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The West Gate Tunnel leads to arbitration

The D&C JV contractors on the West Gate Tunnel (Project), CPB Contractors and John Holland (Subcontractors), have won the first round in their dispute against Transurban (Project Co) over the presence of contaminated “PFAS” soil in the tunnel area and subsequent purported termination of their contract due to force majeure.

In Transurban WGT Co v CPB Contractors Pty Ltd [2020] VSC 476, Victorian Supreme Court (VSC) refused applications designed to prevent the disputes from proceeding through arbitration.

Facts

The Subcontractors purported to terminate their contract with Project Co on 28 January 2020 due to the discovery and persistence of “PFAS” contamination, which it claimed was a “Force Majeure Termination Event” under the contract.[1] Since this time, the Subcontractors and Project Co have been engaged in disputes on the validity of the termination and various related matters.

By notice dated 2 March 2020, the Subcontractors sought to initiate a “downstream” arbitration with Project Co in relation to various claims.[2] Some 3 months later, Project Co initiated its own “upstream” arbitration in relation to various claims which it had passed upstream via its head contract with the State of Victoria.[3]

Project Co claimed the disputes were “Linked Disputes” under the contract with the Subcontractors. Project Co argued that clause 44A.3(a)(ii) operated to suspend the downstream arbitration while the upstream arbitration progressed (suspension clause).[4]

The Subcontractors sought to refer their various disputes with Project Co to arbitration. Project Co made an application for:

  1. a declaration that the suspension clause was enforceable; and

 

  1. an interlocutory injunction to restrain the Subcontractors from taking steps to progress the downstream arbitration until such time as the upstream arbitration was determined.[5]

The Subcontractor argued that the arbitral tribunal should decide whether to grant such relief to Project Co, not the court. The Subcontractor pointed to ss 5, 8, 9 and 17J of the CAAs which provide only limited powers for court intervention.[6]

The Subcontractor made a referral application to the VSC relying on s 5 and / or 8 of the Commercial Arbitration Act 2011 (Vic) (CAA), requesting the court refer Project Co’s query in relation to the operation of the suspension clause to the arbitral tribunal.[7]

Decision

Lyons J:

  1. found that the court had no power to make a declaration of the kind sought by Project Co;

 

  1. refused Project Co’s application for interlocutory injunctions; and

 

  1. granted the Subcontractor’s application to refer to the arbitral tribunal the question of whether the suspension clause was inoperative.[8]

Lyons J considered in detail the relevant law on the nature of arbitration and the limited ambit given to the court under the CAA. Some of His Honour’s key conclusions included that:

  1. the question whether the suspension clause is valid and enforceable was a matter ‘arising in connection with’ the contract between the parties and, therefore, it was a type of dispute the parties had agreed under their contract would be arbitrable;[9]

 

  1. the arbitral tribunal had the power to make orders relating to the validity, enforceability and/or applicability of the suspension clause of the kind sought by Project Co in court;[10]

 

  1. under the CAA the court’s power to grant interlocutory relief to matters which the CAAs apply derives from s 17J[11]. Accordingly, the court’s power to intervene is limited; and

 

  1. Project Co had failed to establish that the circumstances of the case were exceptional or objectively urgent such that court intervention was required.[12]

As a result, the Subcontractor’s claims in relation to the contract will be heard and determined by an arbitrator. The arbitrator will need to determine whether the suspension clause is enforceable and, if so, operates in the circumstances to pause the downstream arbitration.

Take Home Tip

Parties who agree to arbitration as their preferred dispute resolution forum should note that the courts are increasingly minded to allow arbitral tribunals to rule on their own jurisdiction or “competence” under the CAA. A party should closely consider whether their set of circumstances are truly urgent or exceptional to warrant intervention by the court. If not, it would be better to apply its resources in ventilating preliminary issues in the arbitration first, then challenging the arbitrator’s determination on those issues if necessary and as permitted by the CAA.

Importantly, Lyons J considered that he was bound by Hancock v Rhodes[13], being ‘a decision of an intermediate appellate court in circumstances applying sections of a uniform commercial arbitration act in force in each state in Australia.[14] This reinforces the relevance of the current decision of the VSC to parties in all States and Territories in Australia.

[1] At [10(1)].

[2] At [12].

[3] At [12].

[4] At [14].

[5] At [23].

[6] At [115] and [128].

[7] At [20].

[8] At [208].

[9] At [170].

[10] At [174].

[11] At [147] and [191].

[12] At [192] to [203].

[13] Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd [2020] WASCA 77.

[14] At [147].

Employees, independent contractors and ‘shams’ in the construction industry

It is common for builders and operators in the construction industry to utilise contractors to carry out specific trade skills such as concreting, plastering, bricklaying and plumbing.

Business operators however, need to be cautious when ‘hiring’ skilled or other labour to ensure that they are not in breach of provisions of the Fair Work Act 2009 (Cth) (the ‘Act’). The Act prohibits a person from misrepresenting ‘employment’ as ‘independent contracting’, otherwise known as ‘sham arrangements’.

These sham arrangements have been predominant in the construction industry and are illegal.

It is important for business operators to understand the difference between an independent contractor and employee.

Example of a sham arrangement

Sham contracting came back to haunt Royans Wagga Pty Ltd in the 2017 case, Putland v Royans Wagga [2017] FCA 910. Royans Wagga was a business primarily running truck repairs. Linda and Shane Putland performed work for Royans Wagga over many years in a call centre, obtaining and passing on information about vehicle accidents to Royans Wagga sales representatives so that repair work could be secured.

