Contracts in Papua New Guinea can be challenging, according to research from the World Bank. The bank’s Doing Business 2016 survey ranked PNG only 169 out of 189 in the world for ‘enforcing contracts’. It pays to be well informed, says Peter Taimre.

Oceanie Lawyers’ Peter Taimre

The law relevant to contracting in Papua New Guinea and the Solomon Islands has some elements that it may be useful to be aware of when dealing in these jurisdictions.

There are four areas that, in my view, new entrants need to be aware of. These are:

• certification;
• retention of title;
• special taxes;
• defective shipped goods.

Safety is also an important area.

Certification and ROT

If a foreign company ‘carrying on business’ in PNG is not properly certified, its contracts become voidable (able to be treated as unenforceable). This means the counterparty (or Investment Promotion Authority) can apply to treat the contract as void. In the Solomon Islands, while the obligation to be certified is the same, the consequences of failure to comply are not so severe.

‘The average cost of a claim is 110 per cent of the debt’s value: more than double the average in East Asia and the Pacific, and five times the average in OECD high income nations.’

Whether certification is needed depends on an analysis of the term ‘carrying on business’ in each country.

In the Solomon Islands, failure to register documents containing retention of title (“ROT”) clauses as ‘Bills of Sale’ within three weeks renders those contracts void.

In PNG this is not the case, although you will want to register to obtain appropriate priority. An example might be a machinery sale contract retaining title until paid in full.

Special taxes

Both PNG and the Solomon Islands have a withholding tax regime that applies to payments to non-residents doing work in PNG on certain contracts.

‘If goods have been shipped from a place in PNG to another place in the country, the purchaser must confirm any defects to the carrier within three days of receipt.’

In PNG it is called ‘Foreign Contractor Withholding Tax’ and in the Solomon Islands ‘Non-Resident Withholding Tax’.

In PNG, the relevant contracts are those connected with substantial machinery, construction, clearing, scientific equipment and others. Importantly, this catches professional services connected with these categories.

In both countries, the paying party must ensure that the recipient has arrangements in place with the tax authorities. Otherwise the paying party will be liable for payment of the tax of the recipient.

Locally shipped goods

If goods have been shipped from a place in PNG or the Solomon Islands to another place in that country, the purchaser must confirm any defects to the carrier within three days of receipt (including holidays). Otherwise, they will waive the right to any claim against the carrier for damage or partial loss.

‘There is arbitration available and all forms of commercial disputes can potentially be submitted, according to the World Bank.’

All claims for loss and damage against the ship and the carrier are also barred if not brought within one year.

The time and cost of litigation

The World Bank’s Doing Business 2016 Study indicates that it is sensible to avoid contract disputes in PNG if at all possible. On average it takes 591 days to resolve a contract dispute in the country.

The World Bank says the average cost of a claim is 110 per cent of the debt’s value: more than double the average in East Asia and the Pacific, and five times the average in OECD high income nations.

There is arbitration available and all forms of commercial disputes can potentially be submitted, according to the World Bank. However, the Bank reports that valid arbitration clauses or agreements are not usually enforced by the courts.

Peter Taimre is a director at Oceanie Lawyers’ Brisbane office.