Last chance to tell the NSW Government what you really think …

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This weekend witnessed thousands of Sydneysiders hitting the streets to protest against lockout laws.  While the Security of Payment Act (SOP) is unlikely to generate mass protests, it can often be the cause of frustration and irritation for all construction industry participants (for different reasons).  In any event, NSW Fair Trading has circumvented the need to hit the streets by the release of its Discussion Paper, calling for submissions in respect of the SOP Act from industry stakeholders.

Recent amendments to the NSW SOP Act

Effective from April 2014, a raft of amendments were made to the NSW SOP Act as a result of the Collins Inquiry into contractor insolvencies in the construction industry.  Those amendments included:

  • the introduction of mandatory payment time frames;
  • the introduction of a requirement for head contractors to provide a supporting statement with payment claims;
  • the removal of the requirement for a payment claim to state that it is a payment claim under the SOP Act; and
  • the introduction of the requirement for head contractors to hold retention money in a retention money trust account on projects with a value greater than $20 million (introduced by the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 and effective from 1 May 2015).

Discussion paper

Fair Trading’s discussion paper is accessible at: http://www.fairtrading.nsw.gov.au/biz_res/ftweb/pdfs/About_us/Have_your_say/
Building_and_Construction_Industry_Security_of_Payment_Act_1999_Discussion_Paper.pdf), which is the beginning of the NSW Government’s full review of the SOP Act.

The Discussion Paper seeks submissions on a very broad range of issues, including issues such as whether:

  1. claims ought to be possible both up and down the contractor chain;
  2. the requirement for a payment claim to state that it is made under the SOP Act should be re-introduced;
  3. NSW should follow the Queensland legislation and introduce different time frames for the adjudication of high value payment claims;
  4. the current adjudication process and time frames are effective and appropriate;
  5. attempting to resolve a dispute by mediation should be a mandatory condition precedent to making an adjudication applications; and
  6. retention money trust accounts should be extended to all projects, not just those with a value greater than $20 million.

Essentially, it appears that nothing is off-limits in the review of the SOP Act.

Naturally, there will be contrasting experiences for principals, head contractors and subcontractors and each category of stakeholders will have different bugbears with the SOP Act.  The review provides industry stakeholders with a rare opportunity to directly lobby the NSW government, however time is running out.

The deadline for submissions to be lodged with NSW Fair Trading is Friday, 26 February 2016.  If you would like assistance in preparing submissions, please do not hesitate to contact us.

Broad Indemnities and Narrow Insurances – A Match Made in Hell

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When drafting indemnities into contracts, it is important to consider the relevant insurances that sit behind the parties and the interplay between them.

Too often, contracting parties insert indemnity clauses into contracts without giving adequate consideration to the effect and operation of those indemnities.  It is usually the contracting party with the most bargaining power that will insist on broad indemnities.  This article touches on some of the issues, particularly those relating to insurance, that need to be considered (by both contracting parties) before entering into a contract that contains indemnities.

An indemnity, put simply, provides that one party is to be held harmless for the actions or omissions of another. This effectively transfers risk from one party to a contract to the other party in relation to a specific event.

As we know, each project is different, and each contracting relationship has its own distinct nuances.  It follows that ‘boiler-plate’ indemnity clauses obtained from a previous contract or a lawyer’s precedent files are unlikely to allocate risk between the parties in a manner that reflects the inherent or underlying risk of the project or the contracting parties’ relationship.

These broad indemnities may also be inconsistent with the parties’ respective common law rights and obligations.  This is where the parties’ insurances become relevant.  A party who offers a broad indemnity may not be able to obtain insurance for the full extent of the liability imposed by the indemnity.

The issues that arise for insurers (who may ultimately be responsible for defending liability claims) are many.  Below are three of the more significant considerations.

