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One of the Worst Contracts We Have Seen

January 2010

ICA has been approached by a group of independent contractors worried about their standard form contract with a large firm. We've looked at the contract and talked with the contractors. This is perhaps one of the worst contracts we have seen. It's a perfect example of why at ICA we are dedicated to our 'Contract integrity' campaign. We must encourage change in the commercial and legal culture that seeks advantage through highly unbalanced contracts. Some may see this as 'smart' law. We see it as bad business and questionable ethics.

Below we detail our summary of the contract terms without identifying the company or the independent contractors concerned.

Assess the contract terms for yourself. Would you sign contract based on them? Have you ever been presented with a contract with some or most of these features? We'd be interested in your views and experiences.

The contract

The contract we have sighted is a standard form contract that the company requires independent contractors to sign if they are to work for the company. It appears that variations are not allowed.

In our view, the contract does the following. It:
  1. Allows the company to change the terms of the contract exclusively at its discretion and without reference to, or approval from, the independent contractors.
  2. Allows the company to change the price at which it pays the independent contractors without securing agreement from them.
  3. Allows the company to change at its absolute discretion the key performance indicators against which the independent contractors are assessed to ascertain if they are adequately performing their work or not.
  4. Allows the company at its absolute discretion to change and order where, how and when the independent contractors undertake the work.
  5. Requires the independent contractors to invest in a equipment which meets the company's specifications. The specifications may be changed at any time by the company. The investment required is in the order of $80,000.
  6. Allows the company to terminate the contract at its exclusive discretion, removing from the independent contractors any right to external appeal or redress or compensation for loss of their business.
  7. Gives the company the exclusive right, upon termination of the contract, to acquire the independent contractor's equipment from the contractor at a price exclusively determined by the company.
  8. Imposes a restriction of trade on the self-employed person such that they are prevented from offering their services to the public at large---either during the life of the contract or on the termination of the contract (for 6 months).
  9. Requires the independent contractors to have the company's colours and insignia on their business equipment as stipulated by the company, which can be changed at any time by the company.
  10. Allows the company to withhold payments from the independent contractors.
  11. Requires the independent contractors to indemnify the company against losses or damages, whether those losses or damages are proven or not.
  12. Requires the independent contractors to indemnify (that is, pay for) any costs that the company may be obliged by law to incur in relation to workers' compensation premiums and payroll tax.
  13. Does not have an independent dispute-resolution procedure.
Stop for a minute. Before reading our comments, make some notes of your own. What do you think about the genuineness and ethics of a contract with these features?

ICA comment on the contract

We first ask the question: what is a true commercial contract?

Basic commercial law holds that, for a contract to exist, five key elements must be displayed by the parties:
  • An intention to create a legal relationship.
  • Clear terms understood by all parties.
  • Offer and acceptance.
  • Consideration. (This is the wide legal idea of payment.)
  • Genuine consent by all parties.
In our opinion, much of the contract we describe above may possibly be a valid contract at law, but it is questionable on the grounds of fairness. For example:
  • Clear terms understood by all parties: The ability to change the contract terms at the whim of the company and the fact that many terms are contained in unsighted or unreferenced company 'policies' means that the independent contractors, arguably, are not in possession of the full contract terms and could not reasonably be expected to understand the contract terms.
  • Genuine consent: if the company policies are included as contract terms but not made available to the independent contractors, the idea of genuine consent being given by the contractors has strange connotations.
The other aspect that ICA argues is a key feature of commercial contracts is that a proper contract creates and holds a balance of power between the parties which gives equity to the relationship and enables the achievement of mutually beneficial outcomes. Broadly speaking, this is the idea of 'fairness' in contract, which itself is a topical item of interest given proposed amendments to the Trade Practices Act that will introduce 'fair contract' provisions for business-to-consumer 'standard contracts'.

Our view is that the contract might fail in a number of jurisdictions if it were put to the test.

Unfair contract provisions of the Independent Contractors Act: Assuming that a court were to find that the contract was in fact a commercial contract, the contract could be tested for its 'fairness'. The contract elements we have mentioned above would likely give rise to many arguments that the contract was 'unfair'. The Independent Contractors Act was created in 2006 and two cases have been heard under its unfair contracts provisions since then, with both resulting in decisions in favour of the applicants. ICA monitors these court actions. (To see these go to our dark blue drop-down menu at the head of our website. Under 'IC Act' you'll find 'unfair contracts'. This is a members' information section.)

Unfair contracts action under the Trade Practices Act: There appear to be a number of possible mechanisms in the TPA which enable consideration of unfair contract terms and which could possibly be applied in relation to this contract.

Victorian Small Business Commissioner: The Victorian Small Business Commissioner has wide authority to investigate contract issues on his own initiative.

Corporate intent and ethics

The Victorian Small Business Commissioner, Mark Brennan, operates in interesting ways. He seeks to resolve contract disputes often by appealing directly to the ethical integrity of firms.

At ICA's conference on 12 November 2009 titled 'Building relationships with the self-employed', Mark Brennan gave an impressive talk about practical ways to fix contract problems. Watch his presentation here.

In his talk, Mark spoke of a report he released following a survey he conducted with senior business and corporate leaders from across Australia which explored their approach to achieving quality business-to-business (B2B) relationships.

The corporate leaders identified seven main characteristics for quality B2B relationships:
  1. Alignment of the values and ethics of a business internally and with its external business partners
  2. A commitment to long-term relationships
  3. Working toward achieving mutual interests
  4. Clear, transparent communication
  5. Mutual accountability and responsibility
  6. Professional conduct by all parties
  7. Pre-agreed dispute-resolution procedures
From Mark Brennan's survey it's clear that these B2B principles are shared, ethical corporate principles evident in most large organisations. It appears that commitment is strong to such principles---particularly at the senior corporate levels. But as Mark notes, these principles often break down at some levels in organisations in ways that run counter to the intent of the corporate organisation.

We believe that these principles can best be secured within organisations if the principles are reflected in a real way in the B2B contracts through which they operate. Where large organisations engage self-employed people, the initiative really is with the large organisations to secure these principles in their standard form contracts.

ICA's Integrity of Contract campaign is about seeing these ethical principles reflected and embedded in the commercial contracts operating in the community, particularly as they apply to, and with, self-employed people.

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