The Modern Slavery Acts: what businesses need to know

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After much discussion, the Australian government has followed the examples set by the NSW government and overseas countries.

On 29 November 2018, the Modern Slavery Act 2018 (Cth) (Commonwealth Act) was passed by Parliament. It will join the Modern Slavery Act 2018 (NSW) (NSW Act) and impose reporting obligations on large businesses.

Both Acts will come into effect when the respective governments announce it in their gazettes in the near future. The first reporting obligation will likely kick in on 30 June 2020.

It is hoped that such anti-slavery laws will make a dent into the staggering number of people that are subjected to modern slavery. The Global Slavery Index estimates that this is 40.3 million people globally, 25 million in the Asia-Pacific region, and 15,000 in Australia. Such exploitation is estimated to be produce $150 billion per year for the global private economy.

Who is affected by the Commonwealth Act?

Entities that:

  1. are based or carry on business in Australia, and
  2. have a revenue of over $100 million for a financial year,

are affected by the Commonwealth Act.

This includes not just individuals and companies, but also partnerships, trusts, and superannuation funds. Not-for-profits and foreign companies should be aware that the Act will apply to them if they satisfy conditions (1) and (2) above. All Australian-based principals and contractors should check their balance books. Any entity that might be affected by the Act should seek advice.

In total, there are approximately 3000 large companies and entities who will now be required to lift the lid on how their supply chains create risks of modern slavery.

In a world first, the Australian government itself will also be subject to the same reporting requirements as the private sector. This includes not just the Australian Government, but also Corporate Commonwealth entities, and Commonwealth companies. The Act does not capture state governments.

Any entity may also volunteer to submit a report on its activities.

However, even if an entity does not fall under (1) or (2) above, it may be affected by the NSW Act (see below).

What do entities have to do?

Entities must produce a signed Modern Slavery Statement. This statement must:

  • describe the structure, operations and supply chains of the reporting entity;
  • describe the risks of modern slavery practices in these operations and supply chains;
    • this includes the operations and supply chains of any entities that the reporting entity controls (e.g. a subsidiary company)
  • describe actions taken by the entity to assess and address these risks (including due diligence and remediation processes);
    • this will include policies and processes to manage the risks and training for staff about modern slavery
  • make an assessment of the effectiveness of these actions;
  • describe any process of consultation that a reporting entity has with entities that it controls, and
  • include any other relevant information.

The statement must be given to the Minister for Home Affairs within 6 months of the end of the reporting period. As mentioned, this will likely be within 6 months of 30 June 2020.

These reports will be stored by the Minister for Home Affairs, in a register that will be called the Modern Slavery Statements Register. The Register will be made accessible to anyone for free on the internet.

The Commonwealth Act imposes no obligations on businesses to actually take steps in response to the risks of slavery in supply chains. It merely requires reporting on them.

Legally trained readers will be thinking that these obligations can only apply to natural persons or corporate entities. This is why, in the case of non-persons like partnerships, the obligations will be imposed instead on a responsible member of the entity. This will fall on persons such as a trustee, or an administrator.

What if the entity doesn’t report?

In short, nothing.

In contrast to the NSW Act (below), the Commonwealth Act does not provide for any penalty if an entity does not produce a report.

However, this might change in the near future as the Commonwealth Act takes effect and entities develop processes for compliance. The federal Labor Party has indicated that it supports penalties for an entity’s failure to report. Thus, depending on the outcome of 2019 elections and other factors, this situation may change.

What about state laws?

Entities should be aware that they may be subject to separate obligations imposed on them by state governments.

For instance, in mid-2018 the NSW government passed the NSW Act which requires entities to report to it about risks to modern slavery. In fact, these obligations are in some cases much more stringent.

Like its Commonwealth counterpart, it is not yet in force.

When it does come into effect, the NSW Act will apply to organisations that:

  1. supply goods and services for profit or gain, and
  2. have employees in NSW, and
  3. have a turnover of $50 million or more for the financial year.