  1. From a legal perspective, indemnities often alter the tests for causation and remoteness. It is the wording of the indemnity provision itself that determines causation (as opposed to actual cause), meaning that it is not necessary for the indemnified party to prove that the wrongdoer actually caused the loss claimed.  Similarly, indemnity provisions may be drafted in a manner that removes the common law test of remoteness (reasonable foreseeability).  This extends the indemnifier’s liability to types of loss and damage that is not reasonably foreseeable (and would not otherwise be recoverable).
  2. Another issue to consider is that indemnities may remove the common law duty of the innocent party to mitigate its loss. Again, this extends the indemnifier’s liability to losses that may not have been incurred if the indemnified party had taken steps to reduce its loss (as it would be required to do in relation to a common law damages claim).
  3. Thirdly, an indemnity can have the effect of extending the relevant statutory limitation period. For example, in NSW, the time period within which a claim may be brought for breach of contract is 6 years (commencing from the date of the breach).  With respect to indemnities however, the relevant breach (and therefore the limitation period) commences from the date on which the indemnifier refuses to honour the indemnity. This may be some time after the act or omission that triggered the indemnity.

Not only are the above considerations important for parties to understand the extent of their liability, but they also may have an effect on a party’s ability to obtain adequate insurance, or be determinative on whether an existing policy will respond.

The obvious example, in a construction context, is where a principal requires its contractor to indemnify it against loss and damage caused not only by that contractor but also the contractor’s sub-contractors and consultants.  In practice, the average contractor will have an existing public liability insurance policy in place.  Such policy will usually exclude liability assumed by way of contract, unless that liability would have existed in the absence of the contract.  The effect of this exclusion is that the insurance policy will cover liability only where the contractor or sub-contractor has been negligent.

Public liability insurance policies are also typically narrower than indemnities in that those policies:

  1. will not cover the proportionate liability of a concurrent wrongdoer who is not covered by the insurance;
  2. may only cover liability in respect of personal injury (or death) and property damage (and not liability where it does not arise or flow from property damage); and
  3. will exclude professional services such as design, specification and advice.

Consequently, it is likely that any broad contractual indemnity will be broader than the average public liability policy that is maintained by contractors.  This has obvious effects for the contractor who has assumed uninsured risk and must bear the loss itself.  This dominos to affect the project, as the principal may be faced with a contractor who is not financially capable of satisfying the principal’s claim.

To cover its ‘contractually assumed’ liability, the contractor may effect and maintain additional liability insurance (covering itself and its sub-contractors and consultants), and it may name the principal as an insured. It is therefore important that a contract specifies the scope of insurance cover required by each party.  Indeed, a prudent principal may insist that a contractor effect and maintain insurance that will respond to a claim under each indemnity (and to provide a copy of all such policies in order to confirm that is the case).

In the absence of such additional insurance, a party giving an indemnity under a contract is best advised to ensure that indemnity provisions are covered by the insurances in place, and do not invalidate those policies. This can be achieved by:

  1. limiting the indemnity to losses foreseeable at the time of contract;
  2. amending the indemnity to require the indemnifier to mitigate its loss;
  3. amending the indemnity to apply only to loss or damage caused by the indemnifier;
  4. amending the indemnity to reduce proportionately to the extent the loss, claim or damage is caused or contributed to by the indemnified party or its agents;
  5. amending the indemnity to exclude ‘consequential loss’ (and defining that term sufficiently);
  6. seeking an overall liability limit on the indemnity (to the proceeds of available insurance policies); and
  7. amending the indemnity to limit the time period within which claims can be brought under the indemnity (e.g. 6 years from the date of completion of the relevant work).

If you or your business needs advice in relation to this subject matter, please do not hesitate to contact us.

The Vienna Convention: all about opting out

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According to the Australian Department of Foreign Affairs and Trade, in the 2014-2015 financial year Australia exported and imported approximately AU$256bn and AU$270bn worth of goods respectively. It is clear that trade on this scale requires some form of international regulation. The United Nations Convention on Contracts for the International Sale of Goods 1980 (Vienna Convention), to which Australia is a Contracting State, attempts to provide uniform regulation while also taking into account different social, economic and legal systems. It is hoped this form of uniform regulation will remove legal barriers in and promote the development of international trade.

