Understanding business contracts 9781925215700, 1925215709

Table of contents :
Product Information
CHAPTER 1 — EXECUTIVE SUMMARY
CHAPTER 2 — NEGOTIATING THE CONTRACT
CHAPTER 3 — FINALISING THE CONTRACT
CHAPTER 4 — PERFORMING THE CONTRACT
CHAPTER 5 — CHANGING THE CONTRACT
CHAPTER 6 — ENDING THE CONTRACT BY AGREEMENT
CHAPTER 7 — ENDING THE CONTRACT DUE TO FAILURE TO PERFORM
CHAPTER 8 — ENDING THE CONTRACT DUE TO UNEXPECTED DISRUPTIONS
CHAPTER 9 — PROBLEMS WITH CONSENT
CHAPTER 10 — REMEDIES FOR BREACH AND DISPUTE RESOLUTION
INDEX
A
B
C
D
E
F
G
I
J
M
N
O
P
R
S
T
U
V
W

Citation preview

Product Information Disclaimer No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

About Wolters Kluwer Wolters Kluwer is a leading provider of accurate, authoritative and timely information services for professionals across the globe. We create value by combining information, deep expertise, and technology to provide our customers with solutions that contribute to the quality and effectiveness of their services. Professionals turn to us when they need actionable information to better serve their clients. With the integrity and accuracy of over 45 years’ experience in Australia and New Zealand, and over 175 years internationally, Wolters Kluwer is lifting the standard in software, knowledge, tools and education. Wolters Kluwer — When you have to be right. Enquiries are welcome on 1300 300 224.

Creator:

Harris, Jason, 1975— author.

Title:

Understanding business contracts / Jason Harris and Christopher Croese.

ISBN:

9781925215700 (ebook)

Notes:

Includes index.

Subjects:

Contracts — Australia. Contracts — Interpretation and construction. Commercial law — Australia.

Other Croese, Christopher, author. Creators/Contributors: Dewey Number:

346.9402

ISBN 978-1-925215-70-0 (ebook) © 2016 CCH Australia Limited All rights reserved. No part of this work covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, recording taping, or information retrieval systems) without the written permission of the publisher.

Preface Contracts are an essential part of doing business. Virtually everything that a business does involves entering into a contract. Dealing with suppliers, leasing companies, customers, employees, service providers all involves working with contracts. Although many organisations have contract managers or contract administrators, the rules of contract law are often not fully understood. Contract managers know how to negotiate and work with contracts without fully understanding the rules that make contracts work, and in some cases not understanding the terms of the contract itself.

There is a common perception that contracts are the domain of lawyers, and that contract law is best left to lawyers. From this perspective, contracts are negotiated by businesspeople and written up by their lawyers. While this may reflect a realistic view of business contracting, it is not an ideal or inevitable process. Business contracts are made for businesspeople to work with and it is important that all businesspeople understand the basic law of contract. A basic understanding of contract law can help businesspeople better understand: • When a contract will be binding in law, and when contractual negotiations will not be legally enforceable • What promises made prior to contracting will be legally enforceable and those that will not • When a contract can be varied or avoided • How parties to a contract can minimise their risk if the contract goes bad • How to ensure that the scope and meaning of the contract is consistent with your view of what the contract involved. In summary, a basic understanding of contract law is a valuable investment for all businesspeople. This book discusses business contracts by following the life cycle of a contract from negotiation, to signing, to performance, variation and termination. Our focus is not on the rules of contract law, but on how contract law affects business contracts. This is not a textbook on contract law, it is a handbook for using and understanding business contracts that is written for businesspeople. Jason Harris and Christopher Croese Sydney 2016.

Wolters Kluwer Acknowledgments

Wolters Kluwer wishes to thank the following who contributed to and supported this publication: Managing Director: Bas Kniphorst Content Director: Scott Abrahams Content Coordinator: Farhana Khan Editor: Anne Wardell Cover Designer: Natalie Liew

About the Author/s Jason Harris BA LLB (UWS), LLM (ANU), FCIS Jason Harris is an associate professor in the UTS Faculty of Law where he teaches and researches in the areas of commercial law and insolvency law. Jason has taught contract law to law and business students at UTS, UNSW and the ANU. Jason has written 13 books (including Contract Law in Context with Christopher Croese) and has published over 80 scholarly articles in practitioner and academic journals. Christopher Croese BA CommStud (UoN), LLB (First class honours) (UTS) Christopher has taught and lectured on contract law, commercial law and corporate law at UTS since 2010. Prior to teaching law at UTS, Christopher worked for the NSW Crown Solicitors Office, in the Supreme Court of New South Wales as a tipstaff and as a lawyer with the national law firm, Mallesons Stephen Jaques (now called King & Wood Mallesons). He also co-authored Contract Law in Context with Jason Harris.

Author Acknowledgments Jason Harris thanks his family, Kathy, Ciaran, Erin and Kate for their continuing love and support.

CHAPTER 1 — EXECUTIVE SUMMARY ¶1.1 Introduction Contracts are the oxygen of business. They are essential to the creation and to the success of commercial activity. Contracts are present at every stage of a business life including: • Initial contracts to secure a lease of business premises • Contracts of employment with employees • Contracts with suppliers to secure stock • Contracts with customers to supply goods or services • Contracts with suppliers of services for the business (legal, accounting, cleaning, banking, etc) • Contracts with utilities providers for electricity, gas, telecommunications, etc • Leasing contracts for equipment used in the business • Finance contracts with banks or other financiers to provide finance for the business operations. This list is clearly not exhaustive and only covers general contracts commonly found in many types of businesses. Some of these contracts will be generic or standard agreements commonly found across an industry, others will be highly specialist contracts made to suit the specific circumstances. The law of contract is not subject to one simple code that sets out all of the rules and requirements in one seamless document. It is an ever

evolving body of legal rules made up of two sources of law. The first source is literally thousands of judicial rulings over several hundred years in both Australia and in England. This judge-made law is known as the “common law” and is where contract law began. Second, in modern times legislation enacted by the State and Federal Parliaments of Australia has had a major impact on contract law. Books on contract law tend to be written with law students or business students in mind. These works stress the memorisation and application of what are often strict legal rules. This book is different. Our focus is not on the rules of contract law, but on business contracts themselves. This book is focussed on the nature of business contracts, including how they affect business transactions and what rights and obligations may arise for the businesspeople using those contracts. The law of contract is discussed by reference to the life cycle of a business contract, rather than on the rules that make up the law. We are concerned with how contracts work in real world business transactions. We do this by using real examples of contracts and disputes involving business contracts. This is not a book that will explain all of the rules of contract law to you, but a book that will discuss what legal issues are relevant for the formation, use and termination of contracts. The remainder of this chapter will provide an overview of the contracting process and considers the range of legal issues that can arise. This is provided in a short form executive summary and provides the foundation for the remaining chapters that consider the issues in more depth. This chapter also provides a set of frequently asked questions that are designed to dispel common myths about contracts and contract law. The remaining chapters are as follows: Chapter 2 — Negotiating the contract This chapter discusses the legal issues that may arise during negotiations for a contract. These can include the role and powers of contractual negotiators, the legal status of preliminary

documents such as heads of agreement and letters of intent and the effect of conditions to contract (such as subject to finance and subject to contract conditions). Chapter 3 — Finalising the contract This chapter considers the legal steps required to formally conclude a contractual negotiation and execute a binding agreement. This includes formal writing requirements (where necessary), the structure of the final written documents, identifying the persons actually bound by the contract, and defeating conditions that arise after signing (conditions subsequent). Chapter 4 — Performing the contract This chapter examines the content of the contract, specifically what terms are included in the final agreement and what promises are not part of the contract. Terms that may be implied into the contract are discussed. This chapter also considers the way that courts interpret commercial contracts. A particular focus is the interpretation of exclusion and limitation clauses. Lastly, this chapter discusses how to verify that the terms of the contract have been complied with, including whether the obligations under the contract (such as payment) have been fulfilled. Chapter 5 — Changing the contract This chapter discusses the various ways that a contract can be changed, including how a contract may be transferred from one person to another (an assignment) and how it can be swapped for a substitute contract (a novation). Chapter 6 — Ending the contract by agreement This chapter discusses how a contract may be terminated by agreement between the parties. This is a particularly tricky issue for business contracts, and the drafting of termination clauses and determination of termination events is an important task for businesspeople to understand. A wrongful termination can result in litigation and substantial costs for the terminating party.

Chapter 7 — Ending the contract due to failure to perform This chapter considers the concepts of breaching and repudiating a contract and discusses the potential consequences for both parties. Chapter 8 — Ending the contract due to unexpected disruptions This chapter considers in what circumstances performance a contract may be ended automatically due to unforeseen events that radically impact on performance. Chapter 9 — Problems with consent This chapter considers the range of circumstances that can undermine the genuine consent of one or more of the parties to a contract. The basis for legally enforcing contractual agreements is that the parties have freely entered into the bargain. If one or more of the parties is subjected to duress or undue influence then they have not genuinely consented to the contract and the contract may be invalidated. Similarly if there has been misrepresentation or mistakes concerning the subject matter of the contract then this may justify setting it aside. Lastly, the circumstances may be so unfair that it would be unconscionable to enforce the contract, in which case the court may set it aside. Chapter 10 — Remedies for breach and dispute resolution This chapter gives an overview of the range of legal remedies that may be available where a contract dispute arises. Damages are the main remedy, but injunctions, specific performance and equitable remedies will be discussed in brief.

¶1.2 Executive summary of contract law for business contracts Promises and statements of intention are made every day in business transactions. The law provides a framework for recognising and enforcing promises, but only those promises which the parties intend to be legally enforceable as a binding agreement can establish a legal contract.

A contract is typically entered into by two or more persons (called “parties to the contract”). A person in law can be an individual or a body corporate (such as a company, incorporated association or strata corporation). A partnership is not a separate legal person (it is a group of persons called “the firm”) and so it, of itself, cannot enter into a contract. However, a partner can enter into a contract that they and their other partners will be liable for. It is also possible to have a contract with only one person, which is called a “deed poll”. In order to form a legally enforceable agreement, a contract needs to satisfy the following requirements: 1. An offer must be made. An offer is where a person promises to do something (such as pay money) in return for a promise from the other party (such as sell something or perform a service). The person who makes the offer is called the “offeror” in contract law. The person who receives the offer is called the “offeree”. 2. The offeree must unconditionally accept the terms of the offer. The contract is formed when the acceptance is communicated to the offeror. The offeror may set conditions on how an offer can be accepted (such as by registered post, email, etc). A variation of the terms will make a counter offer that must be accepted for it to have effect. 3. The offeree must agree to give up something in exchange for the contractual offer. In contract law this is called “consideration”. A promise to do something at a later date is sufficient consideration. 4. The parties must intend to create a legally enforceable agreement and intend to be bound legally by it. This is usually assumed in commercial contracts. 5. The terms of the contract must be sufficiently certain and complete that the contract can operate in a commercially sensible manner. If key terms are missing or the language used by the parties makes no sense, the contract will be ineffective. 6. The parties making the contract must have sufficient legal

capacity to do so, which means they must usually be over 18. There are some contracts with minors that will be binding on them. 7. Some contracts must either be in writing and signed by the parties or must be evidenced in writing and signed by the party who has obligations under the contract. The most common category is contracts for the sale or transfer of an interest in land. Increasingly, certain consumer contracts are required to be evidenced in writing as well. 8. The contract must not contain terms that are illegal or require an illegal act to be performed. 9. The parties to the contract must have given genuine consent to enter into the contract. That is, the bargain struck between the parties must not be tainted with undue influence, duress, mistake, misrepresentation or unconscionable conduct. These terms will be explained in Chapter 9 — Problems with consent. Once a contract is formed, the following issues are also important and should be noted: 10. Only the parties to the contract can be bound by it and enforce it. 11. Once the parties have agreed to the terms of the contract there is a binding legal contract and parties must perform when required. The law does not wait until both parties perform their obligations before recognising a binding contract. 12. Failure to perform at all, or to the standard required by the contract, will result in legal liability. The “innocent” party will be entitled to claim damages to compensate for any benefits promised but not delivered, or may be able to have a court order that the defaulting party perform their obligations. Each of these requirements will be discussed in subsequent chapters, but it is useful to give an executive summary now.

1.2.1 Making an offer Whether or not a contractual offer is made will depend on whether a reasonable observer would consider that the offeror was making a contractual offer, not necessarily on whether the offeror actually thought they were making an offer. This means that all of the surrounding circumstances have to be taken into account. This will include what correspondence has occurred between the parties, and what prior dealings they have had with each other. The most important factor is what language is used. Does the alleged offer contain promises or are the statements more general? Are the statements inquiries for further information or to determine potential interest, or do they clearly and definitely state/make an offer? The offer can be verbal or in writing (in printed form or email/text form). The person making the offer is called the “offeror” or the “promisor” (as they are making a contractual promise through the offer). 1.2.2 Accepting an offer The offer can only be accepted by a person to whom the offer is addressed (the “offeree” or “promisee”). The acceptance must be a complete acceptance of the offer and take any form (written, oral, by conduct). Any variation of the terms of the offer will not constitute an acceptance but rather a counter offer, which may be accepted or rejected. For example, if Adrian promises to sell his car to Barbara for $10,000 and Barbara says “Yep, I’ll take it, but for $9,500”, then Barbara has not accepted but made a counter offer that Adrian may accept. An offer cannot be accepted by mere silence so statements such as “if I don’t hear from you by 5 pm tomorrow then I know we have a deal” are not effective to make a binding contract. However, acceptance may be assumed where the offeree/promisee performs their obligations under the contract. The classic indication of acceptance is by signature. Where a party puts their name to a contractual document then they have indicated that they will be bound by the terms found within it. Many commercial contracts require parties to sign a document so that everyone clearly

understands that the contract is on foot. 1.2.3 Giving consideration The simple acceptance of an offer made by someone is not enough to make a legally enforceable contract. The promisee (ie the person accepting the contractual promise made in the offer) must agree to give up something in response to the offer. This is called “consideration” for the contract. A contract without consideration is not legally enforceable as a contract, although it may create other legal rights such as the right to sue for misleading conduct. Consideration does not need to provide fair market value; it must simply be something of value given up by the promisee. A promise to do, or not do, something is sufficient consideration. For example, if a seller promises to sell land to a purchaser on a certain date in return for the purchaser’s promise to pay for it, then both parties have provided consideration, being their respective promises to do something in the future. The consideration does not have to be paid from the promisee to the promisor, for example it may be paid to someone else as directed by the promisor. 1.2.4 Intention to create a legally binding contract The parties to a business contract must intend to enter into a legally binding contract that can be enforced by law. Of course, this only becomes an issue when one of the parties wants to avoid obligations under the contract by arguing that they had no intention to enter into a contract. The law takes an objective approach to this issue so it does not matter what the parties to the contract say was their intention, what matters is what a reasonable bystander would think they intended based on all of the circumstances. In most business contracts intention to contract is assumed as businesspeople normally do not want to waste their time. However, this can be a live issue during contractual negotiations as to the precise time that a binding contract is intended by the parties to begin. This is discussed in more detail in Chapter 2. 1.2.5 Only the parties to the contract can be bound by it

This is known as the doctrine of privity because it means that only those persons who are privy to the contract (ie parties to it) can have enforceable obligations under it. You cannot be bound by a contract unless you have agreed to be bound by it. Equally, you cannot enforce the contract if you are not a party to it, even if one of the parties has promised to do something for you. 1.2.6 Certain contract terms and complete contracts A contract will only be legally binding if it is capable of being enforced by the courts. In order to be enforceable it must provide a complete bargain that can be enforced. If the contract is missing important terms that are necessary for the contract to work (such as who the parties are, what is being bought or sold, the price, etc) then the court will find that the contract is void for uncertainty. Similarly a contract may be unenforceable if its terms are incapable of being given a meaning by the court. Hence, there is risk in contractors using sloppy language in their agreements. 1.2.7 When the contract commences It is important to note that a contract will generally start when the parties conclude their negotiations and enter into the agreement. As noted above, in business contracts this is typically signified by the signature of both parties on one or more documents. For verbal contracts it is common to use words (such as “we have a deal then”) or actions (such as a handshake) to indicate that a contract has been formed. However, the contract itself may provide that it commences at a later time, or that the contract will only commence when a particular event occurs. 1.2.8 Capacity to contract Generally speaking minors (persons under 18) are taken to be incapable of forming legally binding contracts because they cannot necessarily understand the legal consequences of entering into such contracts. This general position has the potential to make it difficult for minors who need to form contracts for employment, housing, obtaining food and telecommunications. Therefore, the law does not automatically void all such contracts, but provides that some contracts

are deemed to be void and some are deemed to be valid. This is discussed further in Chapter 3. 1.2.9 Formal writing requirements Most contracts can be entered into by a verbal agreement but certain types of contracts require some form of writing in order to be legally enforceable. The most important category is contracts for the sale or transfer of an interest in land. Some types of specific business contracts such as those involving consumer credit contracts, certain guarantees in some states and contracts for certain financial services are required to be in writing and to be in a particular form. Even if a contract does not need to be in writing it is important to always record the details of the contract in a document which is signed by the parties. This can help minimise potential disputes about what was actually agreed upon. 1.2.10 Illegality A contract for an illegal purpose (such as to commit a crime) is void for public policy reasons. However, merely because a contract can involve conduct not permitted by law does not mean that it is void for being illegal. This is a complex area and is discussed in more detail in Chapter 4. 1.2.11 Genuine consent Even if all of the essential requirements of a legally enforceable contract are satisfied, it may still be possible to have a contract set aside, terminated or varied if there is something that undermines or removes the genuine consent of the parties to enter into that contract. The law provides a variety of grounds that focus on mistaken agreements, misleading statements, contracts under unfair duress and unconscionability (grossly unfair contracts). This is discussed in Chapter 9.

¶1.3 FAQ: dispelling contract law myths Q1. I don’t have anything in writing so I don’t have a binding contract.

Answer: A verbal contract can be just as legally enforceable as a signed written contract. The problem with verbal contracts is that there is no objective evidence to establish what the terms of the contract are and so any dispute about the contract will need to be resolved by who the court believes more. It is important that all business contracts are in writing to help minimise these problems. Q2. I haven’t signed anything yet so I am under no obligations and can walk away. Answer: The fact that you haven’t signed a contract yet does not mean that you cannot be bound by it. While it is common for business contracts to be accepted by signature, many contracts are accepted by conduct indicating acceptance. For contracts on the internet this may involve clicking “accept” or “ok” after placing an order. For physical contracts, such as supply agreements or contracts for work to be performed, acceptance may be found where you accept the goods or where you allow the contractor to start work. It should also be noted that not all contracts have to be in writing. Q3. I haven’t paid anything yet so I am under no obligations. Answer: A contract usually becomes legally binding once it is fully executed (ie signed or accepted by all parties). This means that even if you have not performed your obligations under the contract, or if the other party has not performed their obligations yet, there is still a binding contract once it has been executed. This is because the agreement involves consideration, which is the exchange of promises under a contract. Once an agreement is made (by an acceptance of a contractual offer) and consideration is provided for, the contract is legally binding, actual payment is not needed to make it a binding contract. Q4. We agreed on something during negotiations so that is binding on both parties. Answer: It is common for discussions during initial negotiations to include statements and sometimes promises and assurances that may not end up in the final written contract. It is possible for a contract to include both written and oral terms. It is also common in business

contracts to include a “whole of agreement” or “entire agreement” clause that states that only the terms contained in the written document form part of the contract, which would therefore exclude any pre-contract promises that were not included in the final contract. It is also important to ensure that any terms agreed in preliminary agreements (such as heads of agreements or letters of intent) are included in the final written contract if the parties want to be able to rely on them. It is common for preliminary agreements to be replaced by the final written contract. Q5. The other side to the contract needs to tell me all relevant information relating to the contract. Answer: This is not correct as a general legal rule. There is no general obligation to discuss important information either under a contract or during negotiations for a contract. If you want to impose a duty of disclosure then you need to ensure that this is a stated requirement under the contract. Q6. The contract means what I think it means. Answer: This may be true, depending on what the contract says and what your interpretation is. Obviously what you think the contract means shapes how you will carry out your obligations under it and how you will view the performance of the contract by the other party to it. If there is a dispute about the operation of the contract then the court will objectively assess the meaning of the words used in the contract, by asking what a reasonable bystander would think the words mean. If it is important to you what a particular word or phrase means then you need to put this in as a defined term in the contract. Q7. The contract is made up of a single document. Answer: This is possible, but many business contracts involve multiple documents that are joined together. It is important that you appreciate what other documents may be part of the contract you are signing and that you read these other documents. It is common to include extensive provisions in standard terms and conditions on a website that are incorporated into all contracts with a particular vendor. It is also common to include terms on invoices,

delivery/consignment notes and in credit applications. Q8. The only relevant parts of the contract are those documents that I sign. Answer: While some business contracts require a signature or initials on each page, this is not required by law. Many contracts will only have a signature block at the end of the contract. Further, many business contracts will incorporate multiple documents. Q9. Once I sign a new document it automatically replaces any prior contract. Answer: This may be correct for contracts that include a term that states this, but for other agreements each contract may be treated separately and have continued operation. It is important to state what the effect of any contract is on prior contracts between the same parties in order to minimise confusion and potential disputes. Q10. Anyone who is named in the contract will be bound by it. Answer: This is only true if the person named in a contract has agreed to be a party to the contract. Simply naming a person is not enough to impose obligations on them under the contract. Q11. The other party to the contract has not performed their obligations so I can walk away from my obligations. Answer: This is not always correct. An innocent party (ie someone who has complied with their obligations under the contract) is generally only able to terminate a contract (ie walk away from it) if the other party has rejected the contract (known as repudiation) or otherwise breached a condition (a condition is an essential term of the contract). If you walk away from a contract that does not involve a breach of a condition by the other party or repudiation by the other party then it is possible that you will be in breach of contract and may be sued by the other party. Q12. I’ve made a mistake, so I can just change the contract. Answer: This is typically not the case. The contract may provide a way for one or more of the parties to change the contract but this will usually involve some form of prior notice to the other party. Some

changes may need the prior agreement of the other party. It is possible that the mistake undermines the genuine consent of the parties, in which case the vitiating factors may mean that the contract will be set aside (discussed in Chapter 9). Once you sign up to a contract you can ordinarily only change it with consent. Q13. I can’t make money out of this contract so I can walk away. Answer: The fact that a contract has become unprofitable for you gives no valid reason for you to terminate the contract without legal penalty. If you do walk away you may be sued for breach of contract. If you are concerned about changing business conditions and your ability to make a profit it is possible to include contingent consideration that will vary depending upon external factors (such as significant changes in costs for one or both parties). Q14. Circumstances have changed and I can’t perform my obligations but it’s not my fault and I’m under no liability. Answer: This may constitute a frustration of the contract if circumstances change beyond the control of the parties and the contract is now radically different from the one contemplated by the parties when they entered the contract. Otherwise, it is possible to include provisions in a contract that will allow for a variation or early termination in certain circumstances, but it is often difficult to anticipate the range of potential changes that can adversely affect the contract. Q15. Unfair terms are not enforceable Answer: This is not correct. Contract law is concerned with upholding the genuine agreement between the parties, not whether the bargain freely entered into is fair to both parties. The law does not rewrite contracts. It just enforces what they parties agreed to. There are aspects of contract law that are focussed on fairness, such as (in very limited cases) an implied obligation to act in good faith, or the range of circumstances that may call into question the genuine consent of one of the parties (such as undue influence or misrepresentation). Increasingly, consumer protection legislation is providing courts with the means to strike out unfair terms and rewrite

unfair contracts.

¶1.4 Contracts v contract law It is important to note that contract law provides a range of formal legal rules, legal remedies and legal enforcement mechanisms. These are unlikely to provide complete satisfaction if the parties to a contract become involved in a dispute about the contract. Legal enforcement processes are notoriously slow, complex and very expensive. For most contract disputes sending lawyers running off to the courthouse is the absolute last resort. It is for this reason that many business contracts now incorporate a dispute resolution procedure that must be followed by the parties if a dispute arises. This may involve mediation and/or independent (noncourt based) arbitration. These processes (known as alternative dispute resolution or ADR) are now a common part of the legal system and are well supported by a broad range of legal and business professionals who act as mediators and arbitrators. ADR processes have the advantage of not being bound by legal rules and in many cases would not need to involve lawyers (or as many lawyers) as a court case. They can provide more holistic relief because they are not limited to legal remedies (such as awards of compensation or court injunctions) and can involve flexible outcomes to suit both parties’ needs. However, ADR processes are not necessarily cheap and may not save time if a settlement cannot be reached (for mediation). Arbitration offers the benefit of a definite outcome (a ruling by the arbitrator) but this may still lead to more litigation concerning the process of arbitration itself. ADR mechanisms are considered in more detail in Chapter 10. In summary, although this is a book that discusses contract law, it is always best to try to negotiate a settlement of any contract dispute. If you take the time to ensure that the contract is clear, understandable to both parties and meets your needs and wants then you minimise the risk of developing a dispute in the first place.

CHAPTER 2 — NEGOTIATING THE CONTRACT ¶2.1 Introduction The negotiation of a business contract can take a broad variety of twists and turns and can come in an infinite variety of forms. Negotiation may be quick and simple, particularly where the contract is to acquire a specific item and the parties have agreed on price. This may involve only two people (the buyer and the seller). Negotiations for large or more complex commercial contracts may take days, weeks or months and involve teams of people on both sides of the deal. Large merger negotiations, government or large corporate procurement contracts and large construction projects are common examples where negotiations may be prolonged and complex. Detailed contract negotiations will often produce a volume of correspondence between the negotiating parties. Some of this correspondence may contain statements and/or promises that could appear in the final contract. What is the legal status of preliminary (or pre-contract) agreements? This chapter will discuss this important and problematic issue. One important issue during contractual negotiations is to verify what authority the negotiators have and to ensure that the persons who sign the contract have the authority to bind their companies or partnerships to the final agreement. It is also important to verify that the parties entering into the contract have the capacity to legally enter into a contract, which is an issue discussed in Chapter 3. Another central issue is what the parties are negotiating about, that is, what is the subject matter of the contract? Are the main obligations under the contract (such as the goods or services to be provided and the price to be paid) sufficiently certain so that both parties to the contract understand what will be required to be done? If one or more

terms of the contract are uncertain, or if the contract appears to be an incomplete agreement then this may affect the enforceability of the contract. It is important that the contract provide for some form of consideration (payment in cash or kind) to be given up in exchange for the promisor’s initial promise under the terms of the offer of contract. Providing consideration for the contract is one way of demonstrating to the outside world that the parties intend for the agreement to be legally binding as an enforceable contract. Only contracts willingly entered into by parties intending to be bound by them are legally enforceable. Lastly, it is important during contract negotiations that both the subject matter of the contract and the method by which it will be performed are not illegal under general law or under an Act of parliament. These issues will be considered in this chapter. The next chapter (Chapter 3) then moves onto finalising the contract so that a binding agreement is put into place. Chapter 4 then discusses the performance of the contract before we move onto changing the contract and various methods of ending the contract.

¶2.2 Who is negotiating the contract? In most business contracts the person who negotiates the deal is also the person who signs the contract. For large contracts it is possible that one or more specialist negotiators will undertake the initial bargaining and then senior executives or the board of directors (via a board resolution) will be brought in to complete the contract negotiation. It is important to verify that the person you are negotiating with is authorised to participate in the negotiations, and whether there are items that this person(s) need to have approved by superiors. In Chapter 3 we discuss some specific issues that arise when entering into a contract with a company, partnership and trust. One particularly important issue for negotiations is the authority of agents to bind their principals to a contract.

