and
territories 8 . It is now an embedded part of the legal and commercial landscape in the construction
industry. The policy behind this legislation is very important - it is designed to prevent unscrupulous
developers or builders from subjecting contractors or subcontractors to commercial duress by unfairly
withholding progress payments.
The Security of Payment legislation does not apply in all circumstances. There is a role for standard
contracts in filling the gaps. This could be done by ensuring that standard contracts such as AS4000
reflect the core provisions of the legislation, especially by expressly excluding damages claims, claims
outside the contract and time-related costs from the calculation of progress claims.
Secondly, in a number of cases issues arise in relation to payments in a timely manner between
certification and the obligation to pay. Delays in payment are particularly onerous for smaller
contractors with increasing overheads and reducing margins.
In our view the payment provisions should provide for certification within 7 days of a claim being made
and 7 days for payment by the Principal.
Recommendation 3 (b) is made in this regard above.
Finally, further consideration needs to be given in relation to the application of penalty interest for late
payment by the Principal. This is a matter that we are giving further consideration to and will make
additional representations in appropriate forums.
3.4.2 The role of the Superintendent
Superintendents are responsible inter alia for payments under the contract.
The standard form contract provision provides:
“ The Principal shall ensure that at all times, there is a Superintendent and that the Superintendent
fulfils all aspects of the role and functions reasonably and in good faith.” 9
Many issues arise as to the role of Superintendent including impartiality, experience and timeliness.
Whilst these tend to be practical issues, policy issues do arise as to whether the contract provisions
themselves such as appointment by the Principal support the appropriate role of the Superintendent
in being fair and impartial.
It is the experience of a number of our members that they do not perceive the Superintendent as
acting in an impartial manner but rather as an Agent for the Principal.
8 It should be noted that there are differences between the state legislation.
9 See Clause 20
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In our view these provisions should be the subject of further attention and consideration so that they
appropriately reflect the policy goal of impartiality and fairness as stated. This may include the
imposition of a positive duty to act fairly and impartially.
In terms of appropriate standards of behaviour in practice this may also be something which is better
addressed through industry Codes of Practice like the Best practice guide referred to previously.
For example the Guide provides as follows:
“6.2 Role of Superintendent
The Principal should ensure that at all times there is a Superintendent who is
experienced and competent in contract management and that, in the exercise of
the functions of the Superintendent under the Contract, the Superintendent will:
a. act honestly and fairly;
b. act in accordance with the contract and ensure the contract is implemented;
c. exercise the highest degree of people resource management skills;
d. act within the time prescribed under the contract or where no time is prescribed, within a
reasonable time; and
e. arrive at a reasonable measure or value of work, quantities or time. 10
There is in particular a role for government and authorities to play as noted previously in modelling
good practices and behaviours.
3.4.3 Retention of payments and Bank guarantees and issues in relation to practical
completion.
Issues commonly arise in relation to retention of payments and/or bank guarantees accordingly there
is room to consider whether these provisions appropriately reflect best practice.
What is actual happening is that there are numerous instances of the party holding the Bank
guarantee or retaining funds being slow to return either the funds or the guarantee after completion of
the project.
This clearly has a cost to contractors and can delay their financing arrangements for other contracts
which they may be moving onto after completion of the project the subject of the guarantee. This is
particularly a problem for smaller contractors and as this comes at the end of the project when the
procuring parties are engaging in forward work the bargaining position of the contractors is weak.
Accordingly it appears to us that this needs a contractual solution and we recommend that there
should be a strengthening of the clause which provides for retention of payments and/or bank
guarantees to ensure prompt return of retention payments and/or bank guarantees occurs in practice.
10 See Best Practice Guide at Appendix A. A copy of the full Guide is also available on request.
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Members also report problems with what constitutes practical completion. The definition under the
contract states:
“…practical completion ..is that stage in the carrying out and completion of WUC when:
(a)
(c)
the works are complete except for minor defects:…
documents and other information required under the Contract which, in the Superintendent’s
opinion, are essential for the use, operation and maintenance of the Works have been
supplied; 11
The issue for our members is often the “documents or other information” for example surveyors plans
are not within their control or possession. This can work great hardship for a contractor waiting on
payment with no ability to influence the requirements under this provision for practical completion.
Accordingly, we recommend that what constitutes practical completion under the definition section
and in particular paragraph (c) be rewritten to reflect the fact that not all of the documents and
information is under the control or possession of the contractor.
3.4.4 Wet weather conditions of contract
Issues are also arising in relation to the provisions of the standard form AS 4000 contract in relation to
wet weather provisions.
One of the difficulties for contractors is the increasing number of regulatory obligations which they are
required to meet. This adds to overheads through direct staff costs and the need for expert
assistance.
Civil construction is particularly impacted by climate and climate conditions as the principal activity is
earth works. Wet weather issues are a particular concern as the downtime is not just when the
weather event is occurring but also for a period time thereafter as soil is to wet to be worked.
The link with regulatory burden is that whilst a contractor can’t work and isn’t being paid the
overheads remain the same.
In our view to maintain mid sector capacity contracts need to start to be negotiated which take these
factors into consideration particularly in a changing weather climate.
Finally, we would also make the point that it is somewhat of an irony that it is often the government
that is a procurer of infrastructure that is at the same time increasing the regulatory burden on
business.
11 See the Definition Section of AS 4000 - 1997
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4 Over regulation – the regulatory burden on business
One of the consistent and continual concerns of our members is the growing burden of regulation
across a range of activities which impact on the productivity of the business.
This year alone we have seen the introduction of the Carbon Tax, new reporting obligations in relation
to contractors and changes to a raft of other laws impacting upon business. Many of these reforms
commenced from 1 July this year.
One of the biggest problems for members is the cascading impact of regulation. Whilst reform may be
occurring in one particular area there is often little regard for what may be happening in another tier of
government.
Environmental regulation is a good example where policies of state governments can be in
contradiction to those of the federal or local government.
Additionally, members are often asked for essentially the same data but in different formats and for
smaller contractors this can be particularly frustrating.
In a small business this either results in additional people having to be employed to undertake the non
-productive activity of paperwork compliance or the business owner being distracted from day to day
core activities.
In our recent submission to the Productivity Commission inquiry one of our members who works in
land development advised that compared with 5 to 10 years ago it now takes triple the time to meet all
the planning and regulatory requirements of land development.
In this regard we support the recommendation of the Master Builders Association in their submission
to this Review that:
“ Recommendation 2
The Productivity Commission should be given jurisdiction to investigate the red tape burden
associated with Australia contract law with a view to assisting business facilitation.
We also support Recommendation 8 of that Submission that:
“The Productivity Commission should be asked to provide a stocktake research report which sets out
all State and Territory legislation which affects contracts to determine the utility of current law, identify
duplication between State and Territory law and also identifies how that duplication adversely effects
productivity.”
This should be considered in the light of the final Report of the Productivity Commission Inquiry in
relation to local government.
15

Recommendation 4:
Civil Contractors Federation supports the above 2 Recommendations articulated by the Master
Builders Association.
5 Conclusion
Whilst we welcome the review we do not believe that wholesale change to Australian contractual law
is either required or appropriate.
However, we do consider that in certain particular areas further examination is warranted for example
the appropriateness of AS 4000 to meet current requirements. We set out our Recommendations for
reform in this submission.
Importantly we consider that the role of contract law should be viewed from an economic as well as
legal perspective. Making it easier for business to operate with the flow on effects to productivity and
national prosperity should be a key objective of any reform to contract law.
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APPENDIX A
A Key Principles Best Practice Guide to tendering and contract management
17

Appendix A