Cutting a fairer deal

Commercial contracts should be about finding an equitable power balance in the relationship between parties, but under the present system consultants working in the government sector have to assume a truly onerous level of liability.

However, this could change if new draft guidelines issued by the federal government are implemented. And the upside from better contracts is not confined to the contractors – fairer apportioning of risk actually improves service delivery outcomes.

If you read many government contracts you would wonder why anyone would do commercial work for government. This is because contracts are written in such a way as to transfer any conceivable risk from government to the contracting party. It happens frequently also in the private sector. One party seeks to transfer all potential liability to the other party.

The new thrust of the Department of Innovation's new guidelines for risk management is to encourage federal departments to share risk and liability with contractors based on practical contracting realities. You'd think this was common sense. But it's not what generally happens in practice.

Instead, under the present system if government needs a job done – say fit-out of an office or a specialised computer systems upgrade – they write specifications, issue a tender, review bids and award the job. During this process contracts are drafted. This is thought to exclusively be the lawyers' domain.

Lawyers are a funny lot. They know the law but when it comes to servicing clients they have a narrow perspective. They believe their task is to entirely look after the person paying them. They do this in part, by writing generic clauses enabling their client to avoid risk and liability in almost any circumstance imaginable. They have pretty far-reaching imaginations. Some clauses give the impression they would hold the contracting party liable for a meteor strike. Silly idea, maybe, but some contracts are shockers.

The reality is that these sort of 'contracts' are not really contracts at all. When I discuss this with some corporate lawyers they are affronted by such an idea. They take the view that anything that's based on offer and acceptance is fair game. The attitude is, "here's my offer, if you don't like it, don't accept!” But this is not what the courts say.

Somewhere between a lawyer being a practising lawyer and a lawyer becoming a judge, the real law emerges. Commercial contracts are about finding an equitable power balance in the relationship between parties. This becomes apparent on reading court judgments on the difference between an employment contract and a commercial contract.

Commercial contracts are magical things. They are the legal bedrock of properly functioning market economies. They give both parties rights to control the contract terms. This enables fair commerce. But they are corrupted by the process I describe above. This makes transactions vastly more complex and expensive than needed, diminishing commercial trust. It's bad business.

The way this works in the government sector follows a familiar patter. Let's say a self-employed consulting engineer has a job to assist in the design of a bridge. They are handed a contract that, if applied to its full legal extent, would make them liable for an above mentioned meteor strike on the bridge. The consultant knows this is stupid, but the department will not vary its standard form contract.

The department requires the consultant to have 'suitable' insurance. Naturally insurance companies look at the consultant's 'contract' and add a huge amount to the premium. The consultant realises the risk is all one way, toward him/her and escalates the charge rate accordingly. What's also been created through this process is a relationship of mutual suspicion. The consultant only does the work to the departments' specifications and won't mention improvements that could be made. The department thus locks itself out from much of the available expertise of the consultant.

The federal government is looking to change this. There's a recognition that government can do better in its procurement by having better contracts. It's responding to approaches by engineers, architects, accountants and many other who experience this problem daily. A consultation process is current underway, to which my organisation has responded.

Change will not happen overnight. Management finds it easier to have catch-all legal clauses that transfer risk. Achieving risk balance requires higher procurement skills to assess and share risk. Problems will occur if correct balance is not achieved. However, better contracts improve the delivery of service and raise the quality of services available. The path to this involves legal realignment of contracts and significant cultural and skills upgrade in the public service.

But by taking this initial step, the federal government is demonstrating practical, micro-economic reform leadership. Businesses take a lead from government on this sort of issue. There's a chance that better government contracts will have cascading impact through the wider economy. Businesses should watch developments closely.

Ken Phillips is executive director of Independent Contractors of Australia. www.contractworld.com.au He is the author of Independence and the Death of Employment.