An agent of a business can be someone who works for a business such as an employee, executive and (for companies) managing director and/or CEO. An agent may also be someone who does not work for the business, but rather is a third party acting as an agent (such as a real estate agent, a stock and supplies agent or a stockbroker). When negotiating a contract with an agent (whether internal or external) the question of the agent’s authority will determine whether they can enter into a binding contract on behalf of their principal. Contracts entered into by an agent within the scope of their authority will bind the principal, even if the principal does not sign the contract. Agents will have actual authority given to them by their principal. Actual authority might take the form of a contract granting authority, specific directions or delegations of power or may be implied from the circumstances (ie where necessary for the agent to perform their role). A more problematic form of authority (but still equally binding) is known as apparent authority. This is authority that agents of this type usually have and where third parties would expect the agent to have that authority, and rely on that assumption, but where the agent does not actually have that authority. These situations tend to involve circumstances where the agent’s authority is expressly limited (for example up to a specific monetary amount) but the third party is not made aware of that limitation of authority. Apparent authority usually arises from the specific position occupied by the agent (such as managing director, company secretary, chief financial officer, general manager, etc).

Example: Aztec Mining Aztec Mining NL is a coal mining company in the Hunter Valley of NSW. You are working for a mining supplies business and receive a visit from Bill whose business card says that he is the company secretary for Aztec. Bill wishes to enter into a long-term leasing contract for large and expensive mining equipment. If you signed a contract with Bill would this bind Aztec Mining? Probably

not, because it is not a common task for the company secretary to negotiate large commercial contracts. That is a management task, not an administrative or governance task. It would be different if you were negotiating with Bill to hire a venue to hold the company’s annual general meeting (which is commonly organised by the company secretary). As company secretary, Bill has actual and apparent authority but this would not usually extend to management decisions. You should ask for a board resolution approving the contract or to have a director co-sign the contract with Bill.

¶2.3 What are the parties negotiating about? 2.3.1 Balancing specific v general statements When negotiating a contract it may be ideal to have every term fully discussed and agreed upon before placing these into a clearly written document that is signed by both parties. However, this is rarely the case in business contracts because fully negotiating every potential risk and desired outcome takes a lot of time and resources and can result in frustration if negotiations get bogged down in detail. Many business contracts are negotiated by focusing on what the parties are likely to agree about so that some consensus, goodwill and cooperation is developed. The parties then move onto negotiating more difficult terms. It is possible that some of the early agreed terms may be capable of forming their own separate contract if the more difficult issues cannot be agreed upon, or it may be that everything needs to be agreed before any contract can be entered into. Another approach is for the chief negotiators to focus on significant and difficult items so that the back of the negotiations can be broken before delegating less important and more straight forward issues to be negotiated by junior negotiators. Whatever approach is used it is important that the negotiations result in:

• The subject matter of the contract being clearly agreed upon • The price to be paid is agreed upon, or a mechanism for determining the price is agreed upon • The exact parties to the contract are identified and consent to be bound by the contract • The duration of the contract is agreed upon, or a mechanism for bringing the contract to an end is agreed upon. • The parties agreeing when the contract will commence. Of course this is only a simplified list of what may be important in a particular business contract. The essential terms for the contract to have practical operation need to be agreed upon by the parties in order for there to be a binding contract. If a contract is missing one or more essential terms then the court may find that there was no objective intention of the parties to turn their negotiations into a legally binding contract. Alternatively, the court may find that the bargain was simply never concluded. Either way, the contract would not be enforceable and your efforts in negotiating and agreeing upon the deal may be wasted. Of course, many contracts are fulfilled by the parties without needing to be “legally enforceable”. But you usually only find out whether the contract is enforceable when a dispute arises and that is the time when you need it to be legally binding. 2.3.2 Incomplete contracts How do you determine if your contract is incomplete and therefore potentially unenforceable at law? The law requires that contracts be read and interpreted by the standard of an objective businessperson. A contract will be incomplete when the terms of the contract, both those in any written agreement and those agreed verbally (if any) taken together, are incapable of being enforced because one or more terms that are essential to its operation have not been agreed upon. The courts are reluctant to strike down commercial bargains on the basis of arguments that the bargain is incomplete. The court will

attempt to enforce part of the bargain if it can stand on its own terms and produces a commercially sensible result for the parties based on what has been agreed upon in the contract. As to what number of terms will be required to make up the essential terms of the contract so as to avoid a finding that the contract is incomplete — that will be different for every contract. The court will look at the correspondence between the parties, the documents used by the parties and the surrounding circumstances to establish what the terms of the contract are and will then assess whether the terms comprise a whole and enforceable agreement. It is also possible for the parties to leave certain matters for determination at a future time. This is common in framework agreements which may set out only a few key terms, with the balance of the agreement to be agreed upon at a later date. The balance of the provisions must usually be consistent with the terms of the framework agreement. A question may then arise as to whether the later agreement incorporates the terms of the framework agreement or whether it replaces the earlier agreement. Preliminary agreements such as framework agreements are discussed further below. One common issue that arises with incomplete contracts is where the contract states that it includes some standard set of terms and conditions and then there are problems identifying exactly which standard terms and conditions are included. If the court cannot determine which terms and conditions are incorporated then it may be that no external terms and conditions are included which may leave the contract being incomplete and incapable of enforcement.

2.3.3 Incorporation of standard terms tips It is important that where the parties wish to incorporate standard terms and conditions from an external document that they specifically identify that document and consider providing for the possibility of severance if those standard terms are not included.

2.3.4 Uncertain terms A contract may contain one or more terms that do not have a single definition. Where there are multiple interpretations that may be given to a single term then it has an uncertain meaning. Courts will try to resolve this uncertainty and give the words a single meaning by the ordinary process of interpretation as discussed in Chapter 4 (¶4.7). However, sometimes the parties may express themselves so ambiguously or in such a confused and contradictory manner that the court struggles to work out exactly what the parties meant. While the courts will approach the task of contractual interpretation by trying to uphold commercial agreements where it is possible to do so, they will not develop their own interpretation of a contractual term if the parties have chosen not to do so themselves. It is not the role of the courts to determine what the bargain is between the parties. Where there is uncertainty as to the meaning or effect of a particular term it is possible to include in the contract a mechanism for external determination of what the meaning is. For example, a dispute concerning the operation of the contract may be referred to an external arbitrator for determination. Where this is provided for then the contract can be enforced and hence it is not uncertain. 2.3.5 Severance clauses The parties to a contract can assist the process of enforcing contracts with potentially incomplete or uncertain terms by including a severance clause. A severance clause provides that the parties agree that if one or more terms is struck down or cannot be enforced then they intend for the remainder of the contract to continue in operation if possible. Of course this requires that the remainder of the contract can continue in operation without the terms that are severed, which is not always possible.

¶2.4 How do you know when there is binding contract? 2.4.1 Contractual and non-contractual statements The foundation of all contracts is an agreement between the parties over the subject matter of the contract, and an intention by both

parties that the terms of the contract will be legally binding on them. This is often expressed as a need for an offer and acceptance. One party makes a contractual offer that is capable of being accepted by a person to whom it is directed. Once the offer is accepted unconditionally there is usually a binding contract, unless the parties determine that the contract will start at a later date.

2.4.1.1 Contractual offers tips A contractual offer does not need to be in writing, neither does an acceptance of a contractual offer, unless the terms of the offer state that it can only be accepted in writing.

2.4.2 Reaching agreement (offer and acceptance) 2.4.2.1 What constitutes a contractual offer? An offer usually consists of a promise to do something by the offeror to the other person (the offeree) if they do something. For example, “I will pay you $1,000 for your watch if you agree to sell it to me.” A contractual offer must be sufficiently clear and definite that it is capable of being accepted by the person to whom it is directed. The offeror must intend to be making a contractual offer, which may be assumed based on the circumstances. When business people make statements in the nature of a clear and definite promise they will usually be assumed to have the intention to enter into a contract. In contrast, if a government authority undertakes to provide some form of financial support, that might not be a contractual offer but rather a statement of intended policy that may be subject to change depending on a range of social, economic and political factors. If the terms of the proposed offer are equivocal or allow for some discretion as to whether a contract will be implemented then this is unlikely to be a contractual offer. 2.4.2.2 Contrasting a contractual offer from non-contractual statements

In business contracts there may be a variety of statements, undertakings and requests for information and clarification that do not satisfy the criteria to establish a contractual offer. Requests for information or clarification, invitations to submit tenders and calls for expressions of interest are all usually taken to be not contractual offers. One common distinction is between what is called an “invitation to treat” and an offer. An invitation to treat is really an expression of interest as to whether the other party may be interested in entering into negotiations for a contract.

Example: Orion Pty Ltd Orion Pty Ltd receives an email asking “would you sell 100 widgets at $50 per unit?”. This question is not a definite and unequivocal promise “if you agree to sell 100 widgets to me I will pay you $50 per unit”. The former is asking whether Orion is prepared to sell the widgets at that price per unit. If Orion responds with “yes”, there is no contract at that point because the original question was merely an invitation to treat — an invitation to enter contractual negotiations. Orion is not binding itself to selling the widgets to that person or for that price. Orion may respond by saying “If you place an order for 100 widgets we will sell them to you at $50 per unit” which would be an offer that the customer could accept or reject. If the customer responded with “would you take $45 per unit?” That would be a counter offer and would not be an acceptance of the offer by Orion for $50 per unit. It would be common for Orion to respond to the original inquiry by stating “yes, please complete an online order through our website”. In such a case if the customer made an online order then this would be the offer which Orion would accept by confirming the order. A mere acknowledgement of receipt of the order is not itself an acceptance.

Determining when an offer is accepted is important because it is at this point that the contract becomes binding. If an online or phone order was accepted immediately then there would be a binding contract at that moment and the supplier would be liable for breach of contract if they had insufficient stock to fulfil the order. That is why a mere acknowledgement is given initially and this is usually followed up by a formal acceptance and confirmation of the order and estimated delivery time. Catalogues, newsletter order forms, newspaper or television advertisements and store display windows are all typically classified as invitations to treat and not contractual offers. Another area where contractual offers are unlikely to be found is where an advertisement makes an extraordinary claim about a product. The classic example is an advertisement for toothpaste that says it will make your teeth “whiter than white”. This type of exaggeration is known as “puffery” or an “advertising puff” and is not intended to be a contractual offer. Of course, if clear and certain promises are made about a product that are untrue then this may give rise to issues relating to misleading conduct which comes within the scope of the Australian Competition and Consumer Commission’s role. 2.4.2.3 Who can accept an offer? A contractual offer can only be accepted by a person who is in the class of persons to whom the offer was made. An offer may be made to a specific person, in which case it can only be accepted by that person. If another person tries to accept the offer and communicates this to the original offeror, then this will simply be a new offer that the original offeror can choose to accept or reject. A contractual offer can also be made to a class of persons (for example all persons reading the Age newspaper or all persons who visit a particular website). In this situation, acceptance may need to be limited otherwise the offeror may receive more acceptances than they can deal with. An offeror can limit the acceptance to the first five customers whose acceptance is received in writing at a given address before the closing date of the offer.

Contractual offers made to large classes of people, potentially to the whole world, are often set up so that notice of acceptance prior to acting on the obligation is not required. Acceptance will be notified once the obligation is performed and notice is then given to the offeror. This is common for consumer competitions that require the purchase of some small item, which then constitutes the acceptance of the terms of the competition. The consumer sends in notice of acceptance to claim their benefit or prize. The acceptance must be of the specific offer. A person cannot accept an offer after performing the obligation ignorant of the offer. The performance must be in response to the offer and therefore be an acceptance of it. 2.4.2.4 When and how can an offer be accepted? An offer can be accepted at any time during the period that the offer remains open. It is possible for an offeror to rescind the offer by communicating with the audience to whom the offer was made using the same method of communication (eg advertising in the same newspaper or via post or email). An acceptance made after the offer period has closed or been rescinded will really be a new offer that the original offeror can either accept or reject. The offer may set out any number of conditions and processes that have to be followed in order for the offer to be accepted. Where no conditions are specified, it is assumed that the method of communicating the offer to the offeree may be used to communicate acceptance. So if an offer is made over the phone, the offeree may accept via a phone call. If an offer is made in writing then acceptance may be in writing. It would be good practice to ensure that acceptance is communicated by making a phone call and/or email to communicate acceptance as well as responding in writing (for written offers). There is a legal rule that provides where acceptance by post is made the date of acceptance is the date of postage, not when the letter is actually received. This is a risk for offerors who may become bound by a contract before they actually receive acceptance in the post. This risk can be removed by requiring in the terms of the offer that acceptance must be actually received by the offeror (and stating how

acceptance is to be received). It is not possible for an offer to provide that a failure to reject will constitute acceptance. Mere silence can never be a form of acceptance. However, silence combined with performance of the undertaking required by the contract or acceptance of the benefit under the contract may allow the court to infer that acceptance has been given. 2.4.2.5 The battle of the forms The battle of the forms refers to the situation where a series of offers and counter offers are made using the standard terms and conditions of each party. In such a case it may be that the conditions of one party will prevail, or that the contract will include a combination of both sets of terms (providing they are not inconsistent) or even that there is simply no agreement between the parties.

Example: ABC Manufacturing ABC Manufacturing Pty Ltd receives an email order from Acron Pty Ltd for the production and delivery of 10 pallets of widgets by 1 March 2016. Acron’s email states that it is subject to Acron’s standard terms and conditions available on its website. This is a contractual offer by Acron. ABC emails back stating that it has received the order and will process it. ABC’s email states that it is subject to ABC’s standard terms and conditions available on its website. At this point there may be no agreement because ABC has not unconditionally accepted Acron’s offer. By sending acceptance subject to its terms and conditions ABC has technically made a counter offer which has yet to be accepted by Acron. If Acron simply accepts the goods and says no more then it will be taken to have accepted the contract and will be bound by ABC’s terms (as the last terms used before acceptance). ABC can further confirm the use of its standard terms by having Acron sign a delivery note with an invoice attached which both state in clear terms that the terms of the contract include ABC’s

standard terms and conditions. ABC could also send an email confirmation of despatch of the goods and include a reference to the standard terms and conditions relied upon.

2.4.2.6 Entire agreement clause tips It is important that a contract provide what effect it has on prior terms discussed and agreed upon. If the final contract signed contains an entire agreement clause and excludes all prior terms and agreements then the terms contained in that signed document will prevail. Of course contracts by electronic communication make this a little tricky, but clear and legible statements of what terms apply is always a good idea.

2.4.3 Commercial issues to consider The traditional law of offer and acceptance is suitable for many simple and straightforward contracts for the one-off provision of services or purchase of goods. When you make a purchase order on the website of a retailer or supplier you are making an offer which is then accepted by the retailer or supplier, at which point there is agreement. However, it should be noted that the law requires agreement for a contract, it does not require that the words offer and acceptance be used. In many commercial situations it may be difficult to determine a specific offer and acceptance and that will not prevent a contract forming. Agreement may be inferred from the circumstances and by the conduct of the parties. For example, if you order goods online from a retailer you are making an offer (just as you are making an offer when you present goods for purchase in a bricks and mortar store), which may be accepted by email acceptance, or may be accepted by delivering goods to your stated address together with an invoice. The fact that you receive the goods is demonstration of agreement between you and the retailer. In complex commercial dealings, where there are often a number of

promises, statements and undertakings made, the courts will (if necessary) recognise an agreement based on the circumstances after making an objective assessment.

2.4.3.1 Making note of when contract entered tips It is useful if you believe that you have made a contractual offer, or if you believe you have accepted a contractual offer made by someone else, that you give written confirmation of your belief and that you keep a copy of this. That way if there is any dispute about whether a contract was entered into you have evidence that can be assessed objectively, as opposed to simply your recollection of the correspondence.

¶2.5 The consideration for a contract In order for a contract to be legally binding it must provide for consideration to be given in exchange for the fulfilment of the promises made by the promisor. In many business contracts consideration is found in the exchange of promises by both parties.

Example: Metalco Ltd Metalco Ltd and Scrap Ltd have decided to enter into a joint venture agreement. Under the terms of the agreement Metalco will contribute logistics and processing facilities up to an agreed value while Scrap provides scrap metal up to an agreed value. The materials produced by the joint venture are then split 60/40. In this situation Metalco’s promise to provide logistics support and processing facilities is given in exchange for (ie in consideration of) Scrap agreeing to provide scrap metal. Similarly Scrap’s promise to provide scrap metal is given as consideration for Metalco’s promises.

Consideration must be something given up by the promisee, that is, the person to whom the contractual promise was made and the person who accepted the contractual offer. This is because the consideration is made to support the enforceability of the contractual promise. Consideration need not be given to the promisor directly. For example if Scrap supplied scrap metal to Metalco, Scrap could request that Metalco pay someone other than Scrap for the materials (presumably someone else who Scrap owes money to). Because consideration must be given in response to the promise, the giving of consideration cannot pre-date the making of the promise. Consideration given before the promise was made is called “past consideration”.

Example: Alex Alex gives $100 to his friend Mary. After giving Mary $100, she promises to give him her watch as consideration for the $100, which he accepts. This promise is not a binding contract because the consideration pre-dated Mary’s promise to transfer the watch.

Example: Elliot Elliot is the successful bidder at a stock auction where he purchased a healthy looking bull. After the hammer falls Elliot is inspecting the bull and he asks the seller if the bull is suitable for breeding, to which the seller says yes. If the bull is sterile (and hence not suitable for breeding) Elliot cannot enforce the promise made by the seller after the sale transaction was entered into (ie after the auction hammer fell) because that would be past consideration for the promise.

Similarly, if there is a pre-existing duty to undertake work or perform some action, a further promise to perform this duty or work will not be valuable consideration.

Example: Max Max is concreting a driveway for a client Amelia and the price is agreed at $5,000. Amelia is concerned that the driveway will not be ready for her weekend BBQ so she promises to pay Max an additional $1500 if he can finish by Friday which he accepts. Amelia is not required to pay Max the additional money because he had already agreed to perform the work hence he was providing no new consideration to enforce the new promise. The result would be different if Amelia was asking Max to perform his obligations in a different way, for example by working longer hours or by using additional labour. That would be valuable consideration.

Example: Acorn Pty Ltd Acorn Pty Ltd owes $100,000 to Eastwest Finance Ltd which is due to be repaid in six weeks. Unfortunately Acorn cannot repay this in this timeframe so it requests additional time to pay. Eastwest Finance says that if Acorn can pay half of the money on time then it will give Acorn another six months to pay the balance. Acorn pays half of the money on the due date. This would not prevent Eastwest from taking action to recover the balance. The promise to give six months additional time was not supported by consideration because Acorn was already under a duty to pay all of the money by the due date. The answer would be different if Eastwest had asked Acorn to vary its payment terms such as by paying earlier than agreed, or by paying additional interest or by paying in cash rather than via electronic transfer. A variation of

the agreement may provide sufficient consideration to support the new promise.

There is a still developing legal principle known as the “practical benefit principle” which states that if the promise confers a practical benefit on the promisor then this may be sufficient consideration to vary the agreement. This principle works in the context of variations to a contract and is discussed in Chapter 5 (¶5.3.2). In business contracts it is possible to avoid problems with insufficient consideration by requiring the party to make the promise in a formal deed as a deed does not require consideration to be enforceable. Although consideration is most often given in the form of monetary payment for goods or services provided, consideration is not limited to payment. It can involve giving up anything of legal value. For example, Alex agrees to give his car to Mary if Mary agrees to drop a law suit that she has against Alex at the time. Mary giving up her legal rights to sue is valuable consideration to enforce the promise by Alex to transfer his car to Mary. Consideration must be something of legal value, but it need not bear any resemblance to the market value of the transaction. A parcel of land can be sold for $1 and that will be legally enforceable as a contract. However, if the price paid for a transaction is significantly below market value then this may lead to questions about whether there has been some unconscionable dealing or unfair transactions between the parties. Unconscionable dealings are discussed in Chapter 9. One last issue that can arise with consideration in commercial contracts is where the consideration is subject to conditions that are within the discretion of one of the promisees providing the consideration. If the consideration is uncertain or subject to being withdrawn at the whim of the promisee then the court may consider that the consideration is illusory and the contract will fail for lack of consideration.

2.5.1 Dealing with a failure of consideration If there are concerns about a failure of consideration, the most straightforward way to address the concerns is to cause the party who might not be providing sufficient consideration to enter into a deed, which does not require consideration in order to be enforceable. Other ways to enforce promises without providing contractual consideration include: • Establishing an agency relationship — the agent owes duties to the principal even where the principal has not provided consideration (ie a voluntary agent still owes duties to the principal) • Establishing a trust — a voluntary trustee owes duties to the beneficiaries • Establishing a fiduciary relationship — a fiduciary owes duties to the principal even where there is no enforceable contract between them • Entering into a bailment over goods — a bailee who takes possession of a bailor’s (owner’s) goods owes duties to the bailor even where they are not paid. The reason why promises in the above contexts may be enforceable is because they are duties imposed by areas of the law outside of contract law. Another significant area of law that may be useful for dealing with problems of consideration is the principle of estoppel. This is a legal rule that provides that a person who makes a statement or promise which may not be legally enforceable as a contract may be prevented from avoiding the statement or promise where: • The innocent party assumed that a legal relationship (eg a binding contract) existed or would come into existence • The innocent party acted to their detriment by relying on the assumption

• The other party encouraged and induced that assumption and knew that the innocent party was acting to their detriment based on the incorrect assumption • The innocent party will suffer harm if the assumption is not upheld • The other party has acted unconscionably in failing to uphold the assumption.

Example: RetailCo Ltd RetailCo Ltd wishes to lease new premises and engages in a lengthy negotiation for a lease from LeaseCo Ltd. RetailCo is concerned about having the property ready for the busy Christmas period and expresses this concern to LeaseCo. LeaseCo tells RetailCo that “we are confident the lease contract will be ready to sign next week, you can terminate your existing lease and make preparations to move your stock and fittings in next week”. LeaseCo knows that RetailCo is acting on this statement and has terminated its existing lease and booked removalists to move its stock into the new store at considerable expense. LeaseCo then changes its mind and decides not to lease the store to RetailCo. When RetailCo argues that LeaseCo is in breach of contract by failing to lease the site to them, LeaseCo responds that there is no contract yet and no consideration (ie rent) has been paid. While this may mean there is not a legally enforceable contract, RetailCo may take action against LeaseCo under estoppel to prevent LeaseCo from avoiding the correctness of the assumption that it actively encouraged RetailCo to adopt to its detriment. This may result in LeaseCo having to lease the store to RetailCo or to pay compensation to RetailCo.

Estoppel is not available merely where commercial expectations are

frustrated. It requires unconscionable conduct by the party who encourages the assumption. The unconscionable conduct required is where the promisor intends the promisee to rely on their promise, and the promisee acts to their detriment in relying on the promise. It would be unconscionable for the promisor to deny the promise if they encouraged the promisee to detrimentally rely on their word.

¶2.6 Intention to contract 2.6.1 General It is not enough that the parties reach agreement on the terms of a contract, the parties must also intend to have those terms form a legally binding contract. For commercial agreements it is usually assumed that the parties do not intend to waste their time and resources negotiating agreements that would not have binding effect. If a person wishes to argue that an operative commercial agreement was not intended by the parties to be binding they will have a tough argument in court to prove this. Where intention to contract usually becomes an issue is in relation to preliminary agreements and pre-contractual representations. During the negotiation phase of a contract there are often promises made and agreement may be reached between the parties as to certain matters. This raises the question of whether the preliminary agreement is intended by the parties to be binding in and of itself, or whether they intend that the preliminary matters will only become binding once they are incorporated into a formal contract at a later date. It is also possible that the parties intend that the preliminary matters will be immediately operative, but that they will be replaced by terms in the formal contract when that is executed at a later date. This is an area of contract law that will be determined according to the precise wording that the parties use for their preliminary agreements in the circumstances. Preliminary contracts are discussed below. Another category where intention to contract is often raised is in relation to so called “letters of comfort”. These are letters that are provided by parent companies or major shareholders or directors of

companies that are provided to creditors of the company that it is the policy and intention of the provider of the letter to ensure that the company will continue to have sufficient funds to continue to pay its ongoing financial commitments. At one extreme this can take the form of a legal guarantee which is legally binding and will be a contingent liability against the provider of the letter. At the other extreme are letters of comfort that are no more than vague statements of intention but are not intended to be legally enforceable. The language used in the letter will be critical: does it provide definite promises or only statements of intention or policy?

2.6.1.1 Letter of comfort tips If you are concerned about the enforceability of a letter of comfort, try asking the provider of the letter to give a formal guarantee. If they refuse then that tells you whether they wish to be bound legally by the statements made in the letter of comfort.

2.6.2 Preliminary documents A preliminary agreement may take many forms and may be called a variety of things: • heads of agreement • framework agreements • letter of intent • agreement to negotiate in good faith • agreement to continue negotiating. It is a general legal rule that an agreement to agree upon a contract at some future date is legally unenforceable because it is too uncertain to give rise to definite legal rights that can be enforced. An agreement to negotiate in good faith is on only marginally better footing, unless the terms of the negotiation agreement provide concrete and definite

obligations on the parties. For example, there may be a requirement to participate in negotiations for a particular duration or to meet with particular persons. The more detailed obligations that are contained in the negotiation agreement the more likely it will be held to be enforceable. An agreement simply to continue negotiating would be likely to be unenforceable as it is too vague and uncertain. Letters of intent do not fare much better, again unless they are framed in definite language that imposes actual obligations on the parties. A framework agreement may be in a different category because it will usually provide agreed terms that impose duties and obligations on the parties that will effect how they enter into subsequent contracts. The wording of a heads of agreement will determine whether it demonstrates an intention to be binding as a contract. It is typically used as a temporary document that records what is agreed upon up to a particular point in time. If several documents will be generated it is important to keep track of what preliminary agreements remain operative by specifying in each new document what its effect on preexisting agreements is intended to be. For example, a clause can be included that provides the heads of agreement dated 1 February which replaces all prior documents, agreements and understandings. It is preferable for the document itself to state whether the parties intend it to be binding, and if so from what time and for how long? For example, the parties may intend that the document is operative immediately, is operative only if incorporated into a formal legal document signed by the parties, or is only operative once a final contract is fully negotiated and executed. As always the assessment of whether the parties intend the contract to be binding will be based on what a reasonable businessperson would believe having regard to the wording of the relevant documents, the conduct of the parties and the surrounding circumstances.

2.6.2.1 Preliminary documents tips Always strive for clear and definite wording in your contract so as to minimise the need for the court to rely upon standards of a reasonable businessperson. If your contract

clearly expresses the parties’ intentions then this will be hard to overturn if a dispute arises. The parties can also try a number of strategies to ensure that they have enforceable rights. These can include: • Purchasing an option contract to ensure that the terms of the preliminary agreement are kept open for a period of time • Purchasing pre-emptive rights or a right to submit the final bid if the transaction involves a purchase/sale or tender arrangement • Negotiating confidential, exclusive access to confidential information (such as setting up a private data room), asset lock up agreements and/or no shop and no talk clauses in the preliminary agreement. This can help protect the rights and first mover advantage that a purchaser has in negotiating a transaction.