Certain NSW government agencies are affected, as are non-corporate entities such as partnerships. Not-for-profits however will not need to report to the NSW government.

To satisfy the NSW Act, an entity’s modern slavery statement must outline steps taken to ensure that an organisation’s goods and services are not the product of supply chains in which modern slavery is taking place.

In contrast to the Commonwealth Act, the NSW Act imposes hefty penalties for not producing a statement to the NSW government, or for providing false or misleading information in the statement. The maximum penalty is $1.1 million in either case.

The NSW Act also allows courts to make modern slavery risk orders against a person. Such orders may prohibit certain actions, such as contacting any victim of the modern slavery offence.

Conclusion

Large businesses and not-for-profits now have legal obligations to examine their goods and services supply chains. They must inform the public about their findings and what they are doing to address them. In some cases, they will be reporting to multiple governments so they should seek advice as soon as possible on the requirements that apply to them.

As the Assistant Minister for Home Affairs states, it is hoped that these Acts will drive a ‘race to the top’ in which businesses compete for the favour of market funders, investors and consumers by improving their supply chain ethics.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au

Giving Security in Construction Contracts

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It is not uncommon in construction contracts for a principal or even a head contractor to insist on security from a contractor or subcontractor. We discuss below the purpose of the security, the different types of security commonly given and what happens when a call on a security is made.

Why is ‘security’ given in a construction contract?

The purpose of security is to provide the principal or head contractor with protection if the contractor or subcontractor fails to fulfil its obligations or defaults in some way on the contract. The principal or head contractor can recoup losses that arise because of the default.

The requirement for security to be provided may also be a sensible precaution for a principal, if a contractor or subcontractor is seeking pre-payment for building materials or goods (such as bathroom or kitchen fittings) that are yet to be used in the construction project.

Similarly, a contractor may be wise to insist that a principal (or head contractor in the case of a subcontractor) provides security for any payment obligations that may be owed to them. This way, the contractor can still obtain payment if the principal fails to pay what is owed. This is especially important if the principal or head contractor is what is commonly referred to as a ‘$2 company’, that is a company without any substantial assets.

Types of security

Depending on the size and scope of the contract there are a number of options that are commonly available for providing security. These include cash, bank guarantees and insurance bonds.

The simplest type of security is ‘retention money’ or a cash security. This is when a party who is paying another party under a construction contract holds a specified sum of money back from progress payment. This is usually a percentage of the amount payable, and is eventually released at practical completion of the contract or at the end of the defects liability period.

Alternatively, bank guarantees and insurance bonds may be used instead of cash. These forms of security essentially amount to types of promises by a third party to pay an amount of money when a specified event occurs. A ‘specified event’ may include such things as a default by the contractor to complete work on time, a default in payments by the principal (if the security is in favour of the contractor) or even something as simple as a demand for payment.

The advantage of bank guarantees and insurance bonds is that they do not impact as significantly on cash flow, for the party giving the guarantee, as a cash security will. However, in order to obtain a bank guarantee or bond the party providing the security is required to pay a fee to the bank or insurer and is likely, in the case of a bank guarantee, to be required to provide some kind of cash deposit or mortgage over real property or some other security.

Insurance bonds operate in a similar manner to a bank guarantee but generally only a fee for the bond is required, and there is no further security such a mortgage. The cost of the fee for an insurance bond will be determined by both the size of the security and the risk (as assessed by the insurer) of the contractor defaulting and the insurance bond being called upon by the principal.

In addition to the guarantees discussed above, a ‘parent company guarantee’ may be required by a principal if a contractor or sub-contractor is part of a wider organisation. The effect of this type of guarantee is that the parent company becomes responsible for any default by the contractor. This can include stepping in and taking over any of the contractor’s obligations in the event of a default. Ordinarily, whichever approach is adopted the liability of the parent company will be subject to an agreed cap.

