As a number of my clients and many of my readers are in the waste management industry, I thought it would be useful to specifically address some common legal risk issues from a waste collection perspective.

Contract Templates (Tender Monster #2: “Square Peg”)

The best type of contract is always one that is tailor-made for the situation. Unfortunately, many requests for tender (“RFTs”) are based on standard-template contracts. The most common example is the use of construction contract templates, which contain many provisions specific to a project-based scope of works that are inappropriate for scheduled services. This is often the case with Australian Standards contracts (e.g. AS4906-2002, AS4000-1997), almost all of which have a construction “flavour”. Another example is the use of contracts for sale of goods rather than for provision of services – the legal issues in each case can be quite different. The use of an inappropriate contract template increases the likelihood that many of the problems addressed below will exist. For example, you could find that title to your equipment passes under the contract to the principal or that you have no right to issue monthly invoices.

*Bottom line: The use of an inappropriate contract template increases the likelihood that many of the problems addressed below will exist. If you are presented with a contract that is obviously based on a standard template, the warning bells should start ringing immediately.

Price Structures

Price components that are not aligned with cost inputs can result in significant variations in profit margins. Price inputs for waste services vary according to different measures: wages (time and pay rates), fuel (distance and fuel price), capital investment (amount and price of equipment), gate fees and levies (weight of waste).

RFTs will often propose a price structure that involves a single all-inclusive price per bin per lift. To determine the right price to quote, certain assumptions need to be made about the various price inputs. While it might be possible to determine the amount of time and fuel will required to service the bins, assumptions might need to be made as to average weight densities. Variations in weight density have become a critical issue since the introduction of waste levies. Rule of thumb: assumption = risk.

*Bottom line: Try to avoid inappropriate price structures by proposing an alternative price structure that allows for greater correlation between the input costs and price you charge. If you must base your pricing on assumptions about weight density, try to factor something into your price structure to protect against variances in actual weight densities. For example, you might include an excess fee for each load that exceeds a specified density.

There are other reasons, to do with price review and adjustment (discussed below), as to why it’s often a good idea to break your pricing down into a number of components, rather than simply quoting a single all-inclusive price per service.

Futiles (Tender Monster #12: “Safety On”)

Most waste companies have clauses in their own customer terms and conditions allowing them to charge a “futile” fee where a truck attends to service a bin and the bin not made available for collection. Futiles are also standard in tender-based contracts for some industry sectors (e.g. council kerbside collections). However, the right to charge futiles needs to be reflected in the terms of the contract. In most tender contracts the issue is not specifically addressed, so it depends on the wording of the price structure. For example, if the price trigger is “per tenement”, “per scheduled service” or is a fixed price based on the number of tenements, then you should be able to charge for futiles. If, however, the price trigger is “per lift” or “per collection”, then you may have trouble justifying a charge for futiles. Whatever you do, don’t assume that you’ll have the right to charge for futiles. I know of a company that won a kerbside collection contract on pricing that assumed the ability to charge for futiles, only to find that the council refused to pay for futiles on the basis that the price was “per lift”.

*Bottom line: if you want to charge for futiles, make sure your right to do so is expressly referred to in the contract.

Price Adjustments (Tender Monster #7: “Mattress Money”)

In a fixed-term contract, prices can only be increased in the manner and to the extent allowed by the contract. If prices are adjusted during the term, it’s usually by one of two mechanisms: (a) a price adjustment clause or a “change in law” clause. Given that waste contracts are often for long terms, it’s important to ensure that your tender submission includes a price review mechanism which details the timing, frequency and methodology for price adjustments. The price adjustment mechanism should be designed to ensure that your profit margin remains steady over the course of the contract. If it doesn’t, the negative impact on your profit margin will compound over time.

Many waste contracts allow periodic price increases by reference to CPI only, however this is rarely satisfactory. Firstly, it depends on which CPI index is used. For example, disposal fees in Queensland have risen by around 5% per annum for the last few years, while the CPI (All Groups) index has increased by an average of only 2% for the past few years. Also, you may find that the price of fuel increases by an amount in excess of the All Groups CPI index. Waste management companies over that time would have been better served having their prices indexed to the CPI (Transport) index, which increased by 6% over the year to September 2018 and 5.2% the year before. Or, better still, having waste disposal fees listed as a separate price component and passing on any increases in waste disposal fees at cost, with the rest of the contract price increased by reference to CPI (Transport index). Another option might be to have a portion of the price linked to the Australian Institute of Petroleum’s terminal gate price for diesel (TGP), as is common in many council waste contracts.