¶2.7 Illegal contracts Even if all of the requirements of a binding legal contract are satisfied, a contract might be unenforceable where it is affected by illegality. The concept of illegality is broad, and covers contracts that are simply of no effect (void) due to public policy, to those contracts which may be set aside or varied due to breaches of legal rules. A contract may be affected by illegality where: • It involves performance or subject matter that is prohibited by law • It involves the commission of a crime or other wrong (such as civil trespass or conspiracy) • It involves subject matter that is against public policy. The effect of illegality may commence when the contract is entered into, or when the contract is performed. Illegality by performance may arise either where the contract cannot be performed legally (for example, a contract to dump industrial waste in a river rather than through a chemicals processing unit) or where the contract can be performed legally but one of the parties decides to perform their obligations in a manner that is illegal. Some contracts affected by illegality may simply be void and of no

effect because they are not recognised or enforceable in law (such as contracts to commit a crime or a contract to promote corruption or defrauding the government) or where an Act of parliament prohibits certain contracts (such as supplying liquor to a minor or selling firearms to a person without a proper permit). If a contract is void at law that means it cannot generate any legal rights for either party. If a contract is not void, but rather is capable of being set aside by the courts due to illegality then this means that rights created by the contract may still exist. For example, if an Act of parliament prohibits the giving of consumer credit without a credit license. If a consumer receives credit from an unlicensed credit provider that does not mean that the contract is void because that would prevent the consumer from exercising any rights on the contract which may unfairly prejudice them. Rather the contract may be set aside by the court due to illegality (ie non-compliance with credit laws). One particularly important category of contracts illegal for public policy is contracts in restraint of trade. These contracts are used in employment contracts, contracts for the sale of a business and in certain licensing, agency and franchise agreements. Contracts in restraint of trade are voidable (ie capable of being set aside) not void from the start. The courts assess these contracts by reference to the reasonableness of the scope of the restraint. This will be determined by reference to the need for the restraint and the interests that will be protected by the restraint. For example, if a person buys a business and pays consideration for the goodwill it would lower the value of the business if the seller of the business could simply exit the business and set up competition next door. Restraints of trade within a reasonable area and for a reasonable time will be upheld for contracts for the sale of a business. For example, it may be reasonable to restrict the seller from setting up a competing business for 12 months, but it may be unreasonable to restrain them for 12 years (depending on the nature of the business). Similarly, a person who buys a news agency may restrain the seller from setting up a news agency in the same area, but could not expect to restrain them from setting up a news agency anywhere in Sydney or indeed to restrain them from setting any other business that does not compete.

Restraints relating to employees are also assessed using standards of reasonableness but the period and scope of restraint is likely to be less than for a sale of a business. This is because a person should not generally be prevented from working. It is common for professionals to be restrained post-employment for a limited period (6–12 months depending on the industry) provided that the restraint is in their contract of employment and they receive consideration for the restraint. A restraint during ongoing employment is seen to be more reasonable as the employees are paid to work for their employer and not for someone else.

CHAPTER 3 — FINALISING THE CONTRACT ¶3.1 Introduction Once the parties to a contract have completed their negotiations it is time for the contract to be finalised. The finalisation of a contract involves a number of legal issues that will be discussed in this chapter, including: • What the contract may look like • Whether it will include multiple documents • The relationship between the signed contract and prior agreements • How to identify who is bound by the contract • The importance of signatures • The legal capacity of different persons and business to sign the contract • Whether the contract needs to have a particular format • The effect of conditions to a signed contract.

¶3.2 Structure of the contract 3.2.1 Formatting Generally speaking, there are no legal requirements that all contracts must conform with in terms of how they are structured. Contracts are based on the mutual consent of both parties to the agreement and the

parties can have the contract look however they think appropriate. Indeed, many contracts are not in writing at all but rather are simply verbal agreements (sometimes called “handshake agreements” although a handshake is not necessary for it to be binding). There may be many reasons why a business contract would not be in writing, such as: • You trust the other party to the contract to fulfil their obligations and do not feel the need to have a signed written agreement • The contract is simple, like a purchase of a good • The contract needs to be implemented quickly and you do not have time to negotiate a signed contract • You do not want to involve lawyers • You do not see the value in a signed contract and you prefer not to use them • You feel that a signed agreement will make the contract too formal. Many business dealings are undertaken without formal written contracts. Some businesspeople are known to say “I never sign contracts” and prefer the motto of “my word is my bond”. As will be discussed below, this approach only works so far because some types of contracts are required to be in writing otherwise they are not legally enforceable. This approach can also lead to unnecessary costs and delays if a dispute arises.

3.2.2 Formatting tips Although it is possible for business contracts not to be written, it is important that you make your contracts in writing and have all parties sign. This reduces the risk that you will end up in court disputing the terms of the agreement. In the absence of a formal written contract that is signed, a potential alternative is to record the terms in writing as well as an acknowledgement by all parties of the agreement. For example, recording terms in an email and asking the other party to indicate their acceptance.

3.2.3 How contracts are put together The parties to a written agreement are generally free to structure the agreement however they feel appropriate. That said, a large number of business contracts will come in standard formats that are commonly used for certain types of contracts or in certain industries. Some industry associations provide standard form contracts for their members. Some companies have their own standard form agreements which are to be used. Although there is a variety of ways to structure a contract, most written contracts will provide for similar matters such as: • the parties • the main obligations under the contract • timing of performance, and • the price of the goods or services to be delivered under the contract. These are substantive provisions that are usually required in order for there to be a binding contract. For example, if it is unclear who the parties to the contract are then how can the court enforce the agreement? The nature of these substantive provisions will be discussed further in Chapter 4 when we discuss performance of the contract by the parties. It is important to appreciate that written contracts will usually include two types of provisions and these may be set out in different places within the document or documents that make up the binding contract: a) substantive provisions b) machinery provisions. Substantive provisions go to the heart of the agreement; they are literally what the contract is about. What have the parties agreed upon

as their obligations under the contract? It is common for the substantive provisions to be set out towards the beginning of a contract. Machinery provisions are administrative arrangements that will assist the parties to fulfil the substantive obligations arising under the contract. These are commonly called “boilerplate clauses” and are often not even discussed by the parties negotiating the contract, but rather they are inserted by their lawyers towards the end of the contract or inserted under standard form contracts used in the industry. The effect of common boilerplate clauses will be discussed in Chapter 4. The provisions of a contract are commonly called “clauses”, “terms”, “conditions” or “items”. Each of these provisions make up the “terms of the contract” which therefore means that they make up the content of the contract. As we will see in Chapter 4, it is important to distinguish statements and promises that are terms of the contract and those that are not part of the contract as only terms are enforceable under the contract. It is common for the terms of the clauses of the contract to be put in a sequential order using numbers, letters or a combination of numbers and letters. For example this might look like: 1. 2. 2(a) 2(b)(i) 2(b)(ii) Each clause may or may not have a heading. If headings are used, it is important to note whether the heading is part of the agreement or not because this may be important if there is a dispute about what the term means. It is also possible to use only numbers. For example:

1. 2. 2.1 2.1.1 At the start of the contract you will usually find the parties to the contract will be set out. In some business contracts this will simply state that the parties are set out in the schedule to the contract (or in a particular schedule to the contract). After the parties details, you may find a short section called “recitals”. These are not necessary for business contracts but they are useful in setting the background for the contract. Recitals will usually state what business the parties are in and what the purpose of the contract is. Some contracts may call this section the “background”. This can be a useful aide for interpreting the contract and identifying the fundamental assumptions that underpin the agreement. After the recitals some contracts will provide a table of contents for quick referencing. One of the most important parts of a contract is the interpretation or definitions section. This will set out the agreed meaning of words and phrases used in the contract. This is an important part of the contract because the contract may use specialist meanings of particular terms. It is common for terms defined in the contract to be identified in some way such as be written in bold or italic, in capital letters or with a capital first letter. If you see this in a contract check the definitions section. Following the definitions section, the substantive obligations of the contract will normally follow. These will include the duration of the contract, the main promises made by each party, the price to be paid and what events may be classified as an event of default that may allow termination. These may be specifically called “representations and warranties” or may simply be a series of obligations imposed on

one or both parties. The contract will then set out a range of machinery (“boilerplate”) provisions, which are often not subject to extensive negotiation. Boilerplate provisions tend to be inserted by lawyers and may be included at the end of the contract negotiations. It is important to verify that the boilerplate provisions are appropriate to the contract and not simply copied from other contracts. It is also important to note that boilerplate clauses are not any less enforceable or important just because they are often treated as an afterthought — if they are given any consideration at all. They often assume importance when something goes wrong, so it is essential that contractors be aware of them. At the end of the contract the signature block will usually appear which is where the parties to the contract (or their authorised representatives) need to sign the contract to indicate that they agree to its terms. Some contracts require particular clauses, or particular pages, to be initialled by both parties. Technically, a signature by the parties indicating agreement with the entire contract is sufficient to create a binding contract. It does not matter whether the parties have read all of the terms in the contract, they will be bound by their signature. Requiring an initial from the parties for particular provisions is usually done because those provisions are particularly favourable to one party or particularly onerous to the party initialling the clause. This is a risk management technique to minimise the risk that the party will complain that they did not know of the clause or understand its effect.

¶3.3 Who are the parties? The legal enforceability of contracts is based on the genuine agreement of the parties to the contract to voluntarily bind themselves to the obligations laid down by the contract. The parties agree to be bound because they wish to obtain the potential benefits that (hopefully) will be produced by the contract. This justification obviously cannot apply to persons who are not parties to the contract. If you do not agree to become a party to the contract, then why should you be bound by it? Similarly, if you are not a party to the contract then why

should you be able to take advantage of a benefit under the agreement? The concept of limiting the enforceability of the contract only to persons who are parties to the agreement is known as the “doctrine of privity of contract”. Only those persons who are privy to the contract can be bound by its terms. For example, a manufacturer may enter into a contract with a wholesaler which imposes restrictions on the conduct of customers of the wholesaler (ie a retailer). Such a contract would have no effect on the retailer who would be free to disregard any obligations on them set out in the contract between the manufacturer and wholesaler. It is possible to require the wholesaler to include limitations in its contracts with retailers, and for the manufacturer to sue for breach of contract if the wholesaler fails to do so. Notice that this description says only those persons who are parties to the contract, it does not refer to persons who are affected by the contract, or persons who receive benefits under the contract. Privity is concerned with binding legal obligations imposed on the parties to the contract, and not on persons who are simply affected by the contract.

Example: Max For example, Max runs a plumbing business as a sole trader. Max enters into a contract with Erin to install some downpipes outside her house. Max does the work but Erin refuses to pay him. Only Max can enforce the right to payment against Erin, not Max’s wife or adult children, even if they work in the business for him. It may be different if Max was in a partnership with his wife, as individual partners contract on behalf of the entire firm of partners and all partners are bound by contracts in the ordinary course of business. Similarly, if Erin was dealing with Max’s wife, Amelia, for Max to perform the plumbing installation. If Max is not a party to the contract he cannot be forced to perform the work. If Max does not

perform the work, then Erin could sue Amelia (unless Amelia had another plumber perform the work). These points apply equally if Max was providing the services through a company (which is common for tradesmen). It is important to identify who the contract is with (Max or the company). It is possible for Max to sign his name as the signature of the company (discussed below).

In business contracts, the privity rule can be managed in the following ways. First, the parties could make sure that any third party who is intended to be benefited by the contract actually signs as a party to the contract. The third party would need to provide consideration, but that is usually managed by having them pay a nominal amount (eg $50). Alternatively the party who is obliged to provide a benefit to a third party under a contract can sign a deed poll to this effect, which the third party can sue on. Second, it is possible to avoid the privity rule by setting up a trust with the third party as a beneficiary. This would give the third party enforceable rights under the terms of the trust deed. Third, it is possible that a contract could be made of three parties, where two parties make promises jointly. If two parties are joint promisees they are parties to the contract and provide consideration together, even if “in reality” only one of them actually performs the promise. If they are parties and have provided joint promises as consideration then they will be bound together to perform their obligations under the contract. In such cases it is important that the joint obligations are clearly stated in the contract and the consequences of one or more joint parties’ non-compliance is provided for. It is important to distinguish between joint liability under a contract, and joint and several liabilities under a contract. For joint liability, both joint promisors/promisees will be liable and must be sued together,

while for joint and several promisors/promisees they may be sued together or separately. In such cases it is important that any rights of contribution between joint promisors/promisees are set out in the contract. It is also possible that the liabilities will be only several in nature, so that either of the promisors/promises can be sued to enforce them. Fourth, in some cases there is an agency relationship between the third party and one of the parties to the contract. If a person enters into a contract as the agent of another person, and the agent does not disclose this fact, then it is possible (under a rule known as the “undisclosed principal rule”) that the principal will be a party to the contract, even though it is signed by the agent. Finally, it is also possible for an original party to the contract to transfer their rights (but not their obligations) under the contract through an assignment of contract. It is not generally possible to assign a burden (ie obligations) under a contract to a third party. Of course, if the other party consents to the transfer then it is possible to carry out a novation of contract. Assignment and novation are discussed in Chapter 5. In Queensland, Western Australia and in the Northern Territory the privity doctrine has been modified by statute to allow third parties to enforce contracts in limited circumstances. The privity rule has also been modified in relation to insurance contracts so that the insureds under policies of insurance can enforce them against the insurer even where they have not paid the premiums themselves.

¶3.4 Signature blocks The signature blocks for business contracts are usually at the end of the document. They will set out a space for the parties to sign. It is also possible for the signature to be made by an agent or representative of a party to the contract. The way that a person signs a contract says a lot about who is bound by the contract. The most common way to sign a contract is simply to sign using your name. For example:

Signed: Jason Harris For business contracts, the person signing is usually representing a company or a partnership. A company has the legal power to enter into a contract and can do so by two directors signing, or by one director and the company secretary signing. Some companies use a formal seal together with signatures of a director and secretary, or two directors so as to indicate that the company is entering into the contract. The signatures of the two directors, or the director and secretary will be followed by the company’s name and ABN (provided this includes its ACN). For example: Signed: Jason Harris and Paul Harris, Directors, Acme Pty Ltd 99 123 456 789 This indicates that Jason and Paul Harris are signing the contract as directors of Acme Pty Ltd because the signature of two directors of a company is the signature of the company under the Corporations Act. The directors are signing as the company, not as separate individuals. Their signature is legally the signature of the company as if it were a real person. A person (including a company) may also sign a contract through an authorised agent. Managing directors are usually agents of the company and may sign as such. An agent will sign a contract by stating that they are signing “for and on behalf of” their principal. For example: Signed: Jason Harris, for and on behalf of Acme Pty Ltd 99 123 456 789 This indicates that Jason is not signing as himself, so that he is a party to the contract, but rather he is signing as agent of Acme and Acme is the party to the contract. If an agent does not have authority to sign on behalf of their principal then they may be sued by the other party to the contract (under a rule called “breach of warranty of authority”).

3.4.1 Signing tips

The signature on a contract will usually mean that the contract begins to have legal effect. Even before any money is paid or any service provided, the contract may come into operation upon the signature of both parties. If you do not want your contract to begin on your signature then you need to include a condition that must be satisfied after signature.

¶3.5 Capacity to contract 3.5.1 Minors The parties to the contract must have sufficient legal capacity to enter into the contract. Generally speaking, a person has contractual capacity once they reach adulthood (18 years in each state and territory in Australia). Under general legal principles a minor (someone under 18) could not be bound by a contract, and the minor is able to have a contract set aside by the court. This general rule is subject to a number of exceptions where the contract is for necessary goods and services. If a contract with a minor is grossly unfair to the minor (so that they receive no overall benefit) then this will not be enforced. Legislation in New South Wales and South Australia has overturned the general law rules and provides for court validation and invalidation of certain contracts with minors.

3.5.1.1 Dealing with minors tips If you are concerned about entering into a contract with a minor, you can have a parent or guardian co-sign as a party with several obligation status (so that you can enforce the contract separately against the adult). Alternatively you can seek a separate contract of guarantee with the adult.

3.5.2 Agents An agent does not require contractual capacity, only their principal does. For example, a minor may act as an agent for an adult principal. 3.5.3 Companies A company has the capacity to enter into contracts on its own behalf

or through an agent. Directors who are not managing directors are not presumed to have any authority to act as the agent of the company, but managing directors are presumed to have such authority. Even if a company limits its ability to engage in certain activities through its constitution this will not prevent a company from entering into such contracts. A company can enter into a contract without the resolution of the board of directors, but many business contracting parties will want a board resolution approving of the contract, particularly for significant transactions. 3.5.4 Partnerships Each partner is both a principal and agent of their firm which means that they can enter into contracts on behalf of the firm and their contracts will bind the other partners as long as the contract is for a matter that is within the scope of the firm’s business. 3.5.5 Government entities Government entities are usually established by specific legislation and this will provide what authority the entity and those working for it (such as CEOs, general managers, directors and committee members) have. There are also specific rules which government agencies must comply with when entering contracts. Further information regarding this is available on the Department of Finance website under Procurement (see www.finance.gov.au/procurement). 3.5.6 Bankrupts An undischarged bankrupt is able to enter into binding contracts. Any benefit obtained from the contract may become vested in the bankruptcy trustee rather than the bankrupt personally. There are a number of exceptions to vesting in bankruptcy however. A contract that gives rise to a debt that is entered into after bankruptcy will not be a provable debt in the bankruptcy and will not be subject to discharge. Only debts based on pre-bankruptcy contracts are covered by the bankruptcy and are subject to discharge.

3.5.7 Persons affected by mental illness, drugs or alcohol The mere fact that a person is affected by a mental illness, drugs or alcohol is not enough to render the person incapable of consenting to enter into a contract. If the other person is aware that the person is adversely affected then it may be unconscionable for that person to take unfair advantage of the person. Unconscionability is discussed in Chapter 9. Temporary effects of drugs or alcohol might be insufficient to prevent the person from consenting to the contract. It is useful to ensure that the person has independent advice about the contract to minimise any risk of you being found to have unfairly exploited them. It is possible that a person is so affected by mental illness that they are simply incapable of understanding what they are doing, but equally the mental illness may come and go or may not actually affect their ability to genuinely consent to the contract.

3.5.7.1 Dealing with persons affected by mental illness tips If you suspect that the person you are dealing with is affected by mental illness you should be careful that they have independent advice. Otherwise you may be vulnerable to getting sued for unfairly exploiting them and may need to return any property and/or pay compensation.

¶3.6 Relationship between the current contract and the prior agreements 3.6.1 General Some contracts are entered into in isolation, with no prior agreement or understanding between the parties and with no intention that there will be any future contractual dealings. However, many contracts are entered into between parties who have a number of contractual dealings with the same parties. In these cases, it is important for business people to turn their mind to how this new contract will relate to their other contracts with the same party. You cannot assume that a

new contract will replace an older contract, unless you include a term in the new contract that provides for this. For example: “This Agreement replaces all previous agreements or understandings between The Parties with respect to the subject matter contained in this Agreement.” This is a common clause found in business contracts which makes it clear that the current agreement replaces prior agreements. Notice how “Agreement” and “The Parties” have capitalised first letters, which indicates that these terms are defined in the definition section of the contract. 3.6.2 Preliminary agreements A preliminary agreement (discussed in Chapter 2) may take several forms. Firstly, it may be an early draft agreement, or a collection of agreed items (known as a heads of agreement). Such documents may not be contractually binding unless the parties intend for them to be binding. It is common for them to be expressed as “subject to a final written contract being entered into” in which case they are not binding until the final agreement is operational and at that time the final written agreement will usually replace any earlier inconsistent terms. Secondly, a preliminary agreement, such as a framework agreement, may provide for the form and content of future agreements. That is, all future agreements are expected to be consistent with the framework agreement. In such cases it will be important to ensure that the future agreements provide for the framework agreement to continue in operation because it is common to provide that the contract replaces all former agreements. This may be particularly useful where the parties intend to enter into multiple agreements and want to continue to rely on the terms agreed in the preliminary agreement to avoid negotiating these again. It is also common to see contracts that will specifically include terms and conditions from other documents, such as standard terms and conditions that a particular company uses. In business supply contracts it is common for customers to sign up for supplies using a credit agreement which will set out the payment

terms that will govern all future supplies. Supplies are ordered by placing a purchase order (over the phone, via email or through a website), which will be subject to terms and conditions. This is an offer of a contract. The purchase order may be confirmed by the supplier (which is an acceptance of the offer). The goods are supplied with a delivery note, and perhaps an invoice (although this may be sent later). A written account may be sent at some point as well to show any outstanding amounts. The content of this contract is likely to include terms in the credit agreement (as a framework agreement) as well as terms indicated through the ordering and delivery process. One of the useful things about including preliminary agreements by reference in each contract is that they may be expressed as “standard terms and conditions as exist from time to time” which allows the supplier/service provider to change the standard terms for future individual contracts. It is good practice to notify customers of changes to standard terms and conditions. The legal enforceability of preliminary agreements was discussed in Chapter 2.

¶3.7 Form requirements As a general rule business contracts are not required to take any particular form. Contract law is based on the principle of freedom of contract: the parties are free to form whatever agreement they see fit (assuming the subject matter is otherwise legal). A central theme of this book is that all business contracts should, wherever possible, be in writing because this minimises (but certainly does not eliminate) the risk of contract disputes. Relying on wholly verbal contracts leaves you open to disputes that can only be resolved by verbal evidence in court which comes down to who the court believes more — not a good business outcome. Even where contracts are in writing, it is possible that one or more terms may arise from verbal promises or statements made by the parties during negotiations. This was discussed in Chapter 2 and will be discussed again in Chapter 4.

The law does require written documents for certain types of contracts. Some contracts must take a particular written form, such as consumer credit contracts which are regulated under national credit laws and have a specific format that must be used. This gives consumers the ability to compare credit products using the same information and presented using the same format. There are many other examples of specific legislation requiring a particular form of written contract, but we would not discuss these as they differ between various laws and sometimes also differ between states and territories. One type of contract that must be in writing is a deed. This is a very formal document that does not require consideration in order to be enforceable. A deed can also involve only one party (ie contract with yourself) which is called a “deed poll”. Deeds are very common in commercial transactions where consideration may be difficult to establish, or when dealing with very significant transactions. Some companies require major transactions to be by deed. A deed may also be necessary to transfer certain types of intangible property (such as an easement over real estate). A deed is also used when a person wishes to release their rights to property, including the right to sue another person (known as a deed of release). Persons acting under a power of attorney who wish to execute a deed for their donor of the power will need to be authorised by deed. The requirements for entering into a deed differ between states and territories. Common requirements include a witness (who is not a party to the deed) for the signature of the person entering the deed. This is known as a deed being “signed and sealed”. In some states (Queensland) and territories (NT) a deed must also be delivered to the other party before it takes effect as a deed. If you believe you may need to enter into a deed then you will need to speak to a lawyer to ensure that you comply with the requirements in your state or territory. A broader requirement of writing occurs in relation to certain contracts that are covered by a very old rule called “The Statute of Frauds”. This was a law introduced in England in the 17th Century that required certain contracts to either be in writing or to be evidenced by some written memo signed by the person against whom the contract was to be enforced. The Statute of Frauds applied to a range of contracts,

such as guarantees, transfers of interests in land, contracts for more than 12 months, sales of goods over a certain amount, etc. This law was automatically applied upon settlement of Australia but it has been modified or replaced in all states and territories. The full law continues to apply in WA, but in most other states and territories the major category is for sales and transfers of interests in land. For example, legislation in NSW requires that sales or dispositions of land or any interests in land are unenforceable unless the agreement is in writing or is evidenced by some memorandum in writing and is signed by the person against whom the contract will be enforced. The writing is required to set out all of the essential terms of the contract, such as the land being sold or transferred, the name of the parties and the price to be paid. It is possible for the written memo to be derived from multiple documents as long as the documents are to be read together. Therefore, a signature in a cheque receipt with the price referenced to another document that identifies the land and the parties may be sufficient to satisfy the writing requirements. Where a contract is required by law to be evidenced in writing to be enforceable, often relevant professional or industry organisations will have template agreements that can be purchased and utilised to record a particular agreement. For example, in New South Wales it is almost conventional to use the standard form contract for the sale of land that has been drafted by the New South Wales Law Society and the Real Estate Institute of New South Wales. The advantage of such templates is that they specifically address legislative requirements and often have been drafted to balance the interests of both parties fairly.

3.7.1 Incorporation of other documents tips It is important that you consider whether the contract or written memo needs to include any other documents and if so to specifically state this in the document. The rules relating to incorporation of documents by reference are complex so being clear about what documents make up the contract is essential. A contract that must be in writing can only be varied by a written agreement. However, a contract may be terminated by verbal agreement between the parties.

¶3.8 Conditions to the contract Although a contract will usually come into effect once all parties have signed it (“executing the contract”), it is possible to include a condition that must be satisfied after signature otherwise the contract will terminate, or may cause the contract to not come into effect. A term that provides that either formation or performance of a contract is conditional on something happening is called a “contingent condition”. Contingent conditions that allow for binding contract to terminate are discussed further in Chapter 6 (¶6.3.2). If the contingent condition allows mere termination then this means that the contract is binding and effective and one or more parties simply have an option to terminate. However, if a contingent condition provides that a contract will not take effect at all until a certain condition is satisfied, then this will mean that other parts of the contract are also ineffective and cannot be relied upon until the contract is operational (ie when the condition is satisfied). This distinction will come down to how important the condition is to the bargain between the parties. If the agreement would be ineffective without the condition being satisfied then making the condition an event of termination makes sense. If the condition is essential to the agreement then suspending the operation of the contract pending the satisfaction of the condition is appropriate.

3.8.1 Conditions to the contract tips If a condition allows a party to terminate the contract unless something occurs, it is important that you refer to the machinery (boilerplate) provisions in the contract to determine if notice to the other party is required and if so, how and when this is to be given. See further ¶6.3.2.

¶3.9 Summary When entering into the contract it is natural for parties who may have been negotiating for some time to grow weary of the process and

simply see the signature as the last formality that needs to be undertaken. It is natural to feel that formalities in the execution of a contract should be left to lawyers. What this chapter has shown is that there are a range of factors that every businessperson entering into a contract should be aware of when finalising a contract. Errors or omissions during the finalisation process can lead to significant problems when performing the contract which may ultimately be very expensive to rectify. It is to this issue that we now turn in Chapter 4.

CHAPTER 4 — PERFORMING THE CONTRACT ¶4.1 Introduction Once a contract has been properly entered into the parties to the agreement will then work with the contract. They no doubt anticipate that it will provide them with what they thought they were bargaining for during the negotiation process. It is critical that the parties to the contract understand their rights, and potential obligations and duties that may arise under the contract. This requires a good working knowledge of how a legal contract is commonly assembled. There are different types of provisions that are common in business contracts. It is important to appreciate that some contractual provisions will give different rights if there is a failure to comply with them. We therefore need to classify different types of clauses found in business contracts. Another essential point is to determine what statements and promises are actually part of the contract. As discussed in Chapter 2 (negotiation), there are often a variety of verbal promises and statements that are made by both parties during contract negotiations. We need to verify whether all of these are actually part of the legal contract. The law distinguishes between terms of the contract (which are legally enforceable) and mere representations (which are not part of the contract and may not be legally enforceable). Determining what the exact terms of the contract are may require reading more than one document, which can further complicate things. Things become even more complicated when a party argues that the parties agreed to oral terms in addition to any documents that are signed or incorporated. Once we have determined what the terms of the contract are, we then need to interpret the meaning of the terms. The law of contract provides specific rules for this, which will be discussed.

Most important of all is how to determine whether all parties to the contract have adequately performed the actions that are required by the contract. It is therefore essential that parties to the contract are able to: • Identify what terms are included in the contract • Determine what is required under the contract • Assess whether their conduct, and the conduct of other party complies with the requirements of the contract.