Application of the Vienna Convention and the ‘opt out’ culture

The Vienna Convention has a broad application. It applies to contracts for the international sale of goods if:

  1. the parties have places of business in different Contracting States (article 1(1)(a));
  2. the parties have places of business in different States, and the rules of private international law leads to the law of a Contracting State (article 1(1)(b));
  3. the parties agree that the Vienna Convention applies, even if neither party is from a Contracting State; or
  4. the relevant contract does not contain a choice of law clause, and an arbitral tribunal determines the Vienna Convention applies as the appropriate law (for example, article 21(1) of the ICC Rules of Arbitration 2012).

At present, the Vienna Convention has 84 Contracting States which includes some of Australia’s largest trading partners such as China, the United States, Japan and the Republic of Korea. However, there are some notable exclusions to the list of Contracting States including Indonesia, India and the United Kingdom. In Australia, the Vienna Convention has been implemented into domestic legislation through sales of goods legislation in each state and territory, as well as section 68 of the Australian Consumer Law in Schedule 2 of the Competition and Consumer Act 2010 (Cth).

Article 6 of the Vienna Convention allows parties to exclude its operation or vary its provisions. A discussion paper released by the Attorney General’s Department, Improving Australia’s law and justice framework – A discussion paper exploring the scope for reforming Australian contract law (2012), found that although empirical data is limited, Australian businesses have made relatively little use of international principles (including the Vienna Convention) when entering into international contracts. Similar ‘opt out’ cultures exist outside Australia with 55% of lawyers in the United States and 42% of German lawyers generally opting out of the Vienna Convention.[1]

Notwithstanding these statistics, the Vienna Convention has continued to be used in other countries such as China and Switzerland. This has resulted in the Vienna Convention becoming a well-tested body of law. It may now be time to reconsider whether Australian lawyers and commercial parties entering into international sale of goods contracts should continue to subscribe to the ‘opt out’ culture.

Should parties continue to opt out of the Vienna Convention?

There is no correct answer as to whether parties should continue to opt out of the Vienna Convention. The decision of a party to opt out will be dependent upon all of the circumstances relevant to the contract, the goods sold and its contracting party(s).

The Vienna Convention certainly has some benefits for international contracting parties:

  1. it has been customised and standardised to meet the requirements of international transactions due to longer transport distances and cultural differences, in contrast to often anachronistic and localised domestic sales law;
  2. it provides a neutral legal mechanism accessible in several languages, rather than the party with the least bargaining power most likely required to agree to and research the law of an unfamiliar jurisdiction;
  3. its use for over 35 years has resulted in a well-known and well-tested area of law in both arbitral and court proceedings; and
  4. the obligations imposed by the Vienna Convention do not impede upon the parties’ freedom of contract, allowing parties the ability to agree the rights, obligations and risks of the transaction.

Notwithstanding these benefits, there remain fundamental issues which parties should consider before deciding whether to opt out.

The Vienna Convention is the result of compromise rather than a search for international best practice. As a heavily negotiated legal instrument, compromises were made to ensure its passing, leaving some provisions unclear and/or incomplete. For example, article 78 provides interest is payable on sums in arrears, but does not specify the rate of interest or how this is to be determined. Another example is article 25 which introduces the concept of ‘fundamental breach’ couched in vague terminology, allowing a party to ‘avoid’ a contract should the defaulting-party fail to perform its obligations amounting to a ‘fundamental breach of contract’.

This ambiguity and/or incompleteness results in greater unpredictability and uncertainty. Through inadvertently encouraging reliance on more familiar domestic legal concepts to give meaning to its terms or to fill-in the gaps, the wording of the Vienna Convention increases the possibility of inconsistent interpretations by judges and arbitrators from different jurisdictions. This is exacerbated by difficulties in translating terms from one language to another. For example, the translation of the terms ‘fundamental breach’ or ‘specific performance’ into six different languages is not merely a case of pure translation, but rather the more difficult translation of legal issues.