The contract should also give you the right to pass on, at cost, the impact of any new or increased levies or taxes (such as the new waste levy in Queensland). This can be done by having an appropriately worded “change in law” clause, or, in the case of waste levies (which are built into disposal fees), having disposal fees listed and adjusted as a separate price component.

Now, in order to index each of the significant cost components separately, you have to be able to quantify what portion of your price relates to each cost category. This can be done by having separate price components for each input cost (e.g. a rental fee per bin, a service fee per lift and disposal fees at cost) or by nominating a specified percentage of your overall unit price to each category (e.g. 40% to disposal, 20% to fuel and 40% to other). You can then choose to pass on increases in easily identifiable components such as disposal fees, levies and taxes at cost, fuel component against TGP and other components against CPI either All Groups or Transport index).

Early Termination (Tender Monster #4: “White Elephant”)

Clauses allowing the principal to terminate for convenience are par for the course these days. In many most instances this doesn’t present a huge risk, as you can usually reallocate your resources fairly quickly from one contract to another. It does, however, present an issue where the contract involves a large up-front capital investment, the cost of which is factored into the contract price. Trucks, bins and people can be relatively easily redesignated, but specialised equipment designed or purchased specifically for the contract, such as compactors, is a different story. If you are required to install a brand new $150,000 compactor and your investment is either built into the service fee or a monthly equipment rental fee, it will take years to recoup your capital investment. What happens if the contract is terminated early through no fault of your own?

*Bottom line: If the contract contains a termination for convenience clause and requires a significant up-front capital investment (e.g. compactors), you should request that the principal either (a) removes the termination for convenience clause or (b) allows you to insert a clause requiring the principal to pay a termination fee to reflect the written-down value of the equipment.

Risk Allocation (Tender Monster #22: “Atlas”)

Many contracts (especially those with a construction flavour) assume that you will be the sole contractor in charge of the site. As such, they contain provisions which make you liable for anything that happens on or around the site while you are providing services, even things that would not otherwise be legally considered to be your “fault”. Rule of thumb: risk should be allocated to the party who is in the best position to manage it. This can include nominating the contractor as “primary contractor” for the site, duties to protect people and property and to prevent nuisance and duties to keep the site clean and tidy and free from pollution.

*Bottom line: Don’t agree to be responsible for risk that are beyond your reasonable ability to manage or control.

Equipment (Tender Monster #5: “Bad Divorce”)

Your equipment is often your largest investment in a contract, so you would be wise to protect it. I’m not talking about preventing loss or damage – you should have plant and equipment insurance for that – I’m talking about ownership rights and control. If you’ve been asked to sign a generic contract for sale of goods and services, it will almost certainly contain a clause stating that “title” to the “goods” passes to the principal on the earlier of payment or delivery. When you refer to the definition of “goods”, you may find it’s drafted in such a way that it includes your plant and equipment. Many items of plant and equipment in a waste contract are located on the principal’s premises for the term of the contract, such as bins, balers and compactors. You may find that title to your equipment inadvertently passes to the principal under the contract when the equipment is placed on site.

*Bottom Line: if the contract includes a “transfer of title” clause, ensure that it and its related definitions are worded in such a way so as not to include your equipment.

Many contracts contain “step-in rights” allowing the principal to retain possession of your equipment after termination, until the completion of the services (i.e. the end of the term of the contract, as if it had not been terminated). These range from bad to worse. Sometimes they apply even where the contract is terminated for convenience and often they don’t require the principal to compensate you for the dispossession of your equipment. Worse still, you might find that it triggers exclusion clauses in your insurance policy. The worst one I’ve seen actually had the contractor forfeiting ownership of all its equipment as well as any money owing to it under the contract for services already performed!