¶4.2 Where do I find the terms of the contract? The terms of a business contract may be found: • In a single document signed by both parties to the contract • In a single document not signed (eg emails, promotional materials, etc), or only signed by one party • In multiple documents (some or all of which may be unsigned) • In an exchange of verbal promises and statements made between the parties. Many business contracts involve a combination of all of the above. There is no requirement that a contract consist of a single document. If a contract is to be made up of multiple documents it is important that they be made capable of being read together by the use of language in the main document that clearly incorporates the other documents. For example: “This Agreement consists of this Document dated 1 January 2016 as well as the Supplier’s terms and conditions contained in the Supplier’s customer credit agreement as varied from time to time.” This type of clause incorporates the terms of the supplier’s terms and conditions as set out in a standard document that may be changed by

the supplier from time to time. Note that the terms “this Agreement”, “this Document” and “Supplier” would all be defined terms as indicated by their capitalised first letter. The term “this Agreement” could also be defined as “all of the documents listed in Schedule 1” and then use Schedule 1 to itemise what documents, and what terms from specific documents, will make up the contract. It is important that the terms used in the document are consistent with terms that are incorporated into the agreement by reference. A failure to do so may render the operation of the contract uncertain and ineffective. If the contract is not reduced to a document, or documents, signed by the parties where all terms are easily identifiable, then, if a dispute arises about what the terms are the court will need to identify them. This may mean sifting through the to and fro of pre-contractual negotiations to work out exactly what promises were made and, of those, which comprised part of the contract. Here, the court will distinguish between “terms” and “representations”. A term is a promise made by a party that forms part of the contract. The hallmark of a term is that the language is promissory: the party guarantees that a fact is true or that they will perform an obligation. A representation is merely a statement made by a party, but which the party does not promise is true or will occur. If it is not promissory, it is not a term and cannot be enforced as part of the contract. For example, in negotiations for the sale of a car, the seller may say “the car has a Bluetooth-enabled stereo”. If the purchaser buys the car and then discovers that it does not have a Bluetooth-enabled car stereo, a relevant question will be, was the seller’s statement a promise (ie a term), or merely a representation? If the statement is a term, then the purchaser will have a contractual remedy, such as damages and potentially the right to reject the car and terminate the contract. If the statement is only a representation, then that does not mean that it has no legal consequences. A representation or promise made outside of a contract can still generate legal rights, such as rights to

sue for misrepresentation or misleading conduct (See Chapter 9). If the statement is promissory, it may be a term in a separate but related contract: a collateral contract (See ¶4.4).

4.2.1 Incorporating documents tips When incorporating documents by reference, make sure that any specified dates or years are correct otherwise the terms from the external document might not be included in the contract. When referring to documents that may be subject to change it is possible to note that the included external document “as varied from time to time” understand what the terms of the contract require of each party and what rights they give each party. One common type of business contract involves incorporating terms using tickets and/or signs to notify the other party that terms are included into the contract.

Example: Acme Car Parks Mark drives his car into the Busy Car Park, operated by Acme Car Parks Pty Ltd. When Mark drives up to the entry gate he takes a ticket which contains words printed on both sides of the ticket. The words state “entry into this car park is subject to the terms and conditions displayed at the gate”. Mark sees a large sign with relatively small writing next to the ticket dispenser at the gate. The writing on the sign will no doubt contain a range of limitations and exclusions of the liability of the car park operator for any loss or damage suffered by Mark during the time his car is parked in the car park, even where such loss or damage is caused by the fault or negligence of the car park operator or its employees or agents. The writing on the ticket from the dispenser has incorporated the terms printed on the sign at the gate.

Terms can only be incorporated into an agreement by giving notice to

all parties before the contract is entered into. Terms notified after the contract has commenced will not be part of the contract unless all parties have agreed to change the contract (See Chapter 5). Consent to changing the terms can be made in advance in the contract document (See Chapter 5 (¶5.4)).

4.2.2 Incorporating terms tips Terms can only be incorporated into contracts where sufficient notice is given that the terms are contractual in nature. This may be achieved by having the party sign the document acknowledging the incorporated terms. Business people need to be careful that terms are not “hidden” in non-contractual documents such as delivery notes, receipts, tickets or written acknowledgements unless the documents clearly (and legibly) state that the document is part of a contract. If an important term is not expressly included into the contract, it may be possible to include it within the contract by implying it into the agreement. Implied terms are discussed further below. If the parties to a contract want to ensure that the agreement only includes the terms set out in a single written document then they may use an entire agreement clause (also called a whole of agreement clause). For example: “The terms contained in This Document constitute the entire agreement between the parties in respect of its subject matter, and supersede all prior agreements, representations, negotiations and correspondence.”

¶4.3 Are some contract terms more important than others? The short answer is yes, because different types of contractual terms can generate different legal rights. This is discussed further in Chapter 7. Terms of the contract may be classified as: a) Conditions b) Warranties c) Intermediate terms.

A condition is one of the essential terms of the contract. A failure to comply with a condition will allow the innocent party the right (but not the obligation) to terminate the contract. A failure to perform a condition means that the innocent party is getting a fundamentally different outcome than what they bargained for. One way to work out if a term is a condition is to ask if it was apparent during negotiations that the party for whose benefit the term exists would not have agreed to the contract unless they were assured that the term would be properly performed. If they would not have agreed to the term unless they were assured of complete performance, then it is a condition. Fulfilment of conditions is the reason why parties enter into contracts. A warranty is a promise or statement made in the contract which both parties expect to be fulfilled, but which is not essential to the contract achieving what the parties bargained for. If the parties had known that a warranty would not be performed they may have required a different price for the contract, but would have still been likely to have entered into the contract. A failure to comply with a warranty will allow the innocent party to sue for compensation but will not allow them to terminate the contract. This means the innocent party still has to perform their obligations under the contract even though the other party has not performed all of their obligations. An intermediate term is one that may allow the innocent party to terminate in some circumstances while in other circumstances may only allow the innocent party to sue for damages as compensation. Whether an intermediate term allows termination or only damages will depend on how serious the breach of the term is, taken in all of the circumstances. Intermediate terms can be difficult to classify as they do not fit neatly into the categories of either a condition or a warranty.

Example: Train Advertising Train Advertising Pty Ltd is a company that manages advertising for government trains. Train Advertising enters into an agreement

with Ice Magic Ltd, the manufacturers of a popular ice cream. The agreement provides that Train Advertising will ensure that advertisements for Ice Magic will appear on 30% of trains for at least eight hours per day during the summer months of 2015. Train Advertising places the advertising boards on 30% of train carriages, but many of those carriages run only at night or only run at weekends. Train advertising believes it is complying with the contract because on average the boards are being displayed for at least eight hours per day but this includes evenings and weekends when fewer passengers are using the trains. Ice Magic believed that its advertising boards would be on display for eight hours each working day during daylight hours. Would the term requiring 30% of trains carrying the advertising boards for at least eight hours per day constitute a condition or a warranty? Would Ice Magic have still entered into the contract if it had known when its advertising would appear? Possibly, but it may have paid a lower price for advertising at night or on weekends. This would make it a warranty and would only allow it to sue Train Advertising for damages. If Ice Magic could establish that the circumstances surrounding its entry into the contract make it clear that display for eight hours during daylight hours during work days was a critical factor in signing up to the contract then this would be a condition and would allow Ice Magic to terminate the contract and sue for compensation.

The practical takeaway from this example is to always be clear about what you expect to receive out of the contract! What makes classification of terms in contracts so difficult is that the words “condition” and “warranty” are used by businesspeople to mean things that do not neatly correspond with their precise legal meaning. For example, a businessperson may refer to a condition of the contract when referring to any term of the contract. A businessperson may “warrant” that a particular event will occur, when making a promise. Neither of these uses is the same as the legal meaning of

the words in contract law.

4.3.1 Distinguishing terms and warranties tips It is useful to agree upon what terms will be conditions and what terms will be warranties and to state this in written contracts. Conditions may also be signified by providing a breach of particular terms of the contract as allowing for the party not in breach to terminate the contract. Legislation may require that breaches of conditions in certain situations be treated as breaches of warranties, for example under the Sale of Goods legislation in each state and territory.

¶4.4 What about statements that were made before we signed the contract? Many statements and promises may be made during contract negotiations. As discussed above at ¶4.2, not all of these may end up in the final contract. This may be because the statements were not promissory, or, if they were promissory, they may have been abandoned by consent of both parties who were happy to let go of them in favour of the final agreement getting done. It may not be a conscious decision between all parties however. A person negotiating a contract may believe that everything previously discussed will form part of the contract. Unfortunately, this may not be possible where the written contract signed by the parties contains an entire agreement clause (discussed above). An entire agreement clause limits the scope of the contract to the terms contained in the written document signed by the parties. If prior promises or statements were not included in the final contract, it may be possible to classify these as a “collateral contract” that was entered into based on the consideration of entering into the main contract. This sets up two contracts that must work consistently in order to be effective. The persons seeking to establish a collateral contract must establish that they relied on the enforceability of the collateral contract in entering into the main contract. The terms in the

collateral contract must be consistent with the terms in the main contract. If the main contract contains an entire agreement clause this will be difficult to establish. The terms of the collateral contract must also be contractual in nature (ie they must involve specific promises) in order to be effective.

¶4.5 Is it possible to have terms implied automatically into business contracts? It is impossible to anticipate every possible future event and so business contracts will necessarily be incomplete to a certain extent. The law allows for this by recognising that terms may be automatically included into contracts where certain requirements are met. Terms may be incorporated into an agreement because the prior course of dealing between the parties recognises that the parties intended to include the term in their contract, even if they did not consciously think about or address them. In order to establish incorporation because of a course of dealing it is necessary to establish that the term is clearly justified based on a substantial duration of consistent dealings between the parties. If the dealings are varied, or involve different parties then it will be difficult to incorporate terms by a course of dealing. Terms can also be implied into a contract under general legal principles. This can be because of: • A universal custom or business practice in a particular industry • A need to imply the term to give the contract business efficacy • A need to imply the term due to the interpretation of the contract. A term will only be implied into a contract on the basis of custom or usage where the term is so well-known in the industry that the parties must have known about the term and would be assumed by others in the industry to be contracting on the basis that such a term was included. This is a difficult ground to establish in court as the evidence needed to support it is hard to prove.

A term may be implied on the basis of business efficacy where the term is needed in order for the contract to make commercial sense. This has been described as involving a situation where the contract would be commercially unworkable without the term being implied. This is a tough test to satisfy. A term may be implied where it is a necessary implication from the wording of the contract itself. In other words, it is obvious that the parties must have intended that the term be included in the agreement in order to achieve the goals set out in the contract. In order for terms to be implied, the terms to be inserted into the agreement must be consistent with the terms of the actual agreement. It is possible that the wording of the contract reveals that the parties considered the issue and decided not to include the term alleged to be implied. Entire agreement clauses can be useful here to minimise the risk of terms being implied, but this also reduces the flexibility of the agreement and may see the contract fail if it becomes unworkable in the absence of an implied term. Terms can also be implied into contracts by Acts of parliament, such as the Sale of Goods Act. Some terms implied into contracts by Acts of parliament are mandatory and cannot be excluded by contract, although the implied terms under the Sale of Goods Act may be excluded for sales not involving consumers. These include implied terms relating to: • The fitness of goods for their purpose • The merchantable quality of the goods for sale • Goods sold by sample will correspond with the samples • Selling goods free from prior security (such as mortgages) • Selling goods when the seller does not have title to the goods. It is common for business contracts to include exclusion clauses that will attempt to limit or exclude the risk of implied terms. For example: “This Agreement excludes, to the extent permitted by law, all

conditions, warranties and terms implied by statute, general law or custom.” These clauses produce particular problems with interpretation, which are discussed next.

¶4.6 What are boilerplate clauses? In Chapter 3 we discussed the difference between substantive clauses in a contract and those which are mere machinery provisions. Machinery provisions in a contract are often called “boilerplate clauses” and can cover a broad range of obligations under the contract. It should not be assumed that boilerplate clauses are trivial or unimportant. Indeed some boilerplate clauses may significantly affect the parties rights under the contract, and if well drafted, may save time and money for one or both parties. Common boilerplate clauses include: • Assignment and novation clauses These clauses will set out how rights under the contract can be transferred (assignment) or substituted by a new contract (novation). The clause may impose a prohibition on transfers or may set out a procedure to effect a transfer. • Interpretation clauses These clauses are critical to every contract as they define the key words and phrases used. • Calculation of time clauses These clauses will set out how the timing of obligations or procedures is to be determined. This is usually done by setting a standard time (such as Australian Eastern Standard Time) or by setting the time of a particular place (such as the Australian Capital Territory). It is important that the contract specify whether time is of the essence. • Confidentiality clauses

If any of the terms of the contract or any information produced by the contract are to be kept confidential then this needs to be stated in the contract. The law usually presumes that trade secrets and key business records and customer lists are confidential, but it is useful to back this up with a contractual obligation to maintain confidentiality. Merely stamping documents as “confidential” or “commercial in confidence” is not enough — the information must actually be treated by the parties as being confidential. • Dispute resolution clauses It is increasingly common for major business contracts to provide some form of agreed dispute resolution procedure, such as mediation or arbitration which must be followed before the parties make applications to the court. In some contracts the dispute resolution clauses may require the parties to subject to independent commercial arbitration instead of resolving disputes through the courts. • Entire agreement clauses These clauses will specify that the terms of the contract are contained in one or more written documents which replace and exclude other terms. This is particularly useful for excluding verbal terms discussed in preliminary negotiations. • Force majeure clauses These clauses provide that the parties will not be responsible for delays or failures to perform based on circumstances outside of their control (also known as “acts of God clauses”) which can include storms, natural disasters, acts of terrorism, declarations of war, etc. It is useful for the parties to specifically define what a force majeure event is in the interpretation section of the contract. See further: Chapter 8, ¶8.4.1.1. • Jurisdiction or choice of law clauses These clauses specify what legal jurisdiction’s laws and courts

will apply to enforcing the terms of the contract. This may be done on an exclusive or non-exclusive basis. This is particularly important where the contracting parties are operating in different legal jurisdictions. An exclusive jurisdiction clause means that only that jurisdictions laws and/or courts can apply to the contract, while a non-exclusive clause gives the parties the option of whether a particular jurisdiction (such as NSW law, English law or the law of Oregon in the US) will apply. If you are contracting with a foreign counterpart you need to ensure that you are comfortable with the jurisdiction chosen for the contract. For example, contracting with a Japanese software provider may mean that you need to submit to Japanese law and Japanese courts if a dispute arises. In many commercial contracts where there is unequal bargaining power you may have no choice about these clauses. In some types of contracts (such as international sale of goods transactions) there may be international standard form contracts used (such as the Convention on the International Sale of Goods whose provisions will automatically apply anywhere the convention is adopted unless the parties have excluded its operation in the terms of the contract itself). • Notification clauses These clauses set out how and where notices are to be given under the contract. Again the timing of notices will be important. Ensure that your current mailing address is specified as you will be deemed to have received notices sent to this address. • Waiver clauses These clauses provide that a party is not assumed to have waived their rights to enforce the contract simply because they delay or refrain from exercising those rights in a particular situation.

¶4.7 How are contractual terms interpreted? 4.7.1 General approach

The law requires that contracts be interpreted not by what the parties say (in court) they meant by the words used, but rather by what an ordinary bystander would believe they intended by the words used. This is known as an objective test (in contrast to a subjective view that is based on what the parties say they intended). There are sound reasons for imposing an objective test on interpreting contracts, including the fact that the memory of the parties may change over time so that they cannot accurately recall what they believed particular words in the contract meant at the time they entered the contract. Of course, most people do not read every word of every contract so asking for a word by word recollection would be of limited use regardless. Another good reason is that parties to a contract dispute in court may feel that they can explain only those details that support their case and ignore inconvenient or adverse facts. It is for this reason that the law generally excludes the parties’ stated intentions when attempting to interpret a contract. This is known as the “parol evidence rule” (parol evidence meaning evidence external to the written contract itself). It applies to prevent oral evidence changing the meaning of written contractual provisions. The rule has its limitations, with one major limitation being that oral evidence is permitted where the purpose is not to change the wording of the written contract, but rather to show that the agreement is not wholly in writing. An agreement may contain some written terms and some terms based on oral agreement. Again, an entire agreement clause may limit the contract to the terms of the written document. The objective test for interpretation is applied to business contracts with the view that the contract should be interpreted as a reasonable businessperson would have understood the words used in the agreement. Where there are competing meanings that may be given to particular words or phrases used in the contract, the court will prefer the interpretation that promotes a commercially sound outcome. The courts are mindful that business people usually do not want to waste time entering into meaningless contracts so the courts will strive to give the contract a commercial meaning if that is possible. In interpreting the contract the court may take into account the circumstances that led to the contract being entered into. However,

this cannot be used to contradict the plain meaning of the words used in the contract itself. If the words used in the contract are ambiguous or unclear, reference to external circumstances may be helpful to give the contract a commercial interpretation. If one term or more is incapable of meaning then it may be possible to strike them out from the contract so as to preserve the rest of the agreement. This may be done using a “severance” clause. For example: “In the event that any term of this agreement is declared by any judicial or other competent authority to be void, voidable, illegal or otherwise unenforceable, the validity and enforceability of the remaining provisions or portions of the agreement shall not be adversely affected by such a declaration.” This approach has it limits however. If the term(s) struck out by the court go to the essence of the contract there may be an incomplete contract incapable of independent enforcement, in which case the contract will fail. 4.7.2 What about provisions that help me manage my risk and liability under the contract? Most business contracts include provisions that attempt to exclude or limit liability for as many potential matters under the contract as possible. These clauses work as a risk sharing mechanism by stating what the parties agree to be liable for, and what they agree they should not be liable for. An exclusion clause attempts to remove liability altogether for particular conduct. A limitation clause seeks to merely limit the total liability for certain consequences that may arise under the contract, but the limit may be a nominal amount such as limiting liability to $100. The traditional view of these clauses is that they will be interpreted strictly, and where ambiguity exists they will be construed against the interests of the person relying on them to limit or exclude their liability. However, in recent years Australian courts have taken a more commercial approach and held that these clauses are to be interpreted as ordinary clauses. The key question will be whether the

loss or liability in question comes within the scope of the provision. If it does there is no need to construe the provision against the party relying on it. It is important for the clause to cover as much as possible, while not necessarily listing all potential losses or events as this may be construed as limiting the protection to those events only. Even where the exclusion or limitation is broadly described, the courts will interpret the scope of the provision within the context of the business relationship between the parties and by reference to the commercial circumstances that led to the contract in the first place.

Example: TradeCo Pty Ltd A stockbroker’s (TradeCo Pty Ltd) contract with its client provides that the stockbroker “will not be responsible for any loss arising in any way out of any trading activity undertaken on behalf of the Client whether pursuant to this Agreement or not” and for any loss not excluded then the client agreed that its damages would be limited to $100. If the stockbroker trades for the client and loses money, then it is clear that the exclusion clause would prevent the client from suing the stockbroker for the trading losses for negligence for example. However, what if the stockbroker’s junior employee conducted the trades? Did the stockbroker include their employees and agents within the scope of the exclusion and limitation clause? What if the stockbroker’s agent defrauded the client out of funds? This may not be considered as trading activity “undertaken on behalf of the client” and so not within the scope of the protection offered by the clause.

Example: Eric

Eric drives into a car park and receives a ticket that refers to terms and conditions printed on a sign near the entry gate. Those terms and conditions provide that drivers can only exit the car park by presenting payment with their ticket upon exit and also that customers agree that the car park operator is not liable for any loss or damage to the vehicles parked “however caused”. Eric retains his ticket but when he returns to his car he discovers it is stolen. The car park attendant allowed a thief to exit the car park with Eric’s car without presenting a valid ticket. It is possible that such a clause would not protect the car park operator because the conduct of the car park attendant was in breach of the agreement in allowing a car to leave without a proper ticket.

It should be noted that consumer protection law, in particular the Australian Consumer Law, renders most exclusion and limitation of liability clauses void and ineffective.

4.7.3 Exclusion and limitation clauses tips Carefully worded exclusion and limitation clauses are an important part of business contracts and if drafted correctly can save your business considerable time and money if a dispute arises. Just be aware that they might not work for all potential situations. Another risk management device is to use an indemnity clause. This is included in a contract so that a party to the contract is protected from any loss from particular conduct of the other party. For example, you may wish to ensure that any work performed under the contract that could involve your business in a breach of law (such as personal injury claims or breach of copyright, trademark or patent rights) will be covered by an indemnity from the party to the contract who is performing the work. It is important that such clauses include work performed by an agent or employee of the party granting the indemnity. It is also important that the party giving the indemnity have resources to satisfy any liability to indemnity.

¶4.8 How do I verify that the contract has been adequately performed?

4.8.1 General For most business contracts the parties perform their obligations to the reasonable satisfaction of the other and the contract comes to an end. This is done in almost all cases without the need to refer to lawyers or to take court action or to have a court determine whether the obligations under the contract have been properly performed. The assessment of performance will therefore arise when there is a dispute about whether performance has been adequate. Assessing performance is broader than situations involving contractual disputes however. It is important for the parties to be able to determine what obligations they need to perform, and how they can perform those obligations to the standard required by the contract. They will also need to assess the performance by the other side to the contract. Often one party to the contract will simply have an obligation to pay for goods or services provided by the other party, in which case performance will depend upon whether that party has paid the money as required by the contract. Even that apparently simple obligation can produce questions about timing of the payment, where the payment is made and in what currency the payment is made. In summary, both parties will need to assess the performance of the other in order for the contract to be fully completed without dispute. The first step to assessing whether performance of the contractual obligations has been fulfilled is to determine what the terms of the contract are, and what they mean (a process of interpretation discussed above). Once that has occurred then there are number of key issues that should be considered: • The timing of performance • The manner of performance – Whether exact performance is needed or whether substantial performance will be enough – The effect of partial performance – Whether the right person has performed the obligation

• Whether multiple obligations are required to be performed together or separately • Whether the parties are under any duty to perform the contract in good faith. Each of these issues will now be discussed. 4.8.2 The timing of performance When the parties have provided a particular time and date by when an obligation is to be performed it will usually be an important term of the contract, but may not necessarily be a condition of the contract. If it is a condition that the obligation be performed on time, then failure to perform on time will allow the other party to terminate the contract and sue for damages. Otherwise, the innocent party may only sue for damages for any loss resulting from the late performance. If they merely stated that an obligation must be performed, but not by when it has to be performed, the law will say that it must be performed within a reasonable time. Late performance is discussed in more detail in Chapter 7 (¶7.2.2). 4.8.3 The manner of performance 4.8.3.1 The standard of performance required Many business contracts will require that work performed under the contract must be to a particular standard. In some contracts, such as building and construction, engineering, manufacturing and computer software and IT contracts, there may be objective measures of performance specifications which can be used to verify that the contract has been performed to the appropriate standard. These industry benchmarks will often include a degree of tolerated variance with the understanding that 100% consistency is often impossible. Where it is possible that the parties may dispute whether the work actually carried out meets this standard it is useful to include an objective verification procedure, which may require an independent expert to confirm acceptable performance. In large-scale business contracts this may also involve commercial arbitration.

In other contracts there may be no objective measure of performance other than the mere satisfaction of the parties. Once it is established what the measure for assessing performance is, the matter that then arises is whether the actual performance under the contract meets that standard. Does the performance completely meet the standard, or is the performance only substantially or partially satisfactory of the expected standard of performance? This is a question that takes us back to the distinction between conditions and warranties.

Example: Sally Sally orders a 180 cm tall bookcase from Norman Harvey’s furniture. Sally pays the purchase price and signs a contract setting out the terms of delivery. The bookcase that is delivered is 185 cm in height. Is this performance of the contract by Norman Harvey? It is possible that the difference is immaterial to Sally and she accepts delivery. It is also possible that her space for the bookcase was 185 cm in height and that was why she measured and ordered a bookcase of no more than 180 cm in height. In this case the failure to deliver the bookcase ordered may be a breach of a condition, which would allow Sally to reject delivery and terminate the contract. Sally should have ensured that her contract specified the exact height of the bookcase and made it clear whether an exact specification was necessary.

Example: Mitch 1 Mitch is contracted to supply 1,000 x 600 ml water bottles for an

upcoming marathon in Sutherland in Sydney. On the day of the marathon Mitch delivers the water bottles but the race organisers are angry that the water bottles are 550 ml not 600 ml as ordered. It is too late for the race organisers to arrange for an alternative supplier of water so they accept the delivery. In such a case there has been substantial performance of the contract but Mitch has breached a warranty and will be liable to pay compensation to the race organisers for failing to perform as agreed.

Example: Mitch 2 Assume that on the day of the race Mitch mixes up the delivery and provides an energy drink instead of water. This would be unlikely to constitute substantial performance. The race organisers may choose to reject the delivery as they have not received what they ordered. However this still leaves the race without adequate hydration and so the race organisers can agree to vary the contract or may decide to retain their rights under the original contract to terminate and sue for damages while entering into a new contract for the energy drinks.

As a matter of strict contract law, if a party only partially performs their obligations — ie something less than substantial performance — they have no right to payment: they promised a certain thing and if what they deliver does not come close, then they have not earned payment. It does not matter if that performing party did their best, were let down by circumstances beyond their control, spent a lot of money on performance, or provided something completely different but just as good. However, if a party only partially performs, but nonetheless delivers something of real benefit that the other party freely accepts, then the performing party may be able to claim some money for that work

under a separate area of the law called restitution. But it must be stressed that a restitutionary payment is not available while the contract continues to bind the parties. The performing party would only be able to make a claim if the other party terminated the contract because of the performing party’s partial performance. And even if the performing party is eligible for restitution, that does not mean that they will receive the contract price promised, or even a proportionate amount. They will only be eligible for a “reasonable” amount, which will be determined by the court. For these reasons, it is not ideal to rely on restitution. The best way for a party to guarantee some form of payment for work done, even if they do not perform the entire contract, is to negotiate staged payments for work done as it proceeds, rather than for a lump sum that is payable once all the work is done. It is common for complex contracts involving multiple aspects of work or delivery of services to provide for progress payments, in which case performance is to be assessed at each progress milestone. It is more difficult where individual obligations are not expressed to be severable or deliverable in stages. If the contract provides for payment by a stated measure (eg per unit) then it is possible to calculate a price to be paid for substantial or part performance. Some contracts however can only be satisfied by complete performance and thus a failure to provide complete performance will mean there is a breach of contract that can be terminated by the innocent party returning any goods provided and requiring a refund or suing for compensation.

4.8.3.2 Standard of performance tips It is important that you consider what potential consequences may arise from a failure to provide expected performance and then set out a procedure in the contract to address disputes concerning performance. This may include providing for the substitution of goods or services and how the cost of such substitutions will be paid for.

4.8.3.3 Has the right person performed the obligation?

Many business contracts are based on the understanding that particular parties will perform the obligations under the contract themselves. Indeed, the parties to the contract may have been selected because they have a particular skill or reputation and in such a case they are being paid to perform the obligations themselves. It is also possible that the focus of the contract is on a particular good being transferred, or in some outcome or product being produced and it does not matter who performs the obligation, as long as the obligation is performed as specified in the contract. In this case it may be possible for one or more of the parties to contract delegating their obligations to employees or third parties (such as agents). The ability to delegate performance by sub-contracting certain obligations under the contract is a matter that should be addressed under the terms of the contract. 4.8.3.4 Example sub-contracting clauses “Clause 20.1 The Contractor shall not sub-contract or assign any part or parts of the Obligations under this agreement without the prior approval, in writing, of the Client. The Client may, in its absolute discretion, refuse to agree to any sub-contracting or agree upon such terms or conditions as it considers appropriate. Clause 20.2 Any work undertaken under a sub-contract otherwise than permitted under written consent by the Client shall not constitute performance or satisfaction of the obligations under this Agreement. Clause 20.3 Any permission to sub-contract part of the Obligations shall not discharge the Contractor from any liability under this agreement. Clause 20.4 The Contractor is obliged to select a sub-contractor who is qualified to perform the duties under the approved subcontracting and who will perform their obligations with reasonable care, skill and diligence. Clause 20.5 The Contractor shall indemnify the Client for any loss or harm caused by the work of the sub-contractor approved under Clause 20.1.”

If a party to a contract attempts to sub-contract without permission then the other party to the contract may assert that personal performance was a requirement of the contract and refuse to allow the sub-contractor to complete the work. Again, if the sub-contractor has partly performed the obligation then the other party will be required to pay a reasonable amount for the work undertaken.

¶4.9 Performing multiple obligations The timing and manner of performance may depend on whether there are multiple obligations that need to be performed. In such cases it is important to determine whether the multiple obligations need to be: • Performed separately only • Performed separately but may be performed together • Must be performed at the same time • May be performed in any order • Must be performed in a particular order. This assessment may be complicated by the fact that the obligations will often be imposed on both parties, so you will not always have control over the performance if you are relying on the other party to do something first, or to do something at the same time. If an obligation that needs to be performed together with another obligation, or in a particular sequence is performed out of sequence that will raise the question of whether such a breach is of a condition or a warranty — see above for further discussion. 4.9.1 Is there a duty to act in good faith? One issue that arises in some situations involving performance is whether the parties are required by law to exercise their rights under the contract in good faith. For example, if one party fails to comply with a condition is there a duty on the innocent party to given them an opportunity to rectify the situation before exercising termination rights.