Another security option is what is colloquially referred to as a ‘letter of comfort’. This type of security is less common and is generally only used when a contractor is not an Australian company or individual and may be offered as evidence of financial standing. However, it is important to realise that letters of comfort are not the same as a bank guarantee or an insurance bond. A letter of comfort may not necessarily give rise to an immediately enforceable legal right on the part of the recipient of the letter and should be treated with considerable caution and care.

What happens when a call on security is made?

Even if unconditional security is given, it is likely that a contract will stipulate restrictions on when the security is able to be called on. Often a contract will be drafted in such a way that calling on a security involves multiple steps. For example, it is usual that the principal will firstly need to show that they have an entitlement to call on the security. Secondly any required notice of the intention to call on the security will need to be given. Finally, any obligation to give notice within a certain period of time needs to be met.

Can a contractor stop a principal from calling on a security?

It is possible to commence court proceedings seeking an order for injunction, to prevent a principal from calling on a security. However, it can often be difficult to obtain orders granting such an injunction unless certain pre-existing conditions are satisfied. These conditions may include that the contract provides for a restriction on the right to call on the security and that there is a genuine dispute between the parties as to whether the principal has an entitlement to claim payment or money from the contractor or subcontractor.

In addition, whether an injunction is granted or not may ultimately turn on the question of where the ‘balance of convenience’ lies. This will be decided by whether or not convenience dictates that the security should not be disturbed until the dispute between contractor and principal is resolved.

Conclusion

The giving and receiving of security is an important part of construction contracts. However, it is important that all parties to the contract understand the scope of the security and any limitations that are imposed on the parties by the contract in relation to both providing, and calling on a security. This understanding is vital for avoiding costly misunderstandings and potential litigation.

If you are considering entering into a contract that provides for security we recommend you seek legal advice before agreeing to any security provisions. We would be happy to discuss the implications of providing or receiving a security with you.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au.

Liquidated damages in construction contracts and the dangers of penalty

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The inclusion of a liquidated damages clause in construction contracts is a common way of addressing what consequences will flow from a breach of contract during the life of the contract and when a build is ongoing. However, to be effective they must be well-drafted.

It is therefore important to understand exactly what is meant by this term, particularly if you find yourself in the unfortunate position of being the party in breach under the contract.

What are liquidated damages?

In their simplest form liquidated damages are fixed damages. They are a way of calculating what compensation a party will pay to another party to that contract, if it is in breach of its obligations. The party in breach is known as the defaulting party, and the party not in breach is the non-defaulting party.

A common example of liquidated damages clause is for delay of the contractor. This might be that the contractor will owe the principal $3000 in damages for each day of delay in achieving practical completion.

The exact amount of damages for a breach of contract can often be difficult to calculate at any given moment. Rather than a contract providing for an unquantified amount of damages, a liquidated damages clause fixes the sum of any damages in advance and includes details of the sum to be paid should a breach occur in the contract.

Are liquidated damages the same as agreed damages?

The short answer is ‘yes’. Other terms you may come across, which effectively mean the same thing as ‘liquidated damages’ include ‘pre-estimated damages’, ‘stipulated damages’, ‘liquidated and ascertained damages’ and ‘adjustment of time costs’.

Liquidated damages clauses in construction contracts

Liquidated damages clauses are useful in construction and other commercial contracts because they provide a degree of certainty for all parties as to what will happen should a breach of contract occur. A valid liquidation damages clause will fix the amount recoverable under the contract without the need for costly litigation.

It can sometimes be difficult to quantify the extent of any damage suffered when a build is ongoing. However, a liquidated damages clause will mean that here is no need for the non-defaulting party to undertake the time-consuming and complex process of proving their loss or damage with evidence. The clause also allows both parties to decide in advance exactly what their respective rights and liabilities will be in the event that a breach occurs.

