Australia: Claim For "Contractual" Damages Under Independent Contractors Act

Some recent decisions have clarified the nature of claims that may be pursued under the Independent Contractors Act 2006 (ICA). The ICA allows parties to an independent contractor arrangement (a "contract for services") to apply for the contract to be reviewed on the grounds that it is unfair or harsh.

In forming its view about the fairness of a contract a court is entitled to consider matters such as the relative bargaining strengths of the parties, and whether undue influence or pressure may have been imposed on a party to the contract. If a court determines that contract to be unfair it may make an order either varying or setting aside the contract (see s. 16). Importantly, the ICA itself does not allow for the recovery of monetary compensation.

Notwithstanding this, in the recent decision in Fabsert Pty Ltd v ABB Warehousing (NSW) Pty Ltd [2008] FMCA 1198, Federal Magistrate Driver, found that a court could make an order of damages for breach of contract when a claim for "reasonable notice of termination" was made as part of a claim under the ICA . It was accepted that contractual damages could be awarded as part of the court's accrued jurisdiction.

The Nature of the Contract for Services

In this case Fabsert Pty Ltd (Fabsert) agreed to provide warehousing management services to ABB as part of a contract of services. The "services" (that of warehouse management) were largely to be provided by Fabsert's directors, Mr Foster and Mr Abbott. The parties initially "agreed" on the terms of the proposed arrangement in an exchange of emails in September 2005. Subsequently, however, there was considerable dispute about the precise terms of the arrangement. The contract did not contain a termination provision and two years later ABB sought to terminate the agreement by giving one week's notice.

The main claim under the ICA was that the contract was unfair and harsh in that it failed to provide for a payment of $20,000 to be made in addition to the contract price some 12 months after the contract had been entered. Associated with the claim under the ICA were claims that Fabsert was entitled to reasonable notice of termination (rather than 1 week) on the basis of an implied term, and that it had been the victim of misleading and deceptive conduct.

Fabsert asserted that it had been promised an additional $20,000 per annum by ABB over and above the contract price once the business was "up and running". This claim of "misleading and deceptive conduct" in breach of s. 52 of the Trade Practices Act was heard as part of the court's accrued jurisdiction. The argument that Fabsert had been misled in this way was ultimately rejected on the basis that any "representation" was so vague in its terms that it could not have been relied upon by the principals of Fabsert. Driver FM also indicated that the statement made was arguably nothing more than a general comment that ABB may have been prepared to consider the payment of an additional $20,000 at some unspecified point in the future.

The Power to Review an Independent Contract

According to the ICA , the power to review a services contract on the grounds that it is unfair and harsh does not apply where the relevant party is a body corporate unless work undertaken pursuant to the contract is wholly or mainly performed by a director of the body corporate or a member of his or her family. In Fabsert it was shown that the two directors of Fabsert (Mr Foster and Mr Abbott) were directly involved providing management services under the contract. It was not relevant that Fabsert also engaged casual and other labour for the purpose of loading and unloading goods. According to the magistrate it was the "skill, experience and judgement (of Mr Foster and Mr Abbott) that was brought to bear in the provision of management services" under the contract.

On the facts in this case the magistrate found that the words "wholly or mainly" in the legislation required that the two directors undertook significantly more than half the work under the contract to ensure that this requirement was satisfied. Here the magistrate found that the requirements of s. 11(1)(b) of the ICA were fulfilled, as services under the contract were mainly provided by a director of Fabsert (or a member of his family). For example it was found that:

  • the services under the contract were management services, and the provision of manual labour (while necessary for the performance of the contract), was not a management service;
  • the management services were provided equally by Mr Foster and Mr Abbott; and
  • Mr Foster was a director of Fabsert for the whole of the period of the contract and Mr Abbott was a director for a reasonable period of time.

Was the Contract Unfair?

While the ICA applied, Driver FM ultimately did not accept that the contract was unfair. Fabsert had argued that the contract was unfair or harsh because it did not include a term that ABB would pay Fabsert an additional $20,000 each year once the business was up and running. In support of this Fabsert claimed that it (and its principals) had been in a significantly weaker bargaining position than ABB, and that it had been subject to unfair tactics.

The magistrate found that the bargaining positions of the parties were equal because the two directors of Fabsert had been employed by the previous owner of the warehousing business and had pre-existing relationships with customers, who later became customers of ABB. His Honour also found that Fabsert had failed to demonstrate that ABB used unfair tactics against it.

The Contract Claim

It was acknowledged by both parties that a term allowing for termination on reasonable notice should be implied into the contract. Such a term was necessary to give "business efficacy" to the arrangement. Just what period would be reasonable in the circumstances?

The decision of Driver FM notes that the sorts of considerations to be taken into account when deciding what constitutes reasonable notice in a contract for services are not the same as might apply in the case of an employment contract. However, a review of the authorities indicated that the following matters may be relevant:

  • The period of notice that would enable a party to bring the arrangement to an end in an orderly way;
  • The period which allows the recipient to wind up existing commitments, or to obtain "the fruits of any extraordinary expenditure or effort carried on within the scope of the agreement"; and
  • The subject matter of the agreement (as this will reflect the common purpose of the parties).

In this case Driver FM found that the period of one week initially given by ABB was "manifestly inadequate" in order to allow Fabsert to hand over its business to the new warehouse manager and to redeploy its labour. His Honour's conclusion was that a reasonable notice entitlement of 12 weeks should be implied into the contract, and ordered that Fabsert should have been paid $36,000 in lieu of that notice.

Lessons from the Fabsert decision

  • Even though the ICA appears to limit the type of orders that are available if a contract is found to be unfair or harsh – it is now evident that other "related" claims may be heard by a court as part of its accrued jurisdiction. In Fabsert both a contractual claim and a Trade Practices Act claim were "attached" to the claim made under the Independent Contractors Act;
  • Parties drafting an independent contractor arrangement (a contract for services) should obviously give consideration to the appropriate termination provision. In Fabsert a court was prepared to "imply" a term allowing for reasonable notice of termination (which it considered to be 12 weeks) in the absence of such a term.

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.

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