This is a difficult and still developing area of law so the answer is not clear or simple. There are various rules of law that address grossly unfair conduct (such as unconscionability) which may be relevant and are discussed in Chapter 9. There is no general duty (implied or otherwise) to conduct business transactions in a transparent, fair or just manner. The line between sharp practice and commercial savvy is a fine one. The law does not prohibit business people from taking advantage of superior bargaining power or commercial leverage. In some cases the courts have been prepared to apply contractual rights within a broad framework of commercial reasonableness based on the circumstances of each particular case. Some of these cases involve long term contracts, where the parties are bound to work together for a lengthy period and where the commercial bargain is vulnerable to the capricious use of power by one of the parties. For example, a franchisee who pours hundreds of thousands of dollars into a franchise business only to have the franchisor terminate their franchise due to a minor breach, but one which allows for termination. Franchise agreements are renown for being heavily weighted in favour of the franchisor. The courts have held that exercising the power of termination should be done in good faith and not unreasonably in the circumstances. The power imbalance between the franchisor and the franchisee led to the introduction of a mandatory franchising code of conduct which is enforceable by the Australian Competition and Consumer Commission (ACCC)1. The courts approach to good faith has differed between implying a requirement to act in good faith into the contract, to being simply a method of interpreting the obligations under the contract. It is common for contracts to include provisions that touch on good faith, with statements such as “best endeavours”, “reasonable endeavours” and general benchmarks of reasonableness and such terms will usually provide a specific enforcement regime that is to be applied if the term is not complied with. Footnotes

1

The Franchising Code of Conduct is available, along with other industry codes, on the ACCC website at www.accc.gov.au/business/industry-codes/franchisingcode-of-conduct.

¶4.10 Commercial considerations in assessing performance This chapter has discussed how to determine what is required of both parties under the contract. This has involved some quite technical legal discussions about classification of terms and the interpretation of contracts. While the legal rules are clear, their application to real commercial situations is rarely clear-cut. The law of contract recognises legal rights under contracts and provides legal ways to enforce these rights which typically involve litigation, court processes or arbitration. These processes are complex, time-consuming and inevitably expensive. Commercial considerations will mean that in many (perhaps most) cases involving contractual disputes the parties will not “lawyer up” and try to resolve the issues in court. In many cases this will be because the parties recognise that legal enforcement will likely damage their commercial relationship with the other party, which they may value more than the cost of minor non-compliance with the contract, or in some cases even more than the cost of breaching the contract. The parties recognise that in most situations the price and hassle of strict legal enforcement of their rights is simply not worth it. The underlying theme of this chapter is that if the parties understand what is in their contract, and what it requires of each party then this will minimise the risk that a dispute will arise. It must be remembered that millions of contracts are performed each day in Australia without dispute or legal enforcement. The law provides a framework to address situations where commercial common sense breaks down.

CHAPTER 5 — CHANGING THE CONTRACT ¶5.1 Introduction Once a contract is formed the parties are legally bound by its terms. Both parties must perform all of the promises each has made to the other, unless the law or the contract itself provides a reason to terminate or avoid performance. This continues to be true even if, once the parties have started performance, external circumstances make performance of the contract inconvenient or unprofitable. But that is not to say that the contract, once made, is set in stone. The parties may make adjustments to the contract to account for or avoid any external circumstance that would otherwise make performance inconvenient or unprofitable. There are many ways that a contract can be changed. For example, the parties might: • Agree to change the terms of the contract • Transfer (“assign”) the benefits to third parties • Agree to change the parties. Normally another contract is required to change the terms of a preexisting contract, but this is not always the case for the following reasons. First, the parties may agree in advance to terms that allow changes to be made mid-performance. Second, certain legal principles may make binding promises to vary performance, even though no variation contract has been made. An assignment (or transfer) of the benefits of a contract will affect to whom a party has to deliver a promised benefit. As a general rule, a party is free to assign a right to an expected benefit without the

consent of the other party, so if a party would like to deal only with the other party to the contract, that party should think about negotiating terms into the contract that restrict or prohibit assignments. It is not possible to assign an obligation or detriment under a contract to another person without their consent. Finally, if the parties would like to change the parties to a contract, then a new contract will be required to which all the parties — continuing and incoming — must agree. The process involves termination of the existing contract and then re-entering another contract on the same terms with the new parties. This chapter will look at what is required to vary a contract in the ways mentioned above, as well as provide advice on what to look out for in respect of each situation.

¶5.2 Varying terms? Or varying the scope of obligations? It is important from the outset to clarify the two senses in which the words “vary” or “variation” may be used when talking about contracts. The first sense of the word “variation” is where the parties agree to change the terms themselves. To change the terms of a contract, it is necessary to enter into a new contract that either removes or modifies them.

Example: AAA Machines 1 A purchaser enters into a contract with AAA Machines for the construction and delivery of some machinery. The contract provides that the purchaser must pay a flat price of $100,000. If, having signed the contract, the parties wanted to change the price of the machinery they must enter into a variation contract to do this because they are changing a term of the contract.

The second sense of the word “variation” refers to changing the scope of the obligations to be performed. This kind of variation may require a variation of the terms, but not necessarily. In the example above, if the manufacturer wanted the purchaser to pay more — ie to increase the purchaser’s obligations — a variation contract would be necessary because the original contract as signed provided for a flat price and nothing more. However many contracts have terms that grant one or both parties the power to increase or reduce the scope of obligations. If this is the case, then there is no need for a variation contract, because the parties have already agreed in advance that the scope of certain obligations may be modified during performance.

Example: AAA Machines 2 A purchaser enters into a contract with AAA Machines for the construction and delivery of some machinery. The contract provides that the purchaser must pay $100,000 for the machinery. Another term in the contract provides that the price may be increased in certain circumstances (for example, if the price of raw materials or labour increases). In this case, assuming that one of the circumstances identified in the term eventuated, AAA Machines could increase the scope of the purchaser’s obligation to pay without any need to enter into a variation contract because the parties had agreed in advance that the price may be escalated in that circumstance. However, if AAA Machines wanted to increase the price because of a circumstance not agreed to in the clause, then that would require a variation contract.

Each of these senses of variation will now be explored.

¶5.3 Varying the terms of a contract

As stated above, a new contract is required to vary the terms of a contract. This means that all the elements of contract formation that were discussed in Chapters 2 and 3 must be complied with: there must be an offer that is accepted, where both parties provide consideration and intend to be legally bound. Lawyers may be called on to draft a formal variation contract that is signed by both parties just like the original contract. If that is the case, it will be clear that a new contract has been executed, the effect of which is to vary or even replace the original contract. Indeed, the advantage of doing this is that both sides will carefully consider the impact that the variation contract will have on the original contract and account for the legal and practical results of the variation in the variation contract. However, a variation contract does not necessarily need to be in the same form as the original contract. Here, it is important to recall as discussed in Chapter 2 that a contract can be written, oral, or partly written and partly oral. Variation contracts are no different. For example, while parties may have originally entered into a contract that was formally recorded in writing by lawyers and solemnly signed, it is possible to then vary that contract by an informal verbal agreement at a later date (for example, at a meeting, on site, by telephone or at a business lunch, etc). This is acceptable and legally enforceable provided that the original contract was not required by law to be evidenced in writing to be enforceable (See Chapter 3). Or the variation may be recorded in an email or letter exchange where changes are discussed and agreed, even though no party formally signs a document that is expressed to be “a contract”, as such. Many contractual disputes are about whether a formal, signed contract has been subsequently modified by informal arrangements made between the parties once performance has begun. The risk with informal variations is that they can creep up on parties. Parties may make informal modifications to performance of a contract from time to time without realising that they have agreed to a binding variation. Often this will not be apparent until a dispute arises and a judge declares that the original contract has been varied. Here it is worth remembering that the law of contract is not so much concerned

with what people actually thought they were doing, but rather with how their external conduct would appear to a third party observer (See Chapter 4). If the new arrangement is binding it is not then possible for one of the parties to insist on performance of an obligation as it used to be. Moreover, if the variation is not carefully considered then parties may unwittingly vary a contract in a way that impacts on the rights and remedies of the parties. For example, if a party breached the original contract and then informally comes to a new arrangement concerning the defaulting party’s obligation, they may unwittingly contract away the innocent party’s right to sue for damages. If parties do modify performance of a contract in an informal manner, it is recommended that the new arrangement be recorded in writing, whether that is in a formal memorandum or even a letter or email. Ideally, a written record of the consent of both parties should also be obtained, such as a signature or correspondence where the parties have expressly consented to the changes. This ensures that both parties are clear on the content of the new or varied obligations and the written record provides useful evidence if a dispute arises about whether the original contract was varied. 5.3.1 Variation clauses Parties can attempt to overcome informal variations by providing in the original contract that variations will not be effective unless they take a certain form or a certain procedure is followed. For example, a term (a “(no) variation clause”) may provide that variations are ineffective unless they are recorded in writing and signed by both parties. Contractors should look out for such terms or consider whether it would be worthwhile including one if none can be found. The benefit of such a term is that it provides a clear signal for when the contract has been varied. If both parties have followed the procedure there can be no controversy about whether the contract was varied. However, their utility as a way of completely preventing informal variations of a contract is limited. Despite the fact that such a term may clearly declare that no variation is binding unless a certain procedure is followed, the law does not prevent parties from later

ignoring or varying that variation term if that is what the parties want. At best such a clause is strong evidence that the parties did not intend a later informal arrangement to be binding until the contractual procedure was followed. 5.3.2 Variations and consideration The difficult part to working out whether a contract has been varied is working out whether the parties have provided consideration for the variation. It was discussed in Chapter 2 that consideration must involve a promise to do something, or to refrain from doing something, that is provided as “payment” for a promise from the other party to do, or refrain from doing, something. Thus, to vary an original contract both parties must provide “fresh” promises to create a new contract that has the effect of varying the original contract. However, in practice it may be difficult to tell if this has been provided.

Example: Plain Ts Pty Ltd 1 Plain Ts Pty Ltd (“Plain Ts”) produces plain t-shirts. It enters into a contract with Novel-Ts Pty Ltd (“Novel-Ts”), a company that prints and sells novelty t-shirts, to supply Novel-Ts with 1,000 plain shirts a month at a certain price for 12 months. The contract is drafted by lawyers and formally signed by both parties. Six months into the contract, Plain Ts encounters difficulty sourcing the cotton it needs to supply 1,000 t-shirts a month for the remaining six months. The managing director of Plain Ts meets for lunch with the chief executive officer of Novel-Ts. The managing director of Plain Ts asks if Novel-Ts would accept 750 t-shirts a month instead with a proportionate reduction in price. Coincidentally, this request suits Novel-Ts as recently sales have been poor and the chief executive officer is looking to reduce its costs. The chief executive officer accepts Plain Ts’ offer. In this case, a new contract has been created that varies the original supply contract. An offer was made by Plain Ts that was accepted by Novel-Ts. Consideration was provided by both

parties promising to release each other from the need to supply/purchase 1,000 t-shirts a month and replace those original promises with the promises to supply/purchase 750 t-shirts a month. From this point on, Plain Ts need only supply 750 t-shirts a month and Novel-Ts is obliged to accept and pay for only 750 tshirts a month.

What is crucial to the above scenario is that there was an exchange of promises that were different or additional to the ones already made under the original supply contract. For the variation contract to be binding, the law requires “fresh” or “new” consideration, not just a reiteration of the promises made under the pre-existing contract. If all that one party does is promise to do exactly as he/she promised under the original contract, then the law would describe this as merely promising to perform a pre-existing obligation and that is not “good” consideration. The following example modifies the facts above in Plain Ts Pty Ltd 1 to demonstrate what is meant by a pre-existing obligation.

Example: Plain Ts Pty Ltd 2 Plain Ts and Novel-Ts enter into a supply contract whereby Plain Ts promises to provide 1,000 plain shirts a month at a certain price for 12 months. Two months into the supply contract, the price of cotton increases by 15%, making the supply contract unprofitable for Plain Ts. Plain Ts asks Novel-Ts to pay an extra 15% and Novel-Ts agrees to do this. This new arrangement would not be binding. Why? Because Plain Ts did not promise to do anything additional to what it had already promised under the original contract (supplying 1,000 tshirts a month) in return for Novel-Ts promise to pay the extra money.

The pre-existing obligation rule is a default rule that was developed hundreds of years ago and still applies today. However, these days the law is much more accommodating of variations where one party promises to perform a pre-existing obligation and the other party receives a “practical benefit” from that obligation being performed as originally agreed. This practical benefit concept will now be analysed. 5.3.3 Practical benefit A “practical benefit” is a benefit that is enjoyed by a party (“A”) who pays more than originally agreed to the other party (“B”) for B to do no more than B originally promised. The benefit is not promised by B — all B promises to do is perform the contract as originally agreed. However, if A gains a benefit out of B performing the contract as originally agreed, then A’s promise to pay more may be binding.

Example: Plain Ts Pty Ltd 3 Recall the facts in Example: Plain Ts Pty Ltd 2 concerning the 12-month supply contract between Plain Ts and Novel-Ts, where the cost of cotton increases and Plain Ts approaches Novel-Ts to ask if it will pay 15% more for the same amount of T-shirts. Assume that Plain Ts asks for more money is because it genuinely will not be able to fulfil the contract if it is not paid the extra money. Rather, it will go out of business and be unable to pay compensation to Novel-Ts for failing to perform the contract. It was said in Example: Plain Ts Pty Ltd 2 that Novel-Ts’ promise to pay the extra money is not enforceable because all Plain Ts promised to do was fulfil its pre-existing obligation. In other words, Plain Ts did not provide any fresh consideration for Novel-Ts promise to pay the extra 15%. Ordinarily, that would be the end of the matter. However, assume that by agreeing to pay the extra 15% NovelTs would realise the following benefits: it would not have to

source a new supplier and it would not default on other contracts it has already entered into to supply the finished t-shirts to retailers. In this case, those benefits could be sufficient “practical benefits” enjoyed by Novel-Ts that would make its promise to pay the extra 15% enforceable. Note how Plain Ts does not promise that Novel-Ts will obtain those benefits: rather they are just benefits that accrue in fact to Novel-Ts by agreeing to pay more for performance of the original promise from Plain Ts.

The examples used so far have assumed that practical benefit may make a variation binding when one party agrees to pay more for the same promise. In fact, the practical benefit principle can work in the following circumstances: The parties agree to a variation whereby: 1. One party agrees to pay more than was agreed for a good or service, or 2. One party agrees to accept less of a service or a cheaper good but continue to pay the original price. The principle is seen as a pragmatic approach to the realities of commercial life. The reality is that parties to contracts frequently come to arrangements similar to those described above because it will be of much more benefit to both parties if one agrees to pay more for the same good or service, or accepts less for the same price, as long as the original contract is substantially performed. If anything, such an arrangement avoids the time, money and stress associated with litigation. Hence, the law has developed to make enforceable these kinds of arrangements. The problem with the practical benefit principle is that it does not sit easily with the default rule about pre-existing obligations. This creates uncertainty. It makes it harder to work out when a promise to pay more or to accept less will be binding. This is because it will probably

always be possible to identify a “practical benefit” in having a contract performed, rather than terminate it and sue for breach. For this reason, parties to a contract should be very careful about agreeing to pay more or accept less, believing that the promise is gratuitous or that the obligation to pay is optional, as the law may have a different view. Conversely, a party who hopes to enforce a promise to pay more for the same work, or a promise to accept less for the same price, should consider having that promise recorded in a deed to remove doubt about the enforceability of the promise. Deeds do not require consideration and thus the uncertainty of the practical benefit principle can be avoided. Finally, it should be pointed out that the law will not find a promise supported by a practical benefit enforceable if the promise was extracted by extortion or unfair pressure. The courts will scrutinise a claim that a variation is binding by reason of practical benefit to make sure that one party has not taken advantage of the commercial vulnerability of the other party by cynically halting performance and demanding more money for the same work. The courts must be convinced that the variation was a bona fide attempt to come to a mutually agreeable arrangement to which both parties properly consented.

¶5.4 Terms that allow the scope of obligations to be varied At ¶5.2 it was said that it is important to distinguish between varying the terms of a contract and varying the scope of the obligations to be performed. Often, if parties want to vary the scope of obligations to be performed then that will require terms to be changed and thus a new contract is needed. However, the parties can avoid the need for negotiations about a new contract by agreeing to terms in the original contract that confer the power to vary the scope of obligations to be performed. This section of the chapter considers those kinds of terms. Terms that allow for the scope of obligations to be varied are essential

to long-term contractual relationships where it is impossible to plan for every contingency. This is especially the case where the contract is intended to cover a highly technical or complicated project where any number of factors might impact on timely performance. They are also commonly found in contracts that create an indefinite service relationship that is terminable on notice, like many consumer contracts. Having the power to make changes to obligations as required removes the need for constant new agreements with clients or customers. You do not need to look far to see these types of terms in operation. For example, many credit card contracts confer on the credit provider a power to vary the terms of the contract with notice. Under such a power the credit provider can typically unilaterally increase or reduce the interest rate, introduce new fees, vary things like the interest-free period, etc. In this case, the consumer must accept the changes or terminate the contract. It should be noted that certain consumer credit contracts have specific legal requirements that must be followed before changes to the contract can be made. Variation terms are also common in construction contracts. In this case, because the subject matter is so complex, such terms will make up an entire section of the contract spelling out the circumstances in which a principal can order changes be made to work, the extent of changes that can be ordered, and the process by which the additional remuneration for the contractor will be calculated. Every contracting party should carefully read a contract to see whether it confers on the other party a right to vary terms or the scope of the contractor’s obligation. In particular it should be noted: • Is there a procedure that needs to be followed? For example, is notice required before the variation can be made? • Does the party have any right to object or refuse the proposed variation? • Does the contract provide for the party to claim additional payment if the other party requests new or additional work to be done? How is that payment calculated?

• To what extent can the other party alter the party’s obligations? Is it limited by the scope of work as originally agreed? Or can the other party essentially order anything? A term that confers an unfettered discretion to vary the contract may render the contract void for uncertainty. • Does it confer on the other party an unfettered discretion to perform at all? Such a term may make the contract illusory and unenforceable. It will be necessary to read the entire contract to find any terms that allow for variations to be made by the parties. Although often in a written contract there may be a section headed “Variations” or something similar, nonetheless the power to vary obligations may be found elsewhere. For example, a credit card contract may confer on the credit provider a power to vary the terms generally in one section headed “Variations” or “Changes to this contract”, but the power to vary interest rates may be found in a section headed “Interest”. Contractual parties hoping to put a variation term in to allow them maximum flexibility to limit their own performance or impose further obligations on the other party should take note of the last two dot points listed above. They should also be aware that legislation may interfere with powers to unilaterally change contracts. For example, the Australian Consumer Law provides that terms that are “unfair” are void and unenforceable. A term that confers on a contractor dealing with a consumer the power to arbitrarily increase the consumer’s obligations with no option for the consumer to negotiate or opt out may fall foul of this legislation.

¶5.5 Waiver and estoppel The preceding sections have established that, as far as contract law is concerned, for parties to vary a contract they need to enter into a new contract, or agree in advance to terms that allow variations. However, contractors should be aware of other principles of law, separate from contract law, that may also make promises to vary a contract binding.

The principles of waiver and estoppel can make binding a promise made by one party, even if the other party has not provided consideration or a practical benefit for that promise. Typically, promises that are made binding by waiver and estoppel consist of promising not to enforce the contract as originally agreed. These terms are explained in some more detail below. (See also the discussion of estoppel in Chapter 3) It should be pointed out again that, like a variation contract, a waiver or an estoppel can be created orally (for example, by telephone or at a meeting) or be made in writing (for example, in email communication), even if the contract itself is in a formal document and signed by both parties. 5.5.1 Waiver It is possible for a party to waive fulfilment of a term that is in the contract for their benefit. A party “waives” fulfilment of a term by clearly indicating to the other party that they will not insist upon the term being fulfilled and that they are abandoning any rights in respect of it. Once a party waives performance of such a term, that party cannot then change their mind and insist upon it being fulfilled.

Example: Big Store A purchaser enters into a contract with Big Store to purchase a television that is to be delivered on 1 May. On 28 April, industrial action by Big Store’s delivery staff throws into doubt Big Store’s capacity to deliver the television on time. Big Store contacts the purchaser to advise them that the television will not be delivered on 1 May and that they cannot commit to a new date for the immediate future. The purchaser says that they do not mind if the television is not delivered on 1 May and that it can be delivered as soon as it is possible. In this case it could be said that the purchaser has waived performance of the promise to deliver the television on 1 May. Because of this, the purchaser cannot now insist that the

television is delivered on 1 May.

A party can reduce the risk of waiving performance of a term by making it clear that they are prepared to make a minor modification to performance, but otherwise reserve their legal rights in respect of the relevant term. Or they can limit the extent of the waiver. For example, in the example given above, the purchaser might say that they will not insist on the television being delivered on 1 May, but that it must be delivered within a week and that they reserve their rights to take action if the television is not delivered. Another way that parties can try to control waiver is by inserting a term into the contract. For example, a term might provide that should one of the parties waive strict performance of an obligation (for example, payment or delivery on a particular day) that, of itself, does not mean that the obligation need not be performed at all, or does not impact on performance any other obligation. 5.5.2 Estoppel Estoppel is a second principle that may make binding a promise not to enforce a contract. It operates very similarly to waiver, so much so that it is sometimes said that they are really one and the same principle. The point of distinction seems to be that in a case of estoppel, the law looks to see if a party has been encouraged to rely on a promise to their detriment. On the other hand, a case of waiver focuses more on a party’s voluntary choice to forego a benefit. In many cases, the two principles overlap. Estoppel was discussed in Chapter 3. The same principle applies in the context of variations to a contract: if one party (“the promisor”) encourages the other (“the promisee”) to act upon a promise that the contract will not be enforced in a certain way, and the promisee incurs detriment by relying on that promise, then the promisor will not be able to change their mind and enforce the contract.

Example: Haakon Janelle has entered into a contract to purchase real property (“Property A”) from Haakon. The contract provides that completion of the sale is conditional on Janelle first selling another property she owns (“Property B”) within three months. Towards the end of the three months, Janelle still has not sold Property B, but tells Haakon that she still intends to proceed with the purchase of Property A. Because of this assurance, Haakon foregoes the opportunity to sell Property A to someone else. The three months pass and Janelle has not sold Property B. Janelle now does not want to complete the purchase of Property A and tells Haakon of this, relying on the term that provides that the completion was conditional on the sale of Property B within three months. Janelle may be “estopped” (ie prevented) from relying on her contractual right to end the contract if Property B was not sold within three months. This is because by making the promise that the conditional term would not be relied upon, Janelle encouraged Haakon to refrain from entering into a contract to sell Property A to someone else. In other words, Haakon was encouraged to act to his detriment.

Thus, a party must be careful when granting indulgences to another in a contract especially when that other party makes it clear that they will be relying on that indulgence to their detriment. If that is the case, the party granting the indulgence must be prepared to honour it and must give reasonable notice to the other party if they want to return to performance of the contract as originally agreed.

5.5.3 Variations, waiver and estoppel tips Before signing

Look for terms in a contract to see whether they allow one or both parties to vary the contract unilaterally and within what ranges: • To what extent can one or both parties vary the contract? Is this reasonable? • Is there scope for the other party to refuse the variation? • Is there scope to claim additional payment for the extra work done? Consider coming to agreement on how the contract may be varied by agreeing to a procedure in the contract. Typically, such procedures require the variation to be in writing and signed by both parties. To remove doubt about the enforceability of a variation, consider having the promises made executed as a deed. During performance Document newly agreed processes, especially where they impact on fundamental obligations to be performed under a contract. Be careful making off-hand promises that reduce the obligations on the other party, or induce them to act to their detriment. The law may hold you to this (practical benefit, waiver, estoppel).

¶5.6 Assignment and novation The preceding sections have considered the situations in which the terms of the contract are changed, whether by consent under a new contract, by terms that allow variation, or by force of other principles of law. But it is not just terms that can be changed. It is also possible to change the parties to a contract under the principles of assignment and novation. These will now be considered. 5.6.1 Assignment The principle of assignment (ie transferring rights under a contract) allows a party to a contract to transfer the right to a benefit they expect to receive from the contract to a third party. For example, a service provider who has a right to payment under a contract with a client may assign that right to payment to a third party. Indeed, “factoring”, as it is known, is a very common commercial practice as the following example demonstrates.

Example: Chemico Pty Ltd 1 Chemico Pty Ltd has a right to be paid $50,000 on 1 June for the supply of chemicals to AgriFuture Pty Ltd. However, Chemico has a pressing need for cash sooner than 1 June. Chemico cannot insist that AgriFuture pay any sooner due to the terms of the supply contract. On 1 April, Chemico therefore agrees to sell its right to payment to Rapid Finance Pty Ltd for $45,000, which is paid by Rapid Finance on signing of the contract. This sale results in the assignment of the right to payment owned by Chemico to Rapid Finance. Thus, Chemico receives the cash it needs on 1 April. Rapid Finance, as the assignee of Chemico’s right to payment, will then be able to insist on payment of $50,000 by Agrifuture to it on 1 June. In so doing Rapid Future will make a profit of $5,000.

Note how in the above example Chemico assigned a right to a benefit. It is only possible to assign benefits, not burdens. Hence, Chemico could not assign its obligation to supply chemicals to Agrifuture to Rapid Finance. If a party wants to transfer both the benefits and obligations of a contract to a third party then a novation is required (discussed in the next section). Once a benefit has been assigned, it creates a legal relationship between the parties to the original contract and the person to whom the benefit has been assigned. For the purposes of explaining this relationship the party who assigned the benefit will be called the “assignor”, the other party to that contract will be called the “obligor” and the third party who receives the assigned benefit will be called the “assignee”. As a matter of strict law it is not correct to say that assignment results in making the assignee a party to the contract. However, the assignment does allow the assignee to sue the obligor directly on the contract to receive the benefit that was assigned. Thus, in the above

example, once Chemico (the assignor) assigned the right to payment by AgriFuture (the obligor) to Rapid Finance (the assignee), Rapid Finance could sue ArgiFuture directly for the payment of $50,000 on 1 June. From the point of view of the obligor, while it must give any promised benefit that has been assigned to the assignee, it cannot ask the assignee to perform any obligations of the assignor. Thus in the above example, Chemico remains obliged to perform any unperformed obligations owed to Agrifuture as all that Chemico has done is assign a right to a benefit, not get out of the contract with Agrifuture. Agrifuture could not ask Rapid Finance to supply the chemicals. There are limits to what benefits the law will allow to be assigned. The law will not allow rights that are “personal” to be assigned. A personal right is one where it is apparent from the terms of the contract that the parties intended only to deal with each other and no one else. A common example of such a contract would be a contract for the supply of personal services. For example, if an employer hires an employee to do a certain job, it is likely that the employee agreed solely on the basis that he/she would be working for that particular employer. The law would prohibit the employer from assigning that right to receive work from the employee to a third party. Parties can also impose their own prohibition on the assignment of benefits by putting terms in the contract forbidding assignments. This is something that contractors should think about when entering into a contract because, generally speaking, the law allows assignment of rights without the consent of the other party. Hence, contractors should consider whether they are comfortable with the idea of the other party assigning benefits to third parties because that may result in the contractor dealing with people who were previously unknown to them. If they would rather deal only with the other party to the contract, then they should negotiate a term into the contract that outright forbids assignment, or at least makes it subject to their written permission. For example, it is very common for leases to contain terms forbidding the tenant from assigning their rights under a lease to a third party without the landlord’s permission. In such a relationship, it is obvious that a landlord would want to have some control over to

whom rights are assigned as the relationship of landlord and tenant is a close one that can last for many years. Conversely, a contractor that wants maximum freedom to assign benefits should look for these kinds of terms and negotiate out of them if possible. Contractors should also be aware of potential “deemed assignments” in contracts. For example, often contracts where the parties are corporate entities contain “change of control” provisions that set out what rights one of the parties has if there is a change in the control or ownership of the other party. Often such terms will be a defined as a “default” that allows the benefitted party to terminate the contract. However, sometimes they may deem a change in control as an assignment, which then engages the terms of the contract that deal with assignments. As to the form of an assignment, the law requires that any assignment be recorded in writing and signed by the assignor, with notice of the assignment provided to the obligor in writing. While it is possible to effectively assign a right to a benefit if the formal requirements have not been satisfied, it is strongly recommended that the legal requirements be followed to avoid doubt. Any dealing with legal rights should be recorded in writing to provide evidence should a dispute later arise. 5.6.2 Novation A novation, in substance, is where one party “drops out” of a contract and is immediately replaced by a new party. Unlike assignment, novation involves a true change of the parties to a contract. The utility of a novation is that it allows both the benefit and the obligations of a contract to be transferred to a new party. This is one of the key points of distinction between an assignment as explored above and a novation. So when a new party is novated into a contract, that party then becomes wholly responsible for performing unperformed obligations as well as entitled to receive any promised benefits.