Liquidated damages clauses are particularly relevant for construction contracts because they:

  • Allow the parties to quantify and be clear about risk allocation and their intentions should a breach of contract arise and also allow parties to clearly understand in advance how loss will be calculated should a breach occur;
  • Encourage all parties to comply with their respective contractual obligations in the knowledge that if a breach occurs the clause can be enforced without the need to resort to litigation;
  • Allow a contractor, at the time they are tendering, to factor the price of their exposure (the amount specified for liquidated damages it there is a breach) into their contract price;
  • Allow a contractor to compare the cost of accelerating works in order to achieve practical completion by a required date versus the amount of any liquidated damages sum that becomes due and payable if the date for practical completion is not achieved;
  • Provide a ceiling or cap on a contractor’s liability for damages for specified breaches of contract;
  • Provide a principal with a means to recover damages regardless of the amount of any actual loss; and
  • Do not require the non-defaulting party to mitigate their losses, in contrast to other forms of damages.

What if I want to claim non-liquidated damages?

In rare cases, a liquidated damages clause will mean the right to damages under general law, calculated in court, will be lost. If clear and unambiguous words indicate to a court that the party wanted the liquidated damages to be the entirety of their damages for an event such as delay, then that party will lose their entitlement to general damages. Regardless of actual losses, it will be capped.

As determined early last year in the Victorian tribunal case Leeda Projects Pty Ltd v Zeng, courts will assume that general damages are not excluded by a liquidated damages clause, but they can be persuaded otherwise. In one disastrous example in England, the parties had entered ‘£ nil’ in the liquidated damages clause for delay, and the court found that the surrounding circumstances showed that the parties intended to exclude all damages for delay when using this clause.

Liquidated damages vs. penalties

Understanding the difference between liquidated damages and penalties is vital for any contracting parties. This is because courts will enforce liquidated damages clauses, but they have also made it clear that they will not enforce a clause if it amounts to a penalty clause.

In the eyes of a court, a clause will be a penalty clause where the amount of fixed damages in the contract is not a genuine pre-estimate of loss or damage sustained by the non-defaulting party, or where it does not protect the legitimate commercial interests of the non-defaulting party. Rather, where a provision is a kind of punishment for non-observance of the contract, it will be a penalty.

It is not enough for parties to label a clause ‘liquidated damages’ in the contract, or to state that ‘the parties agree that this is not a penalty clause’. Courts will consider whether in substance it is a penalty.

The factors that determine whether a liquidated damages clause is a de facto penalty clause will vary from build to build and contract to contract. However, the courts have traditionally applied some key tests when considering whether a contractual provision goes beyond liquidated damages and is in fact a penalty.

The first key questions to consider are:

  • Is the amount provided for in the clause ‘extravagant and unconscionable’ when compared with the greatest possible loss that could possibly be shown to result from the particular breach of contract?
  • Does the breach consist solely of non-payment of money which results in a larger sum for damages being required?
  • Does the clause stipulate the same amount is to be paid for different breaches, even if the breaches vary in terms of seriousness?

If the answer to any of these questions is ‘yes’ then it is likely the clause will be a penalty and will not be enforceable.

What if actual loss can’t be quantified?

A clause may be a valid liquidated damages clause even if it is not possible to estimate in advance the actual or true loss that may be suffered. The main consideration is whether the liquidated sum is extravagant. Therefore, it is important to consider carefully the tests above when determining the size and scope of any liquidated damages clauses.

Conclusion

The difference between a reasonable liquidated damages clause and an unenforceable penalty clause can be a difficult line to draw, even when all parties to a contract enter into negotiations with the best of intentions.

Before entering into a contract or agreeing to a liquidated damages clause it is always advisable to seek legal advice to ensure that you understand the full ramifications of the agreement and to check that, if needed, the terms of the contract will be enforceable by you or the other party.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au.

Personal Property Security Register and the construction industry

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The introduction of the Personal Property Securities Act 2009 (PPSA) was a move by government to streamline the registration of securities over personal property. The Personal Property Security Register (PPSR) is a national, electronic register of security interests in personal property that was established on 30 January 2012.