*Bottom Line: object to any clause that gives the principal the right to maintain possession of your equipment after termination of the contract.

Finally, in relation to protecting your rights to your equipment, you always need to consider the potential application and impact of the Personal Property Securities Act 2009 (“PPSA”). If the contract is longer than two years, then any of your equipment that is placed on the principal’s site could fall within the definition of a “PPS lease”. The effect of this is that if the principal goes into liquidation, you could lose ownership of the equipment, unless you have registered your interest in the equipment on the PPS Register (“PPSR”). Having said that, this could create an administrative burden that is not worth the trouble if the value of the relevant equipment is low (e.g. bins). On the flip side, you wouldn’t want to lose ownership of a compactor or baler simply because you failed to register it on the PPSR.

*Bottom line: If the contract term is longer than two years and you will be placing any equipment of significant value on the principal’s site, make sure you register it on the PPSR and try to include standard clauses in the contract that facilitate the enforcement of your rights under the PPSA.

Recyclables

Recyclables can be treated in one of two ways from a legal perspective. Either you (b) collect and arrange for them to be recycled, processed or treated as “agent” for the principal and rebate any income received as a result back to the principal or (b) buy them from the principal and then do what you want with them and keep the proceeds. This raises two issues. The first is ownership. If, for example, you are bidding for a contract for recycling of materials (e.g. scrap metal) and the contract requires you to pay the principal for the materials at a rate based on the quantity of material collected (as opposed to the value realised), then the financial risk rests entirely on you. In that case, you want to make sure that the contract gives you full ownership of the materials by transferring title to you at the point of collection. If on the other hand, you are simply rebating all or part of the amount actually received from processing the material, then you would be better served by not taking ownership and simply paying a rebate to the principal after the event.

Pricing in the first scenario is relatively easy and is usually based on a well-used market index for the particular material. The price you pay for the material under the contract will usually rise and fall on a monthly basis in accordance with variances in the relevant index. Pricing under the second scenario is always trickier. RFT’s often expect you to quote a rebate amount per tonne for each material type up-front, based on the amount collected. This can be problematic for two reasons: firstly, if you win the tender the price on which you based you quote will inevitably have changed and secondly, it requires you to make an assumption as the realisable percentage of the material collected. Rule of thumb: assumption = risk; secondly, the rebate component in your tender submission will usually be subject to some kind of regular price adjustment, but unless the price is directly linked to a standard materials index, it will be risky.

Many contracts that involve collection of multiple waste streams including recyclables simply don’t address the issue. Rule of thumb: uncertainty = risk. It’s always best of the position is clearly spelt out in the contract, however my view is that if it’s not dealt with, then you are free to keep whatever you happen to earn from processing the recyclables.

Bottom line: if you are paying the principal up-front for recyclable material calculated by reference to the quantity collected, you should ensure that the contract transfers ownership of the waste to you at the point of collection. In you are required to pay any form of “rebate” in relation to recyclable material that you collect, try to ensure that you don’t quote a fixed rebate price in your tender and instead offer to simply rebate all income received back to the principal after the event. If rebate amounts are to be subject to adjustment, try to ensure that the adjustment is done by reference to a well-known standard market index.

Subcontracting

Most contracts prohibit subcontracting without prior written consent of the principal. If you use owner-drivers or any other contractors (i.e. anyone you pay on the basis of their ABN), these are technically “subcontractors”, so you need to obtain consent from the principal for each such contractor prior to their engagement. This is true even though the use of owner-drivers is usually not what the principal is trying to prevent. (Tender Monster #21: “Angry Chihuahua”)

*Bottom line: if you plan on using owner-drivers or other contracted staff, ask for the contract to be amended to exclude them from the prohibition on subcontracting.

Summary

As you can see there are numerous risks that are fairly specific to waste collection contracts. And this doesn’t even begin to cover all of the other legal risks that are generic to all service contracts. It’s not always easy to identify the existence of such risks (“tender monsters”) in a contract or tender package, let alone determine the best way to address them. For the sake of spending a few hundred dollars you would be well served by having the Tender Lawyer review each tender contract and draft appropriate departures before you submit each tender.

Stephen King
The Tender Lawyer
23 May 2019