Example: Chemico Pty Ltd 2 Chemico Pty Ltd and AgriFuture Pty Ltd are in a long-term supply contract whereby Chemico supplies chemicals to AgriFuture to manufacture fertilizer. AgriFuture sells its business to FoodTech Pty Ltd and thus AgriFuture no longer wants to be bound by the supply contract with Chemico. The parties may all consent to novate that supply contract from AgriFuture to FoodTech. That is, the parties may sign a deed whereby Agrifuture is released from the supply contract and Foodtech is substituted into AgriFuture’s place. If this is done, Foodtech will receive the benefit of the supply of chemicals, but, unlike an assignment, will also be obliged to pay for them.

As a matter of law, what happens when a contract is novated is that parties to an original contract (in the example above, Chemico and AgriFuture) agree to release each other from that contract and then one of those parties (Chemico) and a new party (FoodTech) enter into a new contract on exactly the same terms as the original contract. This has several consequences. The first consequence is that, unlike an assignment, all the parties involved have to consent to the novation. Thus a party that is worried about dealing only with the other party to the contract for the duration of it does not need to negotiate a term providing that it must consent to any novations. That said, contractors may like to put terms in that make it clear that only express consent that is recorded in writing is effective to ensure that no informal or implied consent is argued. The converse of that position is that contractors should look for terms that oblige them to accept a novation. For example, a corporate party that is part of a corporate group may want the freedom to novate its contracts to other entities within the group without having to seek the consent of the other party every time. If a party (“the outgoing party”) does have freedom to novate, the other party (“the continuing party”)

should carefully consider how this may impact on other contractual arrangements concerning the outgoing party. For example, if guarantees were provided by third parties to guarantee the outgoing party’s obligations, then they may be useless once the outgoing party has novated out of the contract. Additionally, as mentioned at ¶5.6.1 above in the context of assignments, the contract may provide that a change in control is a deemed novation and attract the operation of any express terms in the contract dealing with novations and change of control. The second consequence of a novation is that, because the original contract is terminated and the released party (in the example above: AgriFuture) is released, generally speaking, the continuing party (Chemico) can no longer claim anything from the released party and must now only deal with the new party (FoodTech). For this reason it is very important that outstanding rights and liabilities from the original contract are clearly identified and dealt with, lest the continuing party find that valuable rights were extinguished by the novation. To avoid this problem, it is common for the continuing party to insist on any or all of the following as part of the “price” of agreeing to the novation: • that the outgoing party guarantee the performance of the incoming party • that the outgoing party indemnify the continuing party in respect of any loss arising from the novation • that the outgoing party agrees to abandon any claims that it may have had against the continuing party • that the outgoing party cover all of the legal fees and related costs associated with preparing the contract of novation. For example, Chemico may agree to the novation of AgriFuture for Foodtech, provided that AgriFuture either guarantee that Foodtech will perform its obligations, or provide an indemnity against any loss resulting from agreeing to the novation, and also provided that AgriFuture agrees to abandon any legal claim it may have had against

it.

5.6.3 Assignment and novation tips • It is possible to assign the right to benefits promised in a contract. Generally speaking, this does not require the consent of the other party. Parties who want only to deal with the other should consider prohibiting assignments or making them subject to their consent. • A novation is where a party is removed from a contract and a new one substituted for them. This requires a new contract and the consent of all parties involved. • A novation can result in more complicated legal issues as the original contract is terminated and a new one entered into. Valuable rights may be lost when the original contract is terminated and the substitution with a new party may result in other contractual relationships (eg guarantees) being affected. • Novation and assignment may attract the operation of “change of control” terms in a contract.

CHAPTER 6 — ENDING THE CONTRACT BY AGREEMENT ¶6.1 Introduction As noted in the Introduction of Chapter 5, the law does not let parties out of a contract lightly. Once the parties have committed to a contract the law provides that the parties must perform it or pay damages for failing to perform. In the absence of a term allowing for it, the law will allow early termination of a contract only if: • The parties agree to terminate it — the subject of this chapter • One party has seriously breached or repudiated it and the other party elects to terminate it (Chapter 7) • A supervening event radically changes performance of it (Chapter 8) • A problem with formation vitiates the consent of one or both of the parties (Chapter 9). In other words, the law does not allow parties to avoid the contract purely because performance has become difficult or unprofitable, even if a party can show that those outcomes were not due to the fault of the party. But the essence of a contract is that the parties are free to organise legal relations between themselves. Sometimes it may be desirable for parties to terminate a contract before it has been fully performed. This chapter considers two ways that parties can agree to do this: 1. By agreeing part way through performance to end the contract, and 2. By way of a term that allows early termination.

The consequences of terminating the contract early will be considered at the end of the chapter.

¶6.2 Termination by agreement One way that parties can terminate a contract is to agree to do so. This can be achieved by entering into a new contract where the parties agree to terminate the existing contract. This is similar to varying a contract as was discussed at ¶5.3. As termination requires a new contract all the elements of contract formation are required: offer, acceptance, consideration and intention. The contract of termination does not need to be in any particular form: it can be written or oral. It is possible to terminate a formally executed existing agreement by informally orally agreeing to do so. For example, parties may orally agree to terminate a contract at a business lunch or by telephone. Importantly, a contract that is required by law to be in writing to be enforceable (See Chapter 3) can be terminated orally, but not varied orally. However, as always, it is preferred that any agreement to terminate a contract is captured in writing to avoid later disputes about whether the parties agreed to the termination. The writing does not need to take any particular form. For example, it could be an agreement made by way of exchange of emails. Ideally, if the contract is complex and substantially performed, legal advice will be sought and the lawyers can record precisely the termination and also the consequences of the termination (See further below at ¶6.4). A legally drafted and executed contract will also eliminate any problems concerning whether the parties intended the termination to be binding. In many cases, if the agreement is drafted by lawyers, the parties will sign something called a “Deed of Release” to clarify that both parties are abandoning any rights to enforce the terminated agreement. An issue that may arise when entering into a contract of termination is whether the parties have provided sufficient consideration to make the contract binding. If no consideration is provided by either party, then

the new contract will not be effective to terminate the existing agreement. Here, the law sometimes draws a distinction between a mutual release and a unilateral release. 6.2.1 Mutual release A mutual release is one where both parties still have outstanding obligations to perform under a contract and they mutually agree to release each other from performing the remainder of the contract. In this scenario, the parties agree to terminate the existing contract and the consideration that they provide are promises to release each other from having to perform it. Here, it can be seen that consideration is seldom an issue. 6.2.2 Unilateral release Consideration may be more of a problem where only one party (Party A) has an outstanding obligation, or obligations, to perform and the other party (Party B) has no obligations left to perform and agrees to terminate the contract. In this case, while Party B can promise to release Party A from having to perform their outstanding obligations, Party A has to promise something in return otherwise they will not have provided any consideration to make the termination effective. Party A can provide anything as consideration: a promise to perform a different obligation, a promise to pay a certain amount for the release, etc. To avoid doubt in this situation, it may be better to execute the release in the form of a deed (See Chapter 2). Deeds do not require consideration to be binding. 6.2.3 Implied termination by agreement For completeness, it should also be mentioned that it is possible for parties to impliedly terminate a contract. In this case, the parties do not consciously make the decision to terminate a contract, rather, the parties conduct themselves in a way that the law holds as impliedly indicating that they want to terminate an existing contract. This can happen two ways. First, the parties may enter into a contract that impacts on performance on an existing contract, but the parties may not make

clear how the two contracts are to work together. In this case, the law may hold that the existing contract was merely varied (See ¶5.3). On the other hand, the court may find that the existing contract was terminated and replaced by the new contract. Given the uncertainty of outcome, if parties do plan to enter into a contract that will affect the performance of an existing one, it is recommended that legal advice be sought before entering into the second contract to ensure that the fate of the existing contract is clearly considered and documented. Second, the parties may abandon performance. If the parties give up on performance and do not call on each other to perform then, after a reasonable period of time, the law will declare that the parties have impliedly agreed to terminate the contract. However, mere delay in performance of an obligation is not abandonment of the contract. Particularly if a contract has been partly performed, a court needs to be thoroughly convinced that the parties are abandoning any valuable rights they may have earned before it will declare the contract terminated.

6.2.4 Termination by agreement tips • Parties can terminate an existing contract by entering into a new contract where they agree to terminate the existing contract. • The contract of termination can be in any form: written or oral, formal or informal. Contractors should carefully note any conversations where parties agree to terminate a contract. Ideally, an agreement reached should be recorded in writing as evidence. • Consideration may be an issue if one party has fully performed and the other party agrees to release them from performance. To avoid doubt about consideration, it may be better to execute agreements to terminate in the form or a deed. • It is possible to impliedly terminate a contract by conduct.

¶6.3 Termination pursuant to a term The preceding section explained how, once performance of a contract

is underway, the parties can enter into a new contract to terminate it. However, this requires agreement which may not be forthcoming if relations between the parties have soured. Another way for parties to agree to an early termination is to agree to terms in the original contract that allow early termination. It is very common for a contract to contain terms that allow for termination in circumstances much wider than the general law will allow. This makes good commercial sense. No business wants to find that it is committed to an unprofitable contract that could have been avoided if the appropriate term had been agreed to in advance. Following are some common types of terms that allow early termination, including “evergreen” clauses which, rather than allowing termination, perpetually renew the contract. 6.3.1 Termination at will Parties are free to agree that either can terminate the contract “at will”. In other words, whenever they feel like it. Often such terms require that notice of the termination must be provided a certain time before the termination will become effective. For example, in employment contracts, it is common that employees must provide four weeks’ notice of their intention to leave the employer. Contractors should carefully read contracts to see if any terms permit one or both of the parties to terminate the contract at will. In cases where at least the other party has the power to terminate at will, a contractor should check to see how their interests are protected. For example: • Does the term require that the other party must give notice of their intention to terminate the contract? Is the period of notice sufficient for the contractor to arrange their business affairs in an orderly manner? • Does the contract allow for payment for services rendered up to the time of termination? • Is there scope for the contractor to receive compensation from the other party for any wasted expenditure?

6.3.2 Contingent conditions A contingent condition is a term that provides that performance of a contract is subject to a certain condition being fulfilled that neither party promises will be fulfilled.

Example: Prime Developments 1 Prime Developments Pty Ltd (“Prime”) agrees to purchase rural land from Malcolm. Prime intends to develop the land into a housing estate, but needs to obtain approval from the local council to do this. Prime is concerned that the council may not grant the approval, in which case it does not want to complete the conveyance. Prime negotiates a contingent condition into the contract for sale that allows it to rescind the contract if the approval is not provided before the settlement date. The term further provides that if the contract is terminated Prime will get back its deposit less a small amount as payment to Malcolm for the inconvenience of the contract not settling. In this example, the contract is subject to council approval. It is important to note that neither Prime nor Malcom promise that council approval will be given before completion. Rather, if the approval is not forthcoming then Prime will be able to end the contract and not be bound to proceed with an expensive and unwanted purchase.

A contractor should carefully read any contract to see if there are any contingent conditions that allow for termination before the contract is fully performed. Such terms may be described as “condition precedent”, “condition subsequent”, “conditional contract” or words to similar effect. If a contingent condition is found, the contractor should note: 1. The circumstances that will allow termination

2. For whose benefit does the contingent condition exist? Does is protect just one or both parties? 3. Whether the contractor’s interests are adequately protected if the contract is terminated. For example, is there any right to claim payment for services rendered or for wasted expenditure? The first point is important as the conditions provided in the term define the threshold at which the contract may be terminated. It is important that the circumstances that allow termination are clearly defined to avoid doubt or dispute. In some instances: • the condition will be one that is “objective” and thus both parties will be able to assess whether the condition has been fulfilled, and • the occurrence of the condition will not depend upon either party doing anything to bring it about. For example, if a contract was subject to the condition that the Reserve Bank did not raise the cash interest rate during the settlement period, it will be clear whether or not that has occurred and neither party has to do anything to ensure that the rate does not change. However, in some cases the condition will be based on subjective factors or will require one or both parties to take positive steps to ensure that the condition is or is not fulfilled. Consider the following example.

Example: Prime Developments 2 Recall the facts given in Example: Prime Developments 1. Assume now that the contingent condition provides that the contract is subject to the local council granting development consent on terms that are “satisfactory” to Prime.

Now assume that Prime, having signed the contract, decides that it does not want to complete the contract irrespective of whether the council provides approval on satisfactory terms. If it were so minded, it could avoid completing the contract by: • Not applying for the consent, or • Declaring that it was not satisfied with the terms of any consent given. This outcome is not ideal for Malcolm. He is left waiting to see if the contract will be completed, without assurance that Prime is genuinely seeking or considering the council’s approval. Although the law will probably imply an obligation on Prime to honestly and diligently seek the council’s approval and to honestly assess whether the consent terms are satisfactory, Malcolm could make this obligation clear by insisting that the contingent condition itself spell out that Prime must undertake its “best efforts” to seek the approval, and that Prime must not act dishonestly or unreasonably when assessing whether the terms are satisfactory. This way, while Prime would not be liable for breach of contract if the council did not give approval to the development, it would be liable for failing to take steps to genuinely apply for and consider the consent.

Another way that parties can make a contingent condition more certain is to specify a time by when the condition must be fulfilled. If the parties do not state a time by when a contingent condition must be fulfilled, then the law will say that it must be fulfilled within a “reasonable” time. Unfortunately, this measure of time is not clear and no doubt both parties will have different ideas on what is “reasonable”. Such uncertainty is best avoided by designating a clear time by when a condition must be fulfilled. The second and third questions above are particularly important if the contingent condition allows for performance to be terminated if the

contract has been significantly performed. Example: Prime Developments 1 provided that performance of the principal obligation (Prime to pay for the land) was conditional on the council granting approval. Thus, performance of practically the entire contract was subject to the condition. Many contracts will be like this. However, a contingent condition may also provide that a contract that has been performed for some time may be terminated if a certain condition is fulfilled. For example, an importer may enter into a long-term contract with a supplier that provides that the importer will accept and pay for a certain product on a monthly basis provided that the importer retains its license to do so. That is, the parties are obliged to keep performing until the contract is completed or the event occurs. A force majeure clause (see ¶6.3.4) can also operate like this. If it is the case that a contingent condition allows for termination of the contract at a late stage of performance, then the contractor should ensure that they will not be adversely affected in the event of that occurring. Thus, the contractor should ensure that the contract provides to a right to payment for services rendered to that point and, perhaps, compensation for wasted expenditure. If a contract does not contain any contingent conditions, a contractor should think about whether they may like the option to terminate the contract if certain conditions arise. Here, the contractor should be careful: if the contractor tries to make the contract one that is completely up to their discretion to perform, the law will say that it is an “illusory” contract and is not enforceable (See Chapter 2). It may also discourage the other party from contracting if it seems that they may invest time and money into performance that may come to nothing if the contractor can suddenly end the contract on a whim. 6.3.3 Termination for breach A contract may also modify when and how it can be terminated when a party breaches it. This kind of term is considered in Chapter 7 at ¶7.3. 6.3.4 Force majeure clauses A force majeure clause is a term that identifies when certain events beyond the parties’ control will either suspend performance of a

contract or allow one or both parties to terminate it. It is considered in more detail in Chapter 8. 6.3.5 Implied power to terminate As discussed in Chapter 4, a contract may be made up of express or implied terms. An implied term is one that a court is prepared to find exists based upon what the parties had actually expressly agreed to, even though the parties never consciously considered it. It is possible that a contract may contain an implied term allowing for termination with reasonable notice. Such a term is more likely to be found in an informal contract where both parties have agreed to ongoing, indefinite obligations and there is no lawful way to terminate the contract short of repudiation, serious breach or a frustrating event. If the court is prepared to find an implied term that allows termination of a contract with notice, the law will insist that any party purporting to terminate under that term must give the other party reasonable notice of the termination. This is to allow the other party a reasonable opportunity to make alternative arrangements. As always, what is “reasonable” will depend upon the circumstances and parties may disagree on what that means. Relying on an implied term is risky. It is not easy to convince a court that an implied term exists, as the discussion in Chapter 4 demonstrates. If a party asserts an implied power to terminate and the court does not agree that such an implied term exists, the terminating party will be guilty of repudiating the contract. To avoid doubt the parties should consider agreeing to express terms that clearly set out when the contract can be terminated. 6.3.6 Evergreen contracts Whereas up to now in this section of the chapter the focus has been on terms that allow early termination, here the problem is not early termination but a contract that will not end! An evergreen clause is a clause that has the effect of automatically renewing a contract for another term unless the customer has notified the merchant that they do not want it renewed. More often than not, the notice must be provided before a certain period before the contract

renews. For example, a membership contract may provide that notice of termination must be provided no later than 30 days before the contract is due to renew. This type of term is common in consumer contracts that provide services, such as gym memberships, internet service providers, etc. But they also exist in commercial contracts. If a contract involves an ongoing service contractors should be careful to identify if any evergreen clauses exist. If an evergreen clause exists, the contractor should note the notice period and perhaps set a reminder to review the contract well before the notice period expires, lest they find themselves committed to a contract for another term and have to pay break fees to exit the contract. 6.3.7 Restraints on the power to terminate If a contract contains terms that allow termination, the exercise of the power will be subject to any procedures agreed to by the parties and, sometimes, an implied obligation to exercise the power in good faith. A court will expect that the party terminating the contract will follow any procedure provided by the contract. This is because such procedures exist to give the other party an opportunity to make adjustments to their own affairs to soften the blow of the termination. If a contract has provided a procedure to terminate then the terminating party should follow that procedure. Failure to do so may mean that the termination is ineffective and that the terminating party has repudiated the contract! (Repudiation is discussed in Chapter 7) There is also a growing acceptance that a power to terminate should be used in good faith. This does not mean that a contractor must place the interests of the other party before their own interests if they want to terminate a contract. Rather, the party terminating should exercise the power reasonably and not maliciously to deliberately injure the other party. Although the law is not settled concerning this obligation to act in good faith, contractors should be aware that the concept is now sufficiently prominent in contract law that it should not be ignored.

6.3.8 Termination tips Carefully read a contract to see if there are any terms that allow either party to terminate the contract. If any are found, check: • In what circumstances can the contract be terminated? Can it be terminated at any time? Or only when certain circumstances are met? • Are your interests protected? Eg does the other party have to give notice in advance? Is that time sufficient? Are there sufficient safeguards in the contract to ensure that you are compensated or paid for services rendered to that point? If any contingent conditions are found: • Does it clearly define what condition must be fulfilled? • Does the condition require input from one or both parties? If yes, consider expressly including an obligation that parties must act honestly and reasonably. • By what time does the condition have to be fulfilled? If none is given, consider whether you need the certainty of a specific date and time. • Ensure that your interests are protected if fulfilled. If no terms in the contract allow early termination, consider whether it is worthwhile to have that option negotiated into the contract. Be aware of and note any “ever-greening” clauses: clauses that will perpetually renew the contract unless you take pre-emptive action to stop the renewal. Ensure that any procedures — including notice periods — to terminate the contract before renewal are noted. If you have the power to terminate, be aware that you: • Should follow any contractual procedures provided, and • May be obliged to exercise that power in good faith.

¶6.4 Legal consequences If parties to a contract agree to terminate a contract part way through performance they should consider carefully the consequences of the decision to terminate. This is because in law, a contract can be ended in two senses: 1. It can be terminated, or

2. It can be rescinded. Termination: If a contract is terminated, then the contract is not gone. All that has happened is that the parties are released from further performance of it. Although the parties no longer have to perform, the contract continues to bind them. This has the following legal consequences: 1. Any rights or property unconditionally acquired before the termination remain enforceable. For example, if a contractor has done certain work for an agreed amount before the termination, they will be able to claim payment for the work done. If a contractor has paid a certain amount for a good or other property that has been delivered or transferred before the termination, then the contractor will be able to keep the property. Also, if a contractor has a right to sue for breach before the termination, that right to sue will also be unaffected by the termination. 2. Remaining subsidiary terms will continue to bind the parties. For example, the parties will have to observe any terms relating to confidentiality, restraint of trade, exclusion or limitation of liability, dispute resolution, etc. Rescission: If a contract is rescinded, then the contract is voided. As a matter of law, it disappears. If the contract is rescinded, then nothing binds the parties and any rights or property gained before the rescission are gone. Parties must return property and money paid and restore each to their pre-contractual positions. In most cases, the courts will assume that when the parties enter into a contract to end a pre-existing one they intend to terminate the contract, not to rescind it, unless the second agreement makes it clear that the original contract is voided and parties are to return property and money paid. However, if the contract of termination is not drafted by lawyers, then there is a risk that contractors will not take into account the

consequences of a termination or rescission. Contractors may find that they have either rescinded a valuable right or be surprised to find that they must observe an ongoing obligation.

CHAPTER 7 — ENDING THE CONTRACT DUE TO FAILURE TO PERFORM ¶7.1 Introduction It is well-known that a contract may be terminated if it is breached. Less well-known is that: 1. Not all breaches allow termination, and 2. It is possible to terminate a contract before it has been breached, if it is clear that the defaulting party will not perform their essential obligations as required. This is known as terminating for repudiation. This chapter will look at: • The generic implied right to terminate for breach and repudiation • How parties can agree to terms that modify the right to terminate for breach or repudiation • How a party can terminate, and • The consequences of termination.

¶7.2 Implied right to terminate for breach and repudiation The right to terminate a contract when it is breached or repudiated is implied by the law into every contract. This means that the parties do not have to agree in advance that the contract may be terminated if it is breached or repudiated. Rather, in the absence of terms providing

for the contrary, the law assumes that the contract may be terminated if one party fails to perform. Parties are free to modify this implied right to terminate within the contract. It is very common for contracts to provide, for example, that a procedure must be followed before the contract can be terminated for breach or repudiation, or that termination is available in circumstances wider than those recognised by the common law. Terms that modify the right to terminate for breach are discussed below at ¶7.3. Following is a discussion on what is meant by breach and repudiation. Although they are treated as separate concepts, the reality is that they overlap. 7.2.1 Termination for breach If a party wants to terminate for breach, they must demonstrate that: 1. A term of the contract has been breached, and 2. The term was an essential term, or that the breach is so serious that it effectively destroys the purpose of the contract. In Chapter 4, it was explained that the law classifies terms into one of three types: Warranty

An inessential term that does not allow the contract to be terminated if breached.

Intermediate / innominate

A term that can be breached in a number of ways, ranging from trivial to serious. A right to terminate will be available only if the breach is sufficiently serious.

Condition

An essential term that allows the contract to be terminated if breached, irrespective of whether the breach is trivial or serious.

As can be seen, the implied right only allows termination if there has been a breach of a condition, or a serious breach of an intermediate

term. A breach of a warranty will not allow the innocent party to terminate the contract, but they may sue the other party for compensation. What this means for contractors looking for a way to terminate a contract is that they cannot rely on a trivial breach to justify termination. In the face of a trivial breach of an unessential term, the law expects parties to continue performing, leaving the innocent party the right to claim damages if any loss resulted from the breach.

Example: Glenda Glenda agrees to purchase a house from Bruce that contains a beautiful front and backyard garden with swimming pool. In the contract, Bruce warrants (ie promises) that the pool is in good repair. After signing the contract and during the settlement period, Brenda decides that she does not want to proceed with the house believing that she agreed to pay too much for it. She discovers that, in fact, the pool is not in good repair. She would like to terminate the contract on account of this breach of promise. The law would probably not allow Brenda to terminate for this breach. Unless Brenda had made it clear that proper functioning of the pool was essential to the contract, the law would probably declare that the promise was just a warranty because the functionality of the pool did not go to the root of the contract: Brenda bargained for certain land and the status of the pool does not interfere with her receiving good title to the land. She will be able to sue for damages to have the pool repaired, but will not be able to terminate the contract.

Parties are free to spell out in clear words that any term is a condition (ie essential), the breach of which will allow the innocent party to

terminate. This is discussed further below at ¶7.3. 7.2.2 Failure to perform on time Failure to perform an obligation on time is also a breach of contract. However, as discussed above, whether a party will have the right to terminate for late performance depends upon the classification of the promise to perform by a certain time. What contractors should be aware of is that the bare fact that the contract states a time and date by when something has to be done does not automatically give the contractor the right to terminate the contract if performance is late. If an unqualified time and date is provided by when an obligation must be performed, it could be classified as a warranty, an intermediate term or a condition. If the promise to perform by a certain time is only a warranty, then the innocent party cannot terminate the contract if the defaulting party is late in performing the obligation. The law sees many common obligations as being inessential in terms of time of performance. For example, in conveyancing the promise to settle on a certain date is seen as a warranty therefore failure to settle on the provided date does not give the innocent party the right to terminate the contract. In leases, the promise given by the tenant to pay rent on a certain day is also a warranty. While the promise to pay the rent itself is essential — and must be done at some point — failure to pay on the appointed dates will not, of itself, allow the landlord to terminate. If a party wants to be assured of the right to terminate for late performance, then they should ensure that the contract clearly states that performance by the appointed time is “essential” or a “condition” of the contract. The conventional way to do this is to state that “time is of the essence”. If the contract states that time is of the essence in respect of a certain obligation, then that sends a clear signal that the time stipulation is a condition and therefore failure to perform on time will give the innocent party the right to terminate. Contractors should carefully read contracts and note whether any of their obligations must be performed on time and whether those obligations are described as being “of the essence” or something similar. Conversely, if contractors want to be assured of the right to terminate if the other party fails to

perform on time, then they should indicate in the contract that the performance of the relevant obligations on time is essential to the contract. If the contract does not state a time by when a certain obligation must be performed, then the law will say that the obligation must be performed in a “reasonable” time. What is reasonable will depend upon what has been promised. It is often not an easy standard to judge without the benefit of hindsight, so contractors should act cautiously when purporting to terminate for late performance of an obligation that did not have an explicit time by when it had to be performed. Contractors who want certainty in their dealings should think carefully about whether they want to state by when certain obligations should be performed, or whether they want to reserve to themselves flexibility by not stating a time. If a contractor would like to terminate a contract because they believe that the other party is late in performing, and there is doubt about whether the late performance is a breach of a condition or not, then they should think about first notifying the defaulting party of their intention and giving them another chance to perform. If a contractor serves a “notice to perform” on the other party that: • Identifies the late performance • Identifies what needs to be done • Fixes a clear and reasonable time by when the obligation must be performed, and • Makes clear that the contract will be terminated if the obligation is not performed then the law will most likely allow the termination if the defaulting party fails to perform by the time appointed in the notice. 7.2.3 Repudiation The previous section looked at the right to terminate a contract where a party has actually breached one of its terms. It is also possible to

terminate a contract if there has not been a breach of it, but where the innocent party can demonstrate that the defaulting party has repudiated it. If a party acts in a way that clearly demonstrates that they will not perform their essential contractual obligations as required (repudiation) then the innocent party may terminate the contract. The benefit of this principle is that the innocent party does not have to wait for an actual breach to terminate the contract. Rather, they can point to the repudiatory conduct of the defaulting party as justification. In practical terms, this could mean that an innocent party may save considerable expense ending a contract once it is clear that the defaulting party is not going to properly perform it, rather than wait until it is actually breached. The classic case of repudiation is when a defaulting party communicates to the other party that they will not perform an essential obligation on time. To use the language of classification of terms, if a party indicates that they will not perform a condition when required, they have effectively repudiated the contract. Where one party declares to the other that an obligation will not be performed, this is known as an anticipatory breach. It is important that where repudiation is communicated verbally the other contracting party should record this in writing, for example by sending a confirmation email. This will assist the innocent party if they wish to proceed with termination.