How does the PPSR affect me?

If you have an interest over any personal property you need to register that interest on the PPSR in order to ensure that you have priority over any other claim.

Whilst the operation of the PPSR is by no means limited to the construction industry, there are a number of industry specific situations that can arise. Taking proactive steps to avoid any potential loss of interest is an important step in any construction project.

Construction industry-specific effects of the PPSR

If you are involved in a construction project that involves parting with possession of personal property including, for example, scaffolding, formwork, plant and other equipment, you would be wise to consider registering your interest as a matter of urgency on the PPSR.

Failing to register your interest on the PPSR could result in that interest being defeated at some later date if the party with possession, such as the owner of the site or the head contractor, manages to grant a later security interest in your goods or goes into liquidation. Your security interest might then lose out to another’s security interest over the same property, or in the case of insolvency, you will have to get in line with other creditors.

Temporary works

Temporary works such as formwork and scaffolding that are removed at the end of a project are examples of personal interests over property that should be registered on the PPSR.

Prior to the introduction of the PPSR, a contractor would simply rely on their legal ownership to protect their interest and remove these items at the end of a project. Now if you fail to register your interest in these or other temporary work items you may be in for a nasty shock at the end of a project. This is because the party in possession, such as the head contractor or site owner, sometimes passes title onto another purchaser. If that occurs and the new purchaser registers their interest on the PPSR, then you may well find that your interest in those goods is defeated by the new purchaser’s claim.

This is because registered claims take priority in many cases.

Retention of title

If a supply contract includes a clause providing that title to goods will not pass to the purchaser until full payment has been received, then because of the PPSA that clause is likely to mean that a security interest in favour of the supplier arises. Your interest will need to be registered on the PPSR if it is to be enforced against third parties.

Leasing equipment

If you own and lease goods and equipment for use on building sites you may be surprised to learn that legal ownership of the equipment may not be sufficient to protect your interest.

Under the operation of the PPSA, the lease may be considered to be a PPS Lease. Your interest in any goods or equipment covered by the lease will be deemed to be a security interest. A failure to register your interest on the PPSR could result in you losing ownership if another party uses those goods or equipment as security for another loan.

Principal’s rights on take out

It is not uncommon in construction contracts for the principal to be given the right to take over a contractor’s construction plant and works in the event that the contractor defaults on their portion of the construction contract.

The principal’s right to act in this way is likely to be considered a security interest under the PPSA. If you are a principal you must register your interest on the PPSR in order to ensure that you have priority over any other possible competing interests.

How can the PPSR help me on my construction projects?

The PPSR provides a national central register where you can record any interests you have in goods including plant or equipment, or in the case of principals, any rights to take out.

Very importantly, the PPSR also provides a useful resource for checking whether goods you may be thinking about purchasing or accepting as collateral are already encumbered with a debt or charge. This is particularly relevant if you are thinking of purchasing construction specific goods such as plant equipment including formwork or scaffolding that are currently located on a construction site. Check the PPSR to ensure that there is no prior interest registered in these goods prior to purchase.

The PPSR is also an excellent risk protection tool. If you find yourself on the other side of the table and are trying to raise funds for your business using your interest in plant equipment, including scaffolding and formwork as collateral for any loan, you may find that you are able to raise finance more easily because potential purchasers are able to check on the PPSR to confirm that the goods you are offering as collateral are not subject to a pre-existing loan arrangement.

A properly registered interest on the PPSR can mean that you are the first party in line to get your goods back if a party in possession attempts to raise funds using your plant equipment as collateral. This is a much more preferable position to be in at the end of what may be a very long queue of an insolvency process if your customer goes belly up, owing you and many others money.

Ensuring that registrations on the PPSR are correct and complete is also important. Our experienced lawyers can advise and assist you on all aspects of the operation of the PPSR and particularly how it can assist those working in the construction industry. If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au.