A further issue is the Vienna Convention’s interaction with Australian contract law. Similar to Australian contract law, the Vienna Convention requires an offer and acceptance prior to the formation of a contract. However, article 14(1) provides an offer will be made if it is “sufficiently definite” and indicates an intention to be bound. An offer is ‘sufficiently definite’ if it indicates the goods and fixes or makes provision for the determination of quantity or price, but does not need to include the place or time for delivery, insurance or security requirements.

The ability to have insufficiently definite offers causes complications in situations where purchase orders and invoices with limited detail flow between the parties. This was the case in Castel Electronics Pty Ltd v TCL Airconditioner (Zhongshan) Co Ltd [2013] VSC 92 where the court was required to determine whether purchase orders or signed and returned invoices constituted an offer and acceptance, or an offer and a counter-offer. It was argued that the purchase orders were not ‘sufficiently definite’ regarding key aspect of the orders such as shipment of the goods. However, the court found the documents amounted to an offer and acceptance, as the purchase orders listed the products by model, quantity required and the unit cost.

A further contractual issue with the Vienna Convention is found in article 8 which requires primarily a subjective, rather than objective, approach to contract interpretation whereby conduct is to be interpreted according to the party’s intent. If the other party was not and could not have been aware of the first party’s intention, then the relevant conduct is to be interpreted according to the understanding that a reasonable person would have had in the same circumstances. In determining the intent of a party on the understanding that a reasonable person would have had, all relevant circumstances of the case are taken into account including negotiations and established practices between the parties.

The difficulty in utilising different methods of contractual interpretation, applicable to any situation where the courts are utilising rules from different jurisdictions, was best described by Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101: “One cannot in my opinion simply transpose rules based on one philosophy of contractual interpretation to another, or assume that the practical effect of admitting such evidence under the English system of civil procedure will be the same as that under a continental system.”

This is particularly relevant in Australia where there is currently judicial uncertainty regarding the ability to consider pre-contract communications in contractual interpretation. Despite the ‘true rule’ in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 that evidence of surrounding circumstances is only admissible in instances of ambiguity, there have been recent decisions in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 and Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113, as well as the special leave application in Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604, that contractual interpretation is determined by reference to a reasonable person with a knowledge of the surrounding circumstances known to the parties at the time the contract was entered into (amongst other things) i.e. without the need for ambiguity in the contractual terms. However, this issue has not been settled by the High Court.

Although the risk of a dispute is ultimately a function of the relationship between the parties and their risk allocation, and notwithstanding the benefits to the Vienna Convention, parties need to be aware that its application can lead to uncertain and unpredictable complexities in the event of a dispute.

Opting out of the Vienna Convention

Depending upon the other terms of the contract, an opt out of the Vienna Convention can be as simple as expressly stating the Vienna Convention does not apply. The courts will take a broad approach to an exclusion if the parties intended to opt-out of the convention’s operation. In Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 4) [2009] FCA 522, the contract stated the contract was governed by “Australian law applicable under exclusion of UNCITRAL law”. The court held that notwithstanding the Australian sale of goods legislation which incorporates the Vienna Convention, the contract evidenced an intention to exclude the Vienna Convention from application through the phrase ‘exclusion of UNCITRAL law’.

However, opting out does not mean civil law concepts cannot be considered. In the same case, the court found that contractual terms referring to a “reasonable period of grace” and a “reduction in price” are civil law rather than common law concepts. The fact that the Vienna Convention had been excluded did not prevent the court from taking guidance from the civil law to understand these contract terms.

Conclusion

Prior to opting out of the Vienna Convention, parties must consider whether it is the right decision in light of the other party(s) places of business and whether this is a Contracting State, all the circumstances relevant to the agreement and the risk allocation under the contract. Any party that continuingly and blindingly opts out of the Vienna Convention may be missing an opportunity to provide regulation that is best suited to a particular transaction. In many transactions the Vienna Convention may be the better choice, but no law is perfect in every circumstance.

[1]Lisa Spagnolo, ‘The last outpost: Automatic CISG opt-outs, misapplications and the costs of ignoring the Vienna Sales Convention for Australian lawyers’ (2009) 10(1) Melbourne Journal of International Law 141, 160.