Example: Oztyres Pty Ltd Oztyres Pty Ltd is a wholesaler of tyres for industrial vehicles. It enters into a contract with Industrial Enterprises Ltd to purchase a consignment of certain tyres used on tractors. The contract provides that the tyres have to be delivered on 1 March and that time is of the essence, because Oztyres needs them to fulfil other contractual obligations to retailers. On 20 February, Industrial Enterprises contacts Oztyres to let them know that due to a problem at their manufacturing plant the promised tyres will not be delivered on time.

This is an anticipatory breach because Industrial Enterprises has forewarned that a term will not be performed on time. Moreover, Industrial Enterprises has repudiated the contract because the term that will be breached is a condition: the tyres must be delivered by 1 March and time is of the essence. Oztyres may elect to terminate the contract immediately and look for an alternative supplier who can meet the deadline (and sue Industrial Enterprises for damages if it is worse off for doing this).

All that is required to prove repudiation is that the defaulting party repudiates just one of any of the essential obligations in the contract. It is not necessary to show that the defaulting party repudiates the entire contract. Repudiatory conduct can consist of a range of conduct. It is not limited to the example of the anticipatory breach provided above. For example, any of the following could amount to repudiation: • An actual breach of an essential term (condition) • Multiple and ongoing breaches of warranties • Chronic late performance or cavalier attitude to performance • Dogged insistence on an incorrect interpretation of the contract • Proof of a party’s incapacity to perform essential obligations. However, contractors need to act carefully when they feel that the other party is repudiating the contract. If an innocent party terminates a contract because of the other party’s alleged repudiation, but a court later does not agree that the contract was repudiated, then it will be the innocent party who has repudiated the contract and will be liable for damages. Thus, in cases where there is no clear, express statement from the defaulting party that they will not perform an essential obligation on time, contractors should be very careful before alleging repudiation and summarily terminating the contract. It would

be wise for the contractor to approach the other party and communicate their concerns to test whether the other party is truly repudiating performance of the contract. Contractors should also be aware that repudiation does not require proof of intent to repudiate the contract. For example, if a party honestly believes that their interpretation of the contract is correct and refuses to accept any other reasonable interpretation, they will have repudiated the contract if a court finds that their interpretation was incorrect, even though honestly held. The test for repudiation is not “does the repudiating party intend to repudiate the contract”, but “would a reasonable person in the position of the innocent party conclude, based on the defaulting party’s conduct, that they renounce or do not intend to perform the contract”. In the preceding chapter, the defaulting party did not intend to repudiate the contract, but by doggedly insisting on an incorrect interpretation, they had the appearance of repudiating the contract and that is all that matters. To appreciate the complexity of repudiation, consider the following case that was considered by the High Court of Australia.

Example: DTR Nominees DTR Nominees Pty Ltd (“DTR”) agreed to sell land to Mona Homes Pty Ltd (“Mona”). Attached to the contract was a plan of subdivision. Completion of the contract was subject to DTR seeking approval of the plan and having it registered. DTR thought that the contract allowed subdivision of the land in two stages. It lodged a plan for registration that was different to that attached to the contract. It planned to follow this up with registration of the plan attached to the contract once the land was further subdivided. A dispute arose between the parties and Mona looked for a way to get out of the contract. By chance — and unrelated to the dispute — Mona discovered the different plan that DTR had registered.

Mona abruptly claimed that DTR had repudiated the contract by registering a plan that was different to the one attached to the contract. Importantly, Mona terminated the contract without giving DTR the opportunity to respond to Mona’s allegation of repudiation. The High Court found that DTR’s interpretation of the contract was incorrect: the contract did not allow DTR to register the attached plan in two steps. However, the court said that this conduct alone was not repudiatory. In other words, it did not convey to a reasonable person that DTR was renouncing its essential obligations under the contract. Importantly, the court noted that Mona never discussed DTR’s incorrect interpretation with DTR, so there was insufficient evidence that DTR was doggedly persisting with an incorrect interpretation. If DTR was not repudiating the contract then Mona had no legal right to terminate the contract. Therefore it was Mona who had repudiated it by terminating it without any legal right to do so. Mona should have first raised the registration issue with DTR to test whether DTR was doggedly persisting in an incorrect interpretation of the contract.

¶7.3 Terms dealing with breach The preceding section of this chapter has looked at the implied right to terminate a contract due to breach or repudiation. This section will look at what parties can do to clarify and modify this implied right. Often, in the absence of clear language classifying a term, the parties cannot be certain of whether it is a warranty, intermediate term or condition until a judge has ruled on it. To avoid doubt about whether a right exists to terminate if a particular term is breached, parties are free to designate that any or all terms of a contract are “essential” or that the innocent party has the right to terminate if any of them are breached. Expressly identifying the terms that are essential will clarify their status and provide certainty as to the rights of the innocent party

in the event that any of them is breached. It will also put the other party on notice of the strictness of the obligation that they have accepted. Further, it is possible for parties to make an obligation essential that, according to the common law, would be a mere warranty. The example was provided above at ¶7.2.2 that in a lease the law holds that the obligation to pay rent is essential, but that the date of payment is only a warranty. In other words, mere late payment of rent, of itself, does not give the landlord the right to terminate the lease. However, if a lease expressly says that payment of rent on time is essential and that failure to do so will give the landlord the right to terminate the lease, then a court will allow termination for any single late payment. Contractors should carefully read contracts to see if any obligations have been expressed as “essential”, or as a “condition”, or it is otherwise made clear that failure to perform them will give the other party the right to terminate the contract. Attention should also be paid to any definition of “default” or “breach” under the contract, as often a contract can deem certain actions or events as a “default” even though there has not been an actual breach of a substantive obligation. “Event of default” clauses are often found in lease or finance contracts and tend to include things like bankruptcy, insolvency or change in ownership; things that are not a failure to perform, as such, but which seriously jeopardise one party’s capacity to perform their obligations. Triggering such a clause may activate a contractual right for the other party to terminate and take further actions against the defaulting party. Ultimately, if a contractor is proposing to sign a contract that makes most of the obligations “essential” — even trivial ones — then the contractor should think carefully about whether they are content to accept the risk of such defaults, especially if they will be investing a lot into the contract. Contractors should also carefully look for terms that restrict a right to terminate. In complex and long-term agreements, it is common for the contract to contain terms that impose procedures on the right to terminate for breach or repudiation. For example, the contract may

provide that the innocent party must: • give the defaulting party: – notice that they intend to terminate the contract – an opportunity to properly perform the breached term – an opportunity to show cause why the contract should not be terminated, or • enter into a negotiation to work out any problems or disputes that have arisen. The effect of including procedures in the contract may be to make termination for breach ineffective unless the procedure is first followed. Courts will hold parties to termination procedures where a lot has been invested in the relationship and termination will result in serious consequences for the defaulting party. Indeed, if the innocent party fails to follow the procedure they may find that they have repudiated the contract, as happened in the following case that was heard by the High Court of Australia.

Example: Amann Aviation On 12 March 1987, Amann Aviation Pty Ltd entered into a contract to provide an aerial coastal watch service to the Commonwealth Government. Under the contract, Amann was required to have the coast watch service operational by 12 October 1987. Under cl 2.24 of the contract, the government could terminate the contract if Amann failed to comply with “any term” of the contract, however, before doing that it was obliged to give Amann the opportunity to attempt to satisfy the Secretary of the Department of Transport that he/she should not terminate the contract. By 12 October 1987, Amann did not have the promised full service of planes operating. The government served a notice

immediately terminating the contract. The High Court found that the parties had contracted out of the ordinary implied right to terminate and replaced it with cl 2.24. Clause 2.24 provided a comprehensive procedure for the exercise of the right to terminate. As the government failed to follow the procedure, its termination was ineffective and amounted to a repudiation of the contract. Amann was therefore able to terminate and sue for damages.

Contractors should look out for terms that provide procedures for when a contract is breached. If a contractor is proposing to sign a contract that involves a long-term investment, with ample opportunities for things to go wrong, they should also look to see if any such terms will protect them if they are the defaulting party. The implied right to terminate can be exercised as soon as there is a serious breach or repudiation, the contractor may wish to have the protection of a term that provides that the other party must give the contractor the right to make good the default before they can terminate. If, during performance, a contractor feels that the other party has breached the contract, then they should check to see if a procedure needs to be followed and do so accordingly.

¶7.4 How to terminate It is important to note that if a party does breach the contract, the contract is not automatically terminated. Rather, the innocent party must make a positive choice to affirm or end the contract. Indeed, if the innocent party would prefer to continue performing despite the breach, then they are free to affirm the contract and continue to perform. If the innocent party does this, the defaulting party must also continue to perform. Whether or not the innocent party chooses to affirm or terminate the contract, they will also be able to sue for damages to compensate for any loss caused by the breach (See Chapter 10). Hence, in some cases, despite the breach being a

serious one, it may make more commercial sense to an innocent party to affirm the contract and sue for damages. However, in many other cases, if further performance of the contract would require ongoing cooperation from the defaulting party and that is not possible — for example, because the relationship has become hostile or the defaulting party has become bankrupt or insolvent — then the innocent party will have no choice but to terminate. Whatever the ultimate choice of the innocent party, once it is made they will be bound by it: choosing one outcome is inconsistent with the other and once the choice is made it is not possible to reverse the decision. To elect to terminate, the innocent party must communicate to the defaulting party that the contract is terminated. They do not have to actually say the word “terminate” for it to be effective. The termination will be effective as long as the innocent party clearly indicates that they consider the contract terminated due to the breach. The surest way to do this is to communicate the termination in writing with clear reference to the contract, the term that has been breached and the fact that the party no longer wishes to continue with performance. Of course, if the contract provides a procedure for termination, as discussed above, the innocent party should follow that procedure. On the other hand, affirmation of the contract does not necessarily require the innocent party to communicate affirmation. If, despite the breach, the innocent party continues to perform and calls on the other party to continue performance, then the contract will be affirmed. This is because the law looks to the actions of the innocent party, rather than whether the innocent party has subjectively decided to terminate or affirm. Therefore, there is a certain danger for the innocent party in remaining silent in the event of a breach if they are considering terminating the contract. If an innocent party would like to reserve their right to terminate and take some time to consider their options, then the law will allow the innocent party to do this. But to be clear on the election issue, it is best practice for the innocent party to acknowledge the breach and clearly state that they reserve their right to terminate. However, this will only buy the innocent party a reasonable time to make a final decision as it is not fair on the other party to be held in suspense for

too long. If the innocent party delays making a decision for too long the law will say that they have elected to affirm the contract. One final, important point should be made about electing to terminate a contract. If a party (Party A) has a right to terminate due to breach or repudiation by the other party (Party B), the law may not allow Party A to terminate if they are not ready, willing and able to perform the contract as well. In other words, if Party A has also breached an essential term of the contract, or has otherwise demonstrated that they are unwilling or unable to perform their own obligations, they cannot point to the breach or repudiation by Party B as an excuse to terminate the contract. Hence, if a contract is not going to plan, relations are beginning to sour and it looks like the other party could breach the contract, the contractor should nonetheless be diligent in performing their obligations, or at least be reasonably ready to perform them, in the event that the contract is breached and they want to elect to terminate it.

¶7.5 Consequences of termination If the contract is terminated, then, just as described in Chapter 6 at ¶6.4, the parties are released from further performance of the primary obligations. The innocent party will have the right to sue for damages. The contract itself continues to exist in law and bind the parties, including certain other important terms. For example, although the innocent party has a right to damages, if there is an exclusion or limitation of liability clause that protects the defaulting party then that will preclude the innocent party from claiming the damages. Other terms like confidentiality and dispute resolution clauses will also be binding. What may come as a surprise to lay people is that the defaulting party will be entitled to keep or sue on any rights they had unconditionally earned before the termination. For example, if the defaulting party had completed stages of work before the termination and a price had to be paid at the completion of each stage, the defaulting party will be able to claim payment for those completed stages. It is not the case that the innocent party gets to keep the benefit of that work for free.

Similarly, if the defaulting party became the owner of property transferred to them before the contract was terminated, then they will be able to keep that property.

¶7.6 Termination tips

Before signing Think about which of the other party’s promises are important to you. Would you like to have the right to terminate the contract if the other party fails to perform any of them? Consider negotiating to include an express statement that those obligations are “essential”. Read the contract: • Are any terms described as “essential” or “conditions”? (NB: There may be a term in a section called “General” that lists all the terms in the contract that are essential.) These are likely to be conditions — failure to perform them will give the innocent party the right to terminate the contract. • Are there express time provisions? Are they described as “of the essence” or something similar? Time stipulations described as “essential” are conditions. Failure to perform by the time provided will give the innocent party the right to terminate. • Do any terms otherwise expressly provide that a party may terminate the contract if they are breached? Note them. • Are there any particular definitions of what constitutes a “default” under the contract? Note them. • Do any of the terms deal with breach of contract? Do they provide a procedure that must be followed? Eg, must notice be given before an innocent party can terminate? Would you like the opportunity to rectify a breach before the other party can terminate? During performance — the other party fails to perform If the other party fails to perform an obligation during performance: • Identify exactly the term(s) that has been breached. You will have to justify any action you take with reference to the contract. • Read the term: – If it is described as “essential”, then it is likely that you can terminate the contract. – There is greater risk in terminating any term that is not expressly designated as essential, as the right to termination will depend upon how the law

classifies the term. NOTE: It is not sufficient for you to subjectively believe that the term is essential. – Consider giving the other party an opportunity to rectify their breach by giving them a notice to perform within a reasonable time. This will prove valuable evidence if they still fail to perform and you terminate. – Ensure that you follow any contractual procedures provided for breaches. During performance — the other party refuses to perform If the other party indicates that they will not perform an essential obligation, or otherwise demonstrates persistent indifference, incapacity or contempt for performance of the contract according to its terms, you may terminate it for repudiation. The test for repudiation is whether a reasonable person in your position would conclude that the other party is repudiating their essential obligations. Be careful as the “reasonable person” is the Court’s point of view, which may differ from your point of view. Election Once you are aware of any breach or repudiation, you must choose whether to terminate or affirm the contract. The contract does not automatically terminate. • Is the commercial relationship salvageable? Consider working through the problem with the other party. • If you terminate, you must be able to demonstrate that you are ready, able and willing to perform your own obligations. If you have breached the contract yourself, you may find that your attempted termination is ineffective. • You must make a positive choice or the law will make one for you. If you continue to perform the contract, the law may say that you have elected to affirm the contract. • If you would like some time to consider your options, indicate this to the other party. However, you only have a reasonable amount of time to decide. • Again, if you elect to terminate ensure that you comply with any contractual procedures. Once the choice is made, it is binding. Irrespective of an election to affirm or terminate, you may have the right to compensation for breach. A warning Termination for breach or repudiation is risky. Honest belief in the correctness of your actions will not aid you if, as a matter of law, you did not have the right to terminate. Your interpretation of the contract may differ from a court, which approaches interpretation objectively, not by asking what you subjectively thought. It is strongly advised that you seek legal advice if you would like to terminate for either breach or repudiation before you terminate. If termination is the end result of a relationship that has broken down, the other party may respond with litigation to any termination that they

view as unfair or unwarranted. If you took legal advice you may be better prepared to deal with a situation like that.

CHAPTER 8 — ENDING THE CONTRACT DUE TO UNEXPECTED DISRUPTIONS ¶8.1 Introduction A contractor may find that, once performance is underway, an unexpected event beyond their control makes performance impossible, disastrously expensive or pointless. This chapter looks at whether that contractor can stop performing the contract because of this unexpected event. The law allows termination when an unexpected event occurs that either makes it physically or lawfully impossible to perform, or otherwise destroys the foundation of the contract for both parties. If performance is impacted in this way, the law says that the contract is “frustrated” and automatically terminated. However, the courts have stressed time and time again that a contract will be frustrated only in very rare cases. The courts are anxious to maintain certainty in commercial dealings. Accordingly not just any post-contractual event that affects performance will frustrate a contract. Commercial life is rife with unforeseen events that make performance of contractual obligations either more onerous or less beneficial. Chaos would result if any “bump in the road” immediately discharged the parties from further performance. The unexpected event must truly wreak a radical change on the anticipated performance of the contract. It is likely that in most cases the contract itself will account for the event typically by including a force majeure clause (See Force majeure clauses below at ¶8.4.1.1). If that is the case, then the parties just look to the contract to resolve any problems. If the contract does not account for the event and both parties are

detrimentally affected, then, if the commercial relationship is an amicable or necessary one, they will probably negotiate an outcome either by varying the contract in light of the event (See Chapter 6) or agreeing to terminate it (See Chapter 7). However, in some cases the event will impact on one party only. If that party seeks a variation of the contract in light of the event and the other party refuses to negotiate, then the impacted party may argue that the contract has been frustrated as a way to avoid further performance. To do this, the party alleging the frustration must satisfy the following legal test: [Frustration] takes place when there supervenes an event (without) the fault of either party and for which the contract makes no sufficient provision which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances.2 Following is a discussion of the test in more detail. Footnotes 2

National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675, 700 (Lord Simon).

¶8.2 Supervening event For a contract to be frustrated there must be an identifiable event that occurs after the contract has formed that affects performance of it. A supervening event can be anything. Obvious supervening events are physical, such as fires, floods, earthquakes, illness and death, or other natural or man-made disasters. For example, if a landlord agrees to hire out a holiday house to a tenant and then, after the contract is

signed, the house burns down, there is a good case to say that the contract was frustrated. However, the supervening event does not have to be such an obvious, physical or catastrophic event. Changes in the law, government interference or legal proceedings can also frustrate a contract. Indeed, these civil events are probably the most likely candidates to be frustrating events in commercial life. The following are examples of real cases where a contract was found to be frustrated by a civil event: 1. An apartment owner in London agreed to let his apartment to a person for the purpose of watching the coronation procession of King Edward VII. After the contract was made, the coronation was cancelled. The cancellation of the procession frustrated the contract. 2. A contract to construct a suburban underground railway track was signed on the common assumption that the construction company would be able to work on the project 24 hours a day, seven days a week. Local residents successfully obtained an injunction restricting the time per day that the company could work. This injunction frustrated the contract. 3. A construction company agreed to build a reservoir for a government body. World War One broke out and the Minister of Munitions ordered that work on the reservoir cease. The government order frustrated the contract. As the foregoing discussion demonstrates, any event can be a supervening event that potentially frustrates a contract. However, as the test provided at the beginning of this chapter says, there has to be more than just an “event”. The event also has to, among other things, radically impact performance. Here, it should be remembered that the law of enforcing contracts is based on the consent of the parties: if a supervening event radically affects performance of a contract as it was originally anticipated, then they ought to be discharged from having to perform it if the resulting situation is something far beyond anything they ever consented to.

¶8.3 Impact on the contract As noted above, a contract is only frustrated by events that radically impact on the performance of the contract. A radical effect could include any of the following. 8.3.1 Contract becomes physically or lawfully impossible to perform If the event makes it physically or lawfully impossible to perform, then it is likely that the contract will be frustrated. 8.3.2 Performance is delayed An unexpected event that delays performance will not, of itself, frustrate the contract. The context of the delay will determine if it was a frustrating event. For example, a very brief delay in a long-term project, or one that sets in towards the end of the contract after both parties have substantially benefitted from it, will not likely be a frustrating event. However, a delay of indefinite duration that sets in at the beginning of the contract is more likely to be frustrating. Again, the test is whether the delay radically impacted on performance, not whether one or both parties suffered loss or did not realise all expected benefits from the contract. 8.3.3 The common foundation of the contract is destroyed Sometimes a supervening event will not make the contract impossible to perform, or even cause a delay, but rather destroys the common foundation of it. If the foundation of the contract is destroyed, then that will frustrate the contract. This concept will be explained further with reference to examples. Example 1 above at ¶8.2 concerned a contract to hire out an apartment that was frustrated due to Edward VII’s coronation procession being cancelled. The contract itself did not refer to the procession, there were just some basic terms dealing with dates and payment. However, evidence of the negotiations that took place prior to signing disclosed that both parties took the occurrence of the procession as the foundation of the contract. Therefore, when the procession was cancelled it destroyed the foundation upon which the

contract was built. Although it was still possible to perform the contract — the cancellation of the procession did not destroy the apartment or otherwise make it unlettable — the court nonetheless found that the object of the contract had been destroyed and so it was frustrated. If the parties are entering into the contract for a specific purpose, or with a particular transaction in mind, this can be recorded in the “recitals” at the start of the contract. Recitals are discussed further in Chapter 4. The recitals will be useful evidence to make clear the assumptions and foundation upon which the contract is made. If the supervening event destroys those assumptions or foundation, then it could be argued that the contract is frustrated. However, the law draws a distinction between events that destroy the common foundation of the contract, and events that merely impact on the subjective expectation of certain benefits.

Example: Times Square Neon Times Square Neon Pty Ltd (“Times Square”) enters into a contract with Oz Beverages Pty Ltd (“Oz Beverages”), where Times Square promises to manufacture and install a neon sign in a prominent public area. Oz Beverages intends to illuminate it 24 hours a day, seven days a week. Under the contract, Oz Beverages does not buy the sign, rather it leases it for a term of two years. Oz Beverages promises to pay rent on a monthly basis. The sign is manufactured and installed by Times Square and Oz Beverages illuminates it 24 hours a day, seven days a week. After three months, the state government passes legislation that makes it unlawful for Oz Beverages to illuminate the sign between the hours of 10.00 pm and 8.00 am every day. Oz Beverages is upset by this development as it is now paying rent on a sign but not enjoying the benefit of illumination of it for 24 hours a day. Oz Beverages would like to argue that the contract is frustrated.

In this scenario, although it may seem obvious that Oz Beverages hired the sign to illuminate it, it can feasibly be argued that the expectation that Oz Beverages would be able to illuminate it for 24 hours a day was merely a subjective expectation of a particular benefit, not a fundamental assumption that formed the basis of the contract for both parties. Times Square could argue: • All it was concerned with was the manufacture and installation of the sign; whether Oz Beverages illuminated it was a matter for Oz Beverages alone. • The contract is still performable. • Oz Beverages still enjoys benefits from the contract — the prohibition on illumination is not an absolute one. Only if there was evidence that the illumination of the sign 24 hours a day, seven days a week was fundamental to the contract for both parties would the court agree that the contract had been frustrated.

8.3.4 Frustration requires more than loss or reduced benefits Example: Times Square Neon also touches on a theme that has pervaded the discussion so far, that being that the impact of the supervening event must be more than one that makes the contract more onerous or less profitable. If a party’s sole complaint is that the contract will become financially unviable, or even that it will make that party bankrupt or insolvent, then the court will ask for more. That party must prove that the event radically altered performance of the contract for both parties.

¶8.4 Unexpected/foreseeability Even if a party can demonstrate that a supervening event has had a radical impact on performance of the contract that will not be sufficient

to amount to a frustrating act unless the event was unexpected. In other words, the supervening event has to have been one that is not in any way accounted for in the contract and takes the parties by surprise. 8.4.1 Risk accounted for in the contract If a party alleges that a contract has been frustrated, then the court will refer to the contract to see if the parties had already accounted for it. If the contract accounts for the event and allocates the risk of it to one or both of the parties, then the contract cannot be frustrated. If the parties have agreed in advance what is to happen if an event occurs, then, as agreed in advance, the relevant terms of the contract will be enforced. The contract can account for an event in the following ways: 1. The parties might identify a particular event that may occur and insert a term that specifically sets out what is to happen if it occurs. An example of a term like this is a force majeure clause. (See below at ¶8.4.1.1) 2. The parties might foresee a risk of something happening and rather than identify it specifically and set out detailed provisions, they account for it in the price. The typical way that parties protect themselves against unforeseen risks or events beyond their control is to agree to a force majeure clause. 8.4.1.1 Force majeure clauses A force majeure clause is a term that identifies when certain events beyond the parties’ control will either suspend performance of a contract or allow one or both parties to terminate it. Typically, this will include things like an “Act of God” (fires, earthquakes, storms, etc), war and other civil or military disturbances, government action or inaction, failure of utilities or vital government services, etc. However, it does not have to limit itself to these “catastrophic” type events. For example, a manufacturer that relies upon certain suppliers to deliver raw materials may protect itself against the risk of any of them failing

to deliver on time in a contract with a purchaser by identifying that as a force majeure event. These types of clause could be seen as a kind of contingent condition (See ¶6.3.2). Any contractor proposing to sign a contract should look to see if there are any force majeure clauses and assess: • In what circumstances will the force majeure be engaged? Does it adequately cover any foreseeable major risks given the nature of the contract, where and how it is likely to be performed? Carefully read any definitions of a force majeure event. • Who is protected by the force majeure clause? Is the contractor’s interests adequately protected? • What are the consequences? Can the contract be terminated or is performance of it merely suspended? In what circumstances may the contract be terminated? Who pays for expenses incurred during suspended performance? Is either party obliged to do anything to work around the interruption? Can payment for services rendered or wasted expenditure be claimed if the contract is terminated? 8.4.2 Risk not accounted for in the contract If the event is not accounted for in the contract then it will only frustrate the contract if it is unexpected. An event will be unexpected when: • It was either not foreseen or not foreseeable at the time the contract was formed, or • If foreseen or foreseeable, it seemed unlikely that it would occur. If at the time of contract the event was foreseen, or easily foreseeable, and very likely to occur then that is unlikely to be a frustrating event. In that case, the law will expect that the parties would have accounted for it in the contract. In other words, if parties identify a clear risk but then deliberately choose not to account for it in the contract, then the law will say that one or both of them has assumed the risk of it

occurring as either of the parties could have easily protected themselves by: • Agreeing to a force majeure clause • Including an exclusion clause or a limitation of liability clause • Not making absolute promises. Accordingly, with so many ways to protect themselves against a clear risk, if the event then occurs the contract will not be frustrated even if the contract is made impossible to perform. Rather the relevant party will have breached the contract for failing to perform.

Example: NSW Minerals 1 NSW Minerals Pty Ltd (NSWM) enters into a charter party with Commonwealth Chartering Pty Ltd (CC), where CC promises to have a ship available in Newcastle harbour from 1 June, with time of the essence. The charter provides that if CC arrives late, it must pay $10,000 per day that the ship is late. At the time the charter is negotiated, both parties are aware of and discuss the recent rise in tensions between China, Japan and the United States of America in the South China Sea. CC is concerned that if hostilities break out then the ship will be delayed. Despite discussing the matter, they agree that they should “leave it to the lawyers” if something occurs. Hostilities break out in the South China Sea. This forces CC to redirect the ship meaning that it will arrive in Newcastle a week late. Now faced with having to pay a late fee, CC says that the contract has been frustrated by the hostilities. In this case, the court will probably find that the contract is not frustrated. The parties plainly foresaw the risk and by failing to account for it in the contract, it could be said that CC made an absolute promise and assumed the risk. This means that if it fails

to arrive on time in Newcastle, it will be in breach of contract.

