Contracts – Don’t put your Neck in a Choker Chain!
  April 6, 2018

There is a reason why it’s not great to put a choker on your dog, cause it chokes them.
However, equally not as great is your dog pulling your arm off to savage a small child if you can’t control it.
On a side by side analysis one can see the reasons behind the other.

In a similar way Contracts have restrictions that become necessary to stop both parties getting bitten unnecessarily, but also have the ability to be pulled too tight and not allow freedom where it should be granted.

In the modern Contracting age you could be forgiven for thinking that a pre requisite to being a Contractor would involve some in depth knowledge of Contracts. As obvious as this may sound the exact opposite seems to be the case. Contracts have a wonderful way I’ve either making things very clear or sufficiently blurring the lines enough to get the average Joe in a mountain of trouble.

My personal experience around this issue is one of great success, shortly followed by great loss. Hence my passion to involve myself in our Industry forums to break the hoodoo caused by these mystifying documents by giving you some resources to assist you to navigate through theses complex beasts.

I’ve been on the receiving end of many a contract oversight, many a variation and then later in my career I have found myself being a prime participant in dispute resolution and contract management and at a high level in litigation proceedings where the stakes are high, and emotions are even higher. My hope is that anyone who reads this article is never in a position to have their professional integrity balanced on a scale of due diligence and negligence.

Despite my involvement in this space nearly every day, I am continually confronted with a new issue that requires a different approach. This reinforces my plea to Contractors of all walks of life that there needs to be a level of acceptance from the part of every Contractor that when they decide to Contract for works, knowledge of contract terms, structures and language become as important in the monthly business cycle as direct line invoicing, and nearly as critical as the ute you drive to work in (unless it’s a van, then it’s as important as that too!).

Interpretation of contracts shouldn’t just be for project managers and administrators of large projects.
Small contracts can be covered by verbal contracts and these can sometimes carry as much weight as written words. Damage to business integrity in a local market can be caused by a broken verbal contract can have the same, if not worse consequences to a small business as a large variation to a large firm, it’s all relative.

Fact; The construction industry in Australia accounts for 5.7 per cent of Australia’s GDP, according to the HIA Window into Housing. The industry, however, is also ranked second for insolvencies, according to March 2017 ASIC insolvency statistics, and represents 16.72% of Australian business insolvencies.

If we break that statement into bit size Tradey pieces, it says that as Contractors we participate in a very healthy sector within Australia’s economy, but that last bit is a slap back to reality stating nearly 17% of total Australian business insolvencies are attributed to the Housing and Construction Industry.

Our Gross Domestic Product in 2017 was $1.69 Trillion. Construction was responsible for nearly 6% of this, yet we have the second highest Industry representation for insolvency. I will not try and draw a long bow into how learning Contracts will resolve all of this, but I will state that I am confident that a deeper understanding of contract fundamentals would assist this figure to be not such a ball ache on the statistics meaning the pain of insolvency may never be felt by a few.

If you were in any doubt whether Contracts can be confusing, go to this link and tell me if you can understand what the hell this flow chart is telling me about the Security of Payments ACT. https://securityofpaymentsact.com.au/security-of-payments-act-new-south-wales/security-of-payments-act-nsw-flowchart/ (By the way, keep the link handy as that little comment on the bottom of your invoices, ‘This payment is made under….. ‘ blah, blah blah….is worth reading about too, you will find it here.)

Does all this need to be so confusing? Put simply, the answer is no.

With a few fundamentals in Contract principles and a bit of background on what underpins the modern Contract we can start to get a bit clearer on what we need to do to protect our own liabilities. If we support this with some links that can help you learn more and could be useful in a bind, then we are pushing things in a useful direction.

A Contract can be legally defined as a promise or agreement made voluntarily between two or more parties.
It is legally enforceable only if agreement has been reached between the parties; and, a consideration has been given by at least one of the parties.
If the parties have legal capacity and intend the contract to be legally binding and all the formalities are complied with, then a Contract is formed. An extremely useful resource can be found on the Minter Ellison webpage (http://www.constructionlawmadeeasy.com/Constructionary).

A Contract contains three elements:
An offer – you offer to give something or do something in return.
An acceptance – by accepting money for services offered. (could be verbal or written)
Consideration – this is the value (usually money) that is given in return for the services.

Some Contracts can be pre-written containing base clauses for the type of Contract delivery scheme and the works to be carried out. The Australian Building Industry Contracts (ABIC) are Contracts jointly published by the Australian Institute of Architects and Master Builders Australia. ABIC contracts are intended for use in building projects where an architect administers the contract. They are designed to make contract admin a little easier and pre define some boundaries. For the most part they are plain English and have a pretty logical sequence. They contain blank forms and certifications too, which make things a little easier.

These can be purchased from reputable Industry associations like the Master Builders Association. and their Australian Building Industry Contracts work has a number of base Contracts for purchase right off the bat. ( https://www.masterbuilders.com.au/Shop/ABIC-Suite).

Don’t forget contracts have different implications and meanings in different States and Territories around Australia and the Australian Building Codes Board (ABCB) has a specific link to each State Jurisdiction, along with many resources too. If you get lost in the matrix of States and Territories they will be able to point you in a good direction.
(https://www.abcb.gov.au/ABCB/State-and-Territory-Building-Administrations).

The State specific arms of Fair Trading are always there to assist too. That doesn’t necessarily mean solely for dispute resolution either! The OFT has a number of great resources and even provide advice if things get a little tricky. A link to the NSW Fair Trading / Contracts page has some great starting points to understanding fundamentals of Contracts, and yes it has the dispute mediation stuff too –http://www.fairtrading.nsw.gov.au/ftw/Businesses/Contracts.page

Contracts management is an uncomfortable area for most Tradies as our exposure to it has been limited over time in the industry. My knowledge of Contracts has only grown as I got flattened by one too many stray clauses and decided that feeling was one I did not want to repeat, so I spent some time getting to know my way around. I encourage you to do the same. It is much easier to learn the fundamentals when the pressure of insolvency is biting at your heels, by then it can be too late.

I encourage you to contain your fear and try to come up with a business plan that mitigates risk of exposure to bad Contracts by sniffing them out ahead of time. It should be part of your business plan to define the tangibles. What are the things I can do now that can provide me a good insight and good knowledge to have meaningful and productive conversations around contracts, growing my knowledge of the base elements.

At this point allow me to clarify that I don’t believe it is a contractors job to know everything there is to know about contracts. However, what I do know is that a baseline knowledge of the contracts that we are entering into is an absolute must if we are mitigate exposure to risk. The nature of the industry today is driving contractors to be diligent and aware of the things they are signing and committing to. Exit clauses, percentage payments for unfinished work, capability clauses, retention monies and certifications are all things that need to be thoroughly thought through and decided upon prior to any engagement.

After reading this my hope is you have some resources available to decipher common terms and navigate your way. I also hope next time you hear the word Contract your eyes dilate and you find a confident platform to have a meaningful and intelligent conversation about the neglected side of our Trades in Australia, Contracts.

I put my opinions to provoke a response and encourage you to do so. Discussion is meaningful and if we continue to challenge ideals and put our opinions forward then perhaps at some stage our industry can have an opinion that is borne of creative discussion.

For any comments – contact me on redddexer@gmail.com

Michael Slatter
Associate Director/Partner
Erbas