Implications of Keldote & Ors v Riteway Transport
As a result of the decision in Keldote & Ors v Riteway Transport  FMCA 394 (16 June 2010) (Keldote), companies will need to pay attention to questions of 'fairness' in the terms on which they engage independent contractors. The decision is an example of how, despite complying with terms agreed in a contract, a party may be subsequently liable for damages for a breach of the contract if a Court decides the terms were unfair.
Australian based service contracts1 between companies and independent contractors are subject to review under the Independent Contractors Act 2006 (Cth) (ICA)2.
Although the ICA provides that a contract cannot, once made, become unfair as a consequence of subsequent events, a Court may consider later events to satisfy itself whether aspects of the contract were unfair from the outset.
Keldote is an example of how a Court is given power by the ICA to:
- review contracts that have been terminated and are no longer on foot
- sever or amend contractual terms to overcome any perceived unfairness
- insert amended terms that operate from the commencement date of the contract, and
- award damages arising from a breach of an amended or inserted term.
The ICA has, until now, been untested in any significant way.
Facts of Keldote
Riteway Transport Pty Ltd (Riteway) engaged a number of owner drivers, on a piece rate basis, to provide trucking services under standard form contracts (Contracts). In 2007, Riteway directed the drivers to upgrade the configuration of their vehicles to match the needs of its revamped distribution facilities – if the vehicles were not upgraded then "the last journey they would be required to undertake for Riteway would depart on 23 August 2007".
At that time, the drivers sought an increase to their rates to ensure parity with the increasing costs of complying with the direction. Although it was common ground that the drivers' operating costs for each journey would increase if they complied with the direction, negotiations to implement the changes failed and an agreement to upgrade the vehicle configurations could not be reached. The drivers sought a remedy under the ICA alleging the Contracts were unfair as it allowed Riteway to unilaterally impose variations to the manner in which the transport services were to be provided without providing comparable compensation. Riteway's failure to provide reasonable notice of the termination of the Contracts was also considered by the Court.
Finding in favour of the drivers, the Court amended the Contracts by inserting terms limiting Riteway's power to require upgrades or replacement of vehicles in the absence of an agreement regarding the applicable trip rate of pay. The insertion of the amended term meant the drivers had not breached the Contracts by refusing to upgrade their vehicles, as no agreement had been reached. Riteway's refusal to provide work to the drivers after 23 August 2007 was held then to be a breach of the amended contract and that it was in turn liable for damages arising from the breach.
In determining that 3 months was a reasonable period of notice of the termination of the Contracts, the Court considered;
- that commercial contracts which embody similar characteristics as employment contracts, such as a one man operation providing exclusive services for an open ended duration, may be reviewed by reference to both commercial and employment contract principles, and
- the contractor's opportunity to wind up the relationship by entering into alternative arrangements, deploying their assets and skills in a similar business and re-ordering downstream business arrangements.
The Court awarded a total of $124,000 in damages and interest.
When will it be unfair?
To establish if a term of a contract is unfair or unreasonable, a Court will have regard to both the method of making the contract and the effects of its terms.
A contract may be construed as unfair if the process under which the agreement was secured was influenced by:
- a material inequality in the parties' bargaining powers, or
- unfair pressure or tactics such as adopting a "take it or leave it" approach to negotiations.
Similarly, a term of a contract will likely be unfair if the effect of that term results in:
- a contractor not being provided with reasonable notice of termination
- a principal party unilaterally imposing significant changes to service provision requirements (such as upgrading vehicles, increasing distribution rates) without providing equivalent or like compensation, or
- an arbitrary decision-making process when exercising an option to renew, extend or terminate a contract arising from a failure to specify and consider objective criteria.
Also, if the contractual terms allow:
- a cursory investigation of facts and circumstances to give rise to allegations of misconduct or negligence, which can be relied on as a grounds for termination
- a contractor being prevented from having a right of reply to such allegations, or
- a contractor's remuneration to be less than would be received if that contractor was an employee engaged to perform the same or similar work,
the contract may be rendered unfair under the ICA.
Implications for Principal Contractors
It is evident from the Keldote decision that in determining fairness, a Court will have regard to the principal's unilateral rights under a contract and whether the exercise of those rights would operate in an onerous way on the contractor. An example is a term requiring upgrades to equipment without the provision of further payment.
When entering into agreements for the provision of services by independent contractors, principals should consider:
- the extent to which the contract can be "moulded" by negotiation and not imposed as standard form, and
- an appropriate balance of advantage and disadvantage, with neither party being advantaged or disadvantaged disproportionately.
1 'service contract' is defined to include
conditions and/or collateral arrangements.
2 Contracts between corporate bodies are not subject to review under the ICA unless the party who is an independent contractor is a body corporate and the work to which the contract relates is wholly or mainly performed by the director of the body corporate or a member of his or her family.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.