If the Putlands could prove that they were employees and not independent contractors, they stood to gain significant back pay and payment in lieu of reasonable notice of termination. Meanwhile Royans Wagga stood down the barrel of a long list of contraventions of the Act and pecuniary penalties. It therefore denied the employer-employee relationship, arguing that the Putlands were independent contractors.

As is often the case, a number of factors pointed towards either relationship. Bromwich J had to balance these factors against each other and arrive at a conclusion.

Is someone an employee or an independent contractor?

The distinction between an employee and independent contractor is not always easy to determine. Generally, the Fair Work Commission or a Court will look behind the label given to the arrangement by the parties to identify the factual substance of the relationship. How one party or both parties view the relationship is not determinative of the issue.

Primarily, an employment relationship is an exchange of labour (time, skill and effort) for remuneration – the employee serves the employer as opposed to carrying on a business in his or her own right.

If the worker is acting as an entrepreneur who owns and operates an enterprise and as a representative of its own business, then it is more likely that the worker is an independent contractor.

The entirety of the relationship is analysed which might consider the following factors:

  • the degree of control that a business operator can exercise over a worker engaged to perform work (whether the control is actually exercised or whether just the potential exists);
  • whether the worker works exclusively for the business operator;
  • the provision of a uniform, business cards, tools etc. from the business operator;
  • whether the worker undertakes work personally or is free to delegate to others;
  • the location of the work;
  • the method of payment for the work performed – whether at an hourly rate or on completion of a specific project, whether wages are paid or there is a commission;
  • the responsibility for acquisition and maintenance of equipment;
  • the creation of goodwill of saleable assets through the work performed;
  • the allocation of risk and profit associated with the work;
  • the degree of integration the worker has with the entity for which it works;
  • the existence of leave, taxation, superannuation payments, etc;
  • how ‘business-like’ is the business of the business operator – are there systems, manuals, invoices etc;
  • the right of the business operator to dictate the place of work, hours of work etc. of the worker

This list is not exhaustive.

In the case above, Royans Wagga required the Putlands to obtain ANBs, it issued tax invoices in lump-sum amounts, it did not deduct income tax, it did not require uniforms to be worn, and it paid others to do work.

On the other side of the scales, the Putlands only worked for Royans Wigans, their telephone and internet accounts were paid by Royans Wigan, they had their office equipment supplied, they did not advertise any business run by themselves, their work led to Royans Wigans accruing goodwill, and they lacked ‘true autonomy’ in their work. Evidence also indicated the managing director of Royans Wigans had authority to control and issued directions and approvals to the Putlands.

Bromwich J decided it was an employee-employer relationship, to Royans Wagga’s significant detriment.

Misrepresenting employment as independent contracting

A business operator is prohibited from offering a person a role as an independent contractor when the relationship between the parties is really one of employer-employee.

Section 357 of the Act states: ‘A person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.’

To take advantage of a sham arrangement, the employer would insist that the ‘contractor’ obtain an Australian Business Number (ABN) and create his or her own business before commencing work. The worker is generally responsible for paying his or her own taxes and insurances.

The worker is treated as an independent contractor and the employer circumvents the obligations that would normally arise from an employer-employee relationship. Consequently, by signing up as an independent contractor, the worker foregoes access to employment entitlements such as payment for annual and sick leave, long service leave, compulsory superannuation contributions and protection from unfair dismissal or termination of employment.

For contractors who are genuinely running a business as a profit-making enterprise this is not problematic. However, in the case of a sham arrangement, the workers may earn a higher hourly rate, but perhaps not conducive to a profit-making enterprise, from which they must pay their own tax, insurance and superannuation. In such circumstances, the sham arrangement results in the employer ‘getting its cake and eating it too’.

Sham arrangements are illegal

It is illegal to inform a someone that he or she is an independent contractor if they are actually an employee. It is also illegal to dismiss an employee or threaten to dismiss an employee for the purpose of ‘re-engaging’ them in predominantly the same work as they performed whilst they were employed.

Similarly, a person must not induce a former employee to carry out the same type of work as when they were employed under the guise of an independent contractor arrangement. Where an employer employs or has at any time employed an individual to perform particular work, the Act also makes it illegal for the employer to make a statement that they know is false in order to persuade the individual to perform substantially the same work as an independent contractor.

Businesses entering sham arrangements risk significant civil penalties and potential claims for back-pay of employee entitlements such as annual leave payments, sick leave and superannuation contributions.

Why do businesses use sham arrangements?

A sham arrangement may result from simple ignorance on the part of the business owner or a desire to minimise costs. A worker may even indicate that he or she is ‘happy’ with the arrangement.

Sham arrangements may be prevalent during the start-up phase of a new business where cashflow is limited and the future success of the enterprise unknown. Conversely, businesses may have been running sham arrangements for some time.

The temptation to use ‘contractors’ instead of employing staff usually flows from a desire to circumvent the financial and other responsibilities that arise from an employment relationship. If the business takes on workers as independent contractors rather than as employees, the business need not comply with nationally-recognised employment conditions, annual leave, sick leave, workers’ compensation or termination processes.

Conclusion

If you are considering engaging workers for your building projects, you should think carefully about the arrangements to determine whether your workers are truly independent contractors or employees. If you are unsure, obtain legal advice.

Failing to do so could lead to significant costs down the line.

Please contact us should you require any further information, on +612 9248 3450 or email info@bradburylegal.com.au