¶8.5 Not self-induced If a contractor can demonstrate that an unexpected event has radically impacted on performance of a contract, there is one more hurdle that they may have to overcome: the law will not find the contract frustrated if the event was caused by the fault of the party alleging that the contract has been frustrated. This embodies the principle that a person may not avoid their legal obligations by relying on their own fault.

Example: NSW Minerals 2 Refer to the facts in Example: NSW Minerals 1 above. Assume that CC arrives on time, but that while in port the ship is impounded by the Australian Commonwealth Government for failing to comply with laws related to environmental protection. It is clear that CC has breached the law due to its negligent maintenance of the ship. If CC were to argue that the contract was frustrated by the ship being impounded by the Commonwealth Government, NSWM would be able to argue that this was due to the fault of CC. The court would likely find that the contract was not frustrated.

¶8.6 Consequences of frustration If a contract is frustrated, it is “terminated” in the sense described in Chapter 6 at ¶6.4. This means that: • Parties are released from further performance, and

• Rights unconditionally acquired to the time of termination are enforceable. Importantly, unlike in the case of termination for breach, neither party: 1. has to elect to terminate the contract because the law terminates it automatically, nor 2. can sue the other for failing to perform the rest of the contract. A contractor may face a problem if they have done a lot of work, or spent a lot of money performing, but have not done sufficient to earn a right to payment under the contract before it was frustrated. In that case, the general rule is that the contractor has to wear the loss of the terminated contract. The law does not require parties to contribute equally or proportionately to any losses incurred. Conversely, a party who has paid money in advance but not received any substantial performance from the other party may find that they cannot have the money refunded.

Example: Whizz Electronics Whizz Electronics Pty Ltd (“WE”) enters into a contract with Industrial Machinery Pty Ltd (“IM”) for IM to manufacture and install robotic assembly machinery. The contract provides that WE must pay 10% of the contract price on signing, which WE does. The remainder of the contract price is payable once all the machinery is installed. IM spends a lot of time and money designing and then constructing the machinery. It installs about 5% of the machinery in WE’s factory before an earthquake and resulting fire destroys IM’s own manufacturing facility. The contract is frustrated. The machinery installed in WE’s factory is useless to WE. In this case, the frustrating event would relieve IM from having to install the rest of the machinery and WE from having to pay the rest of the contract price. However, IM had not earned a right to

payment of the remaining 90% of the contract price before the contract was frustrated. This means that it cannot claim anything further from WE, even though it has spent a lot of time and money preparing to perform. WE would also be unable to get back its deposit even though what had been installed is useless.

The above example states the common law position on termination. It can be seen that a frustrated contract can result in an arbitrary outcome. Legislation in NSW, South Australia and Victoria exists to modify the common law’s approach. It is beyond the scope of this book to consider it, but in general terms the legislation allows a court to: • Ask both parties to contribute equitably to losses experienced because of the frustration, and • Order that money paid up front be refunded, or that the customer pay a proportionate amount for any benefit actually received before the contract was frustrated, even if the contract does not provide for this. However, ideally contractors do not leave it up to the common law or legislation to work out the consequences if the contract is frustrated. Parties are free to agree in advance to terms on how the consequences are to be dealt with, including whether both parties have to equitably shoulder any losses between each other. Indeed, if the parties have troubled themselves to identify potential risks that may eventuate, it is a natural step to agree on what will happen if the risk eventuates. Contractors should scrutinise force majeure clauses to see what, if anything, each party will be obliged to do or pay for if the contract is frustrated.

¶8.7 Ending the contract due to unexpected disruptions tips

Although the law does allow contracts to be terminated due to unexpected events, it does this rarely by setting a high threshold test: the event must radically change performance of the contract. Before signing Think about any foreseeable risks that could impact on your performance. Consider addressing them in the contract, for example, in a force majeure clause. Check for force majeure clauses: • Identify what is defined as a force majeure event. Does it cover all known risks? • Check what happens if a force majeure event occurs: Is the contract terminated or merely suspended? Are the notice obligations? Do parties have to actively take steps to address the event? • What are the consequences if the contract is terminated? Can losses be apportioned between the parties? Does the contractor have the right to proportionate payment for services rendered? Consider other ways to mitigate the risk of an expected event preventing you from performing: • Can you make qualified promises (“The contractor promises to use their best efforts to …”), etc. • An exclusion or limitation of liability clause can exclude or limit your liability for failing to perform. • Consider recording the fundamental assumptions and objectives the parties intend to achieve in the recitals to the contract. This will make it easier to judge if a supervening event has frustrated the contract for both parties. During performance If an expected event occurs that radically disrupts your performance: • Check the contract. Was this risk foreseen and accounted for? In particular, see if it is covered by any force majeure terms. If the contract does not account for the event: • Depending upon your relationship with the other party, you could attempt to renegotiate the relevant terms. • What is the impact on performance? Does it make the contract impossible to perform? If yes, this is the best case to argue frustration. • Was the event discussed as a potential risk and was there a real chance it would eventuate? If yes, the contract is probably not frustrated. • Is the event due to the fault of either party? If yes, the person whose fault caused the event cannot argue that the contract is frustrated. Ideally, if you are looking to argue that a contract is frustrated then you should seek

legal advice. There is risk in declaring the contract frustrated as, if a court does not agree, then you will have repudiated the contract which will give the other party a right to damages. It must be recalled that contracts are frustrated only in exceptional cases.

CHAPTER 9 — PROBLEMS WITH CONSENT ¶9.1 Introduction If consent to a contract is fundamental to contract law, then it should come as no surprise that a party can get out of a contract if their consent was not properly obtained. A party’s consent will be ineffective, or “vitiated”, when: • They consented on the basis of incorrect information provided by the other party (misleading conduct) • The parties are mistaken about a fundamental aspect of the contract (mistake) • The other party applied illegitimate pressure in pre-contractual negotiations (duress and undue influence) • The other party knowingly exploited them when they were not able to look after their own interests (unconscionable conduct). The so-called “vitiating factors” have been recognised and applied by judges as part of the judge-made common law of contract for centuries. However, the common law principles only provide minimum protection to parties. For this reason, the parliaments of Australia have enacted legislation to expand upon the common law principles to provide greater protection to vulnerable people. Today, often a party will have a choice of a common law remedy or a remedy provided by legislation. The remedies provided by the legislation are better. The following discussion of the various vitiating factors will clearly delineate between common law principles and statutory principles. Knowledge of the vitiating factors will also help contractors identify the boundaries between acceptable and unacceptable pre-contractual

conduct. Contract law assumes that every person who contracts is self-interested, rational, capable of looking after their own interests, and will only enter into agreements that are for their benefit. Courts therefore understand the competitive nature of commercial dealings and accept that people can legitimately take advantage of superior bargaining positions or only volunteer information if directly asked (caveat emptor — “let the buyer beware”). Indeed, in commercial dealings the law has a certain tolerance for deals that an ordinary person may call “unfair” or “onerous” or that are obtained by a party taking advantage of a commercial opportunity where the other party has no practical choice but to agree. That is part of the rough and tumble of a vigorous free-market where there are “winners” and “losers”. However, the law sets limits to the advantages a party may take over another. While parties are entitled to act secretively, selfinterestedly and from positions of strength, they must nonetheless be honest in their dealings and not victimise the other party in unconscientious ways. Of the vitiating factors discussed in this Chapter, misleading conduct (¶9.2) and mistakes (¶9.3) tend to occur frequently in any kind of contract so they are considered first. Contractors who tend to deal with other businesses of equal size and bargaining power will probably find that there are few problems encountering illegitimate pressure (¶9.4) and unconscionable conduct (¶9.5–¶9.7). This is because, again, the law recognises in purely commercial contexts that dealings are often guarded, competitive and for high stakes. However, contractors who regularly deal with consumers or vulnerable people such as the elderly or the unwell should be particularly aware of these principles as such the law expects them to be treated differently. The last section of this chapter briefly outlines what a party can do if they have been subjected to any of the vitiating factors discussed in this chapter.

¶9.2 Misleading conduct The law expects that parties will deal with each other honestly. This is

not to say that each party must voluntarily disclose all information that they know to assist each other. As a general rule, it is acceptable to remain silent and leave it to the other party to ask the questions that they need to ensure that the contract will be for their benefit. This situation is called “caveat emptor” — “buyer beware”. However, if a party chooses to provide information they must be honest and truthful. If one party provides false information to the other party to secure a contract then the other party will be able to get out of the contract. What matters is whether any information provided is true, rather than whether the party providing it honestly believed it to be true. It is not necessary to show an intention to mislead or deceive, and an honest belief or an honest mistake is not a defence. If a party has relied upon a misleading statement provided by the other party to enter into a contract, then the first party has not properly consented to the contract. Remedies for misleading conduct can be found in the judge-made common law and, alternatively, in the prohibition on misleading and deceptive conduct found in the Australian Consumer Law. Because the Australian Consumer Law has effectively replaced the common law in trade or commerce, only the legislative prohibition on misleading or deceptive conduct will be considered as well as only its remedies (See ¶9.7.2). 9.2.1 The legislation Section 18 of the Australian Consumer Law3 provides that: “A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.” This section has been adopted as law in all the states and territories under their relevant fair trading legislation. There are equivalent prohibitions on misleading or deceptive conduct found in other important legislation4, however the prohibition in the Australian Consumer Law is the most commonly litigated one and, therefore, the focus of this section. The prohibitions in the other legislation are inspired by s 18, so much so that the relevant sections use practically identical wording. For these reasons, what is said

about s 18 will most likely apply under any legislation in which a similar prohibition on misleading or deceptive conduct is found. The only limit to the prohibition on misleading or deceptive conduct in s 18 is that the conduct must have been “in trade or commerce” and not in relation to a financial product or service5. Although that has a particular meaning, for the purposes of this book it is safe to assume that pre-contractual negotiations will be in trade or commerce. However, it should be noted that the protection is not limited to precontractual negotiations. A party may engage in misleading or deceptive conduct in breach of s 18 even after the contract is formed. Any time a party engages in misleading or deceptive conduct in trade or commerce — whether or not a contract is involved (eg false advertising) — the other party will have a remedy (See ¶9.9 below). 9.2.2 What is misleading or deceptive conduct? Misleading or deceptive conduct is conduct that causes someone to believe something that is untrue. The test applied by the courts is: would a “reasonable person” in the position of the person complaining about the conduct (the plaintiff) be misled or deceived by the conduct of the other party (the defendant)? The emphasis is on the defendant’s conduct, not what the defendant intended or was thinking. There is no need to prove an intent to mislead or deceive. The use of the “reasonable person” is an objective assessment of the defendant’s conduct by the court. It is not sufficient for a plaintiff merely to assert that they were misled or deceived by the defendant. The court will only agree that the defendant’s conduct is to blame if it is convinced that a reasonable person would also have been positively misled or deceived by the defendant. This means that it is not sufficient if the defendant’s conduct is merely ambiguous or confusing. If the plaintiff has an erroneous belief because of their own preconceived misunderstandings or unrealistic expectations, then that is not the defendant’s problem. The simplest case of misleading or deceptive conduct is where a party says something — written or oral — that is clearly factually incorrect. The law calls this a “misrepresentation”. For example, if a salesperson says that a computer has eight gigabytes of RAM, the salesperson

has “represented” that the computer has eight gigabytes of RAM. So if the salesperson represented that the computer has eight gigabytes of RAM when in fact it has only four gigabytes of RAM, then the salesperson has misrepresented the truth and thereby has engaged in misleading conduct. But conduct can be more than literal statements that are untrue. The law is alive to the myriad ways that humans mislead and deceive each other and is prepared to look at all the circumstances of the case to work out whether a defendant has engaged in misleading or deceptive conduct. Therefore, “conduct” has a wide meaning under the legislation. It can include the following: • Literal statements that are untrue • Literal statements that are true, but which convey a false impression (ie a “half truth”) • Misleading statements that are implied by conduct (eg deliberately arranging the interior furniture of a house to hide water damage impliedly misrepresents that the house is free from damage) • Deliberately remaining silent where the silence creates a false impression. It is important to note that the court will look at the conduct of the defendant as a whole, rather than look at any particular statement in isolation from the negotiations between the parties. The meaning of conduct comes from the context in which the conduct occurred. So this means that, in a case of alleged misleading or deceptive conduct, the court will look at: • The entirety of what the parties actually said to each other and how it was said — not just the impugned words • What the parties knew about each other • The level of commercial experience and sophistication of the parties

• Prevailing industry standards and expectations. The result of this is that a statement made by a defendant in a context where both the parties are experienced, sophisticated and legally advised may not be misleading or deceptive, however it might be if the context were that the plaintiff was an inexperienced consumer, whose inexperience was apparent to the defendant. Consider the following examples.

Example: General Manufacturing Pty Ltd General Manufacturing Pty Ltd (“GM”) seeks a $4m loan from Australian Financing Pty Ltd (“AF”) to purchase cost of production insurance. GM retains Stanwell & Co to be its insurance broker to negotiate the finance. Usually, AF does not provide loans of that value unless the insurance policy is cancellable and assignable. This provides some security to AF as, if GM defaults on repaying the loan, AF can have the insurance assigned to it, and then cancel it and retrieve a portion of the premium from the insurer. AF has previously provided GM finance for cost of production insurance through Stanwell. The requirement that the insurance be both assignable and cancellable has been mentioned between the parties, but not emphasised. Stanwell usually just provides all documentation to AF to assess it for itself. The insurance that GM proposes to enter into is not assignable or cancellable. Stanwell sends the “usual” documentation to AF for assessment over the course of a week. No mention is made by either party that the insurance must be assignable or cancellable. Some lengthy documents are provided that are not clear on whether the insurance policy is assignable and cancellable. The actual insurance certificate, a short and easy to read document, is sent the day before the loan contract is signed. Unfortunately, AF’s

employee does not read it properly so it is not discovered that the insurance is not assignable and cancellable. AF assumes that Stanwell would have said something if the insurance was not assignable or cancellable. AF loans the $4m to GM. Unfortunately, GM defaults and then AF discovers that the insurance is not assignable or cancellable. It sues Stanwell for engaging in misleading or deceptive conduct by failing to disclose that the insurance was not assignable or cancellable. In this case, AF’s claim would likely not succeed. A reasonable person in the position of AF would not be misled by Stanwell’s conduct because: • Both parties are sophisticated and experienced commercial entities and can assume of each other that they are capable of looking out for their own interests by asking appropriate questions before entering into the contract. • A reasonable person in the position of AF would have: – read the certificate and seen that the insurance was not assignable or cancellable – been put on notice that the other documentation provided by Stanwell was not clear and thus would have sought clarification.

Example: Yannis Yannis is a loyal customer of NSW Commercial Bank. While educated and professional, he is not an investment-savvy person. Over the years he has developed a friendly relationship with the local bank manager, who has assumed a role of informal advisor with regards to business matters.

Yannis is interested in borrowing some money to renovate his house. The bank manager convinces Yannis to take out a risky foreign currency loan to do that, selling it on the basis that because the interest rates are so low Yannis will be able to borrow more money to invest it in shares. Yannis does not really understand how the loan works and asks “what’s the catch?” The manager says “it’s roughly similar to an ordinary loan arrangement” and that the low rates on foreign currency loans “just work that way”. Yannis agrees to take the loan. Yannis signs the documents without reading them. At no point does the bank manager explain how the loan works or that Yannis could protect himself by hedging. Yannis secures repayment of the loan by granting a mortgage over his home. After taking the loan, contracting for the renovations, and investing in some shares, the value of the Australian dollar suddenly drops. Yannis defaults and the bank moves to sell his home. In this case, Yannis may be able to argue that the bank engaged in misleading or deceptive conduct. Given: • The nature of their relationship: customer/trusted advisor, rather than commercial parties dealing at arm’s length • What the bank knew about Yannis: ie not a sophisticated investor • What the bank manager said: the over-simplified statements that “it’s roughly similar to an ordinary loan arrangement” and that foreign currency loans “just work like that”. Yannis could argue that the failure to disclose how the loan works and the full risks involved was misleading or deceptive conduct, because what was actually said falsely led him to believe that the agreement contained minimal risk. The bank manager’s statements were misleading in the context of the long established relationship between the parties.

9.2.3 Silence One of the key benefits of s 18 is that remaining silent is defined as “conduct” and therefore silence is capable of being misleading or deceptive. This is not to say that the “buyer beware” principle mentioned at the introduction to this section (¶9.2) has been abolished by s 18. To the contrary, it continues to pervade commercial dealings and parties are, generally, allowed to be secretive and discrete in their dealings. Rather, it merely acknowledges that sometimes a failure to say something can leave a misleading impression on a plaintiff. In Example: Yannis above, it was reasonable to expect that the bank manager would properly explain the foreign currency loan in more detail given the inexperience of Yannis and the relationship of trust. Therefore, remaining silent amounted to misleading or deceptive conduct. But if Yannis had presented as being a shrewd commercial investor with experience in complicated financing, then the statements may not have been misleading or deceptive. 9.2.4 Opinions and promises Something should be said about opinions and promises as they are often encountered in pre-contractual negotiations and may even be a reason why one of the parties agrees to contract. If either is provided and turns out to be untrue, they are not, just for that reason alone, misleading or deceptive. An opinion is neither true nor false. Subject to what is said below, if it cannot be true or false, then it cannot be misleading or deceptive. A reasonable person would see an opinion as no more than an expression of personal belief. Similarly, a promise that something will happen is neither true nor false at the time that it is made. It is necessary to wait and see whether it becomes true. If that time does not occur until after the contract is signed, then, at least up to the time the contract was signed, the statement was neither true nor false. However, if someone gives an opinion or promises that something will happen they impliedly make the following statements: 1. That they honestly believe in what they are saying, and

2. That they have reasonable grounds for making the statement. If, in fact, the defendant did not actually believe what they were saying, or had no reasonable ground to offer the opinion or make the promise, then they have engaged in misleading or deceptive conduct. The Australian Consumer Law assists the plaintiff here, at least where a defendant says that something will happen. The legislation says that any statements concerning the future are deemed to be misleading or deceptive conduct unless the defendant can show that they had reasonable grounds for the statement.

9.2.5 Misleading conduct tips Contractors can do several things to protect themselves in respect of misleading or deceptive conduct. If a contractor is relying on pre-contractual statements: • They are not required to check the accuracy of a representation. A representee may assume that any statement made is truthful. However, good business practice involves doing due diligence on matters important to the representee. If possible, seek independent verification of important matters. • Be alert to information that is provided that contain disclaimers. Often they will say something like the representor believes the information to be accurate, but that they cannot assure this and that the party should rely on their own research. The effect of a disclaimer is to make the information merely the opinion of the representor. • If an important pre-contractual statement is made, consider having the representor promise the statement in the contract itself. This way, if the statement is not true, the contractor will have a choice of remedy: damages for breach of contract, or a remedy for misleading or deceptive conduct. • Read the contract and look for any entire agreement clauses or clauses whereby a party declares that they did not rely on any pre-contractual representations other than those that appear in the contract. If a party declares that they did not rely on any pre-contractual representations then they may be held to that declaration. Sometimes these terms will list representations that are being relied upon — if any important representations are missing ensure that they are added to the list. • Entire agreement and disclaimer clauses are generally ineffective as a defence against a claim of misleading or deceptive conduct under the Australian Consumer Law, unless it is clearly drafted and specifically brought to the attention of the plaintiff.

If a contractor is making pre-contractual statements: • First and foremost, be honest. While it is not necessary to volunteer information, the law will look past literal words if the effect of any statement made is misleading. Deliberately remaining silent where to do so creates a false impression also counts as misleading or deceptive. • Be careful to verify important information before making the statement. Remember, honest belief in the statement is not a defence. Under the Australian Consumer Law, a contractor will be liable for any loss that results even if they were not negligent. • If a contractor is unsure about the accuracy of any information or the soundness of any opinion provided, they should disclaim any responsibility for its accuracy. • Consider including an entire agreement clause or something similar that declares expressly which pre-contractual representations the parties have relied upon and excludes all others. This will reduce the potential for claims that a misrepresentation was made. They will not protect a deliberately fraudulent statement. To be effective in a misleading or deceptive conduct claim, the clauses will have to be clear and apparent.

Footnotes 3

Formerly, Trade Practices Act 1974 (Cth), s 52.

4

For example, Australian Securities and Investments Commission Act 2001 (Cth), s 12DA.

5

Misleading or deceptive conduct in respect of financial products and services is captured by the identically-worded s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth).

¶9.3 Mistakes It is an unfortunate part of the human condition that we make mistakes all the time. The object of this section is to look at: 1. whether a party can even get out of a contract because of a

mistake, or 2. whether a party can have a written contract changed because by some mistake it does not reflect what the parties agreed. 9.3.1 Mistakes that affect whether a contract is formed The law allows parties to get out of a contract because of a mistake only in very exceptional circumstances. Those circumstances are, first, where both parties are mistaken about something fundamental to the contract such that it is impossible to perform, or it makes the agreement something fundamentally different to what they intended. Second, a mistaken party may be able to get out of a contract where it would be deeply unfair to let the other party enforce the contract in light of the mistake. This is especially the case if one party was not mistaken and played a role in encouraging the other party to be mistaken. However, it cannot be stressed enough that the circumstances described above are very rarely successfully argued before a court. There are several reasons for this. First, the law is anxious to preserve certainty in contracts. Given how easy it is to make a mistake and how commonly it occurs, there would be no certainty of contract if a party could turn around after a contract is made and avoid it by arguing that they made a mistake. Second, when it comes to contracts the law is seldom interested in what the parties actually think. In Chapters 2 to 3 it was made clear that when a contract is formed what matters is how the parties’ conduct would appear to an observer. If the parties appear to have agreed to a contract, then they will be held to that contract irrespective of whether either party did not “really” intend to be bound. The same thinking applies to mistakes. If a party signs a contract then they are declaring to the world that they intend to be bound by the terms found within. If that party was mistaken about something — and the other party played no role in the creation of that mistake — then that is of no concern to the non-mistaken party. There is one exception to this, and that is if the party signing was unable to read the

document due to blindness or illiteracy and they were mistaken about the fundamental legal effect of the document. For example, if a blind person signed a document believing it to be a lease of their property, when in fact it was a sale. But a party who is capable of reading the contract cannot complain if they are mistaken about the terms within it unless the other party caused the mistake. (See further below at ¶9.3.1) Third, the mistake must be about something fundamental to the contract, which makes the contract something entirely different or impossible to perform. It cannot be a mistake about something peripheral to the contract, like a mistake about a non-important term, expected benefits or even a quality of the thing contracted for.

Example: Astrid 1 Astrid sees a rental house located in a picturesque, rural part of Australia advertised as available for holiday rentals. It is advertised as being very comfortable with all the modern conveniences. She agrees with the owner, Vladimir, to rent it for a long weekend. Unfortunately, at the time of the agreement, neither party is aware that the house burned down the day before. In this case, there is a potential to argue that both parties were mistaken about the existence of the house at the time the contract was made. Because the house does not exist, on one view the contract cannot be performed. On the other view, Vladimir promised a house and could be in breach if he fails to provide it. The correct “view” will depend upon the interpretation of the contract. However, if the court is satisfied that the mistake went to the heart of the contract, then the parties could get out of the contract.

Example: Astrid 2 Assume this time that the house did not burn down, but that the fridge had broken down and needed replacing at the time the contract was signed. After the contract is made, but before Astrid is due to take the house, Validimir discovers that the fridge needs replacing. It is particularly expensive to have large furniture delivered and installed to the holiday house. Vladimir argues that he does not have to perform the contract because he made a mistake about the availability of the modern conveniences. In this case the law would not let him out of the contract. The mistake is only to a minor part of the contract — the availability of the fridge. The substance of the contract — letting out the house — is still performable. Vladimir must perform the contract and either have another fridge ready in time (as promised, being a “modern convenience”) or not replace the fridge and be in breach of contract.

Example: Astrid 3 Assume this time that Astrid was mistaken about the location of the house. She thought that it was a two-hour drive from where she lives, when in fact it is a six-hour drive. She discovers the truth after she has signed the contract. In this case, Astrid’s mistake would not allow her to get out of the contract unless she can prove that her mistake is due to the fault of Vladimir. For example, if Vladimir had said before the contract was signed “the house is only two hours from Sydney”. If Vladimir did not do or say anything to mislead her then her mistake does not impact on the contract, which is still performable.

Fourth, often contracts allocate the risk of the mistake. Indeed, the first

thing that a court will do is look to see if the contract itself has provided for the mistake. If one party has promised a certain thing to be true, then that is just a breach of contract if it is untrue; it is not a reason to avoid the contract all together. In the first two examples above, Vladimir will not be able to avoid the contract if he promised the house or the fridge would be there. Fifth, the law will not let anyone out of a contract if the mistake was their fault. Therefore if a party is mistaken due to negligence or failing to conduct themselves to a standard expected of them, they cannot complain about the mistake. The effect of the culmination of all the matters listed above is that, as stated at the outset, it is very difficult to successfully argue mistake as a way to get out of a contract. A party may have greater success in getting out of a contract due to mistake if it can be proven that the other party was aware of the fact that the mistaken party was mistaken and then took steps to ensure that the mistaken did not discover the mistake. In this case, the court would be prepared to rescue the mistaken party who has been taken advantage of by the non-mistaken party. But even here, the law demands that the mistake be about something fundamental to the contract — if the mistake concerns a minor term then the court may not allow the non-mistaken party to avoid the contract. 9.3.2 Mistakes in written documents If the contract is written, then there is scope for errors to creep into the document that is signed by the parties. The law can assist a party who finds that the document that they have signed does not reflect what was actually agreed before it was signed by changing the words in the document to reflect what was agreed (“rectification”). This remedy has two aspects. First, rectification is possible when both parties “actually” agreed to something, but that actual intention is not properly recorded in the document.

Example: Robyn Robyn agrees to sell her house to Chris for $500,000. The contract is drawn up but due to a typing error, the price is stated to be $50,000. Chris insists because both parties signed a contract which states that the price is $50,000 he only has to pay $50,000 for the house. In this case, Robyn could ask a court to rectify the price to reflect what she and Chris had actually agreed.

In the above example, an obvious typographical error changed the contract into something different to what the parties had agreed. The remedy is also available where the parties have an actual intention, but use words in the written contract that do not correctly express that intention. For example, two parties who are not legally trained may intend to enter into a lease. However, not being legally trained, they may use language that has the effect of creating a licence, which is mere permission to use land and does not create an interest in land that bestows certain rights on the tenant. In this case, if the court can be convinced that they actually intended to create a lease interest, then the court may make the necessary orders to correct the language. Second, a document can also be rectified when one party is mistaken about what is in it and the other party is aware of that and makes sure that the mistaken party does not find out the truth. This is a slight departure from the examples given above because here, one party is mistaken but the other party knows exactly what is in the document. Here, the law may assist the mistaken party because it does not want to reward the fraudulent behaviour of the non-mistaken party. However, it should be noted that the courts are very slow to change a written document that looks complete. In cases where the parties are sophisticated commercial entities who have been legally advised, and the contract has been reviewed multiple times, the court will need compelling evidence for it to accept that the document does not reflect

what the parties actually agreed to. The law will also refuse to rewrite a contract to make it “better” for the parties. The role of the court is not to impose on parties something that they never agreed to. Rather, the court merely gives effect to what the parties intended all along. This means that the court will be reluctant to make major changes to a document or rewrite too many terms. The typical case for rectification is a request for a minor change. The larger the change requested the less likely the court will be convinced that the document does not reflect what the parties intended by reason of some error.

9.3.3 Mistakes tips There are few tips that can be provided in respect of ensuring that a document reflects what the parties agree to apart from “be careful”. Thorough pre-contractual due diligence procedures ought to go some way towards reducing the risk of mistake. If a contract can only be avoided because of a mistake about something fundamental to its operation, then it is likely careful planning will eliminate such mistakes. Thorough due diligence will also be useful to demonstrate — if there is nonetheless a serious mistake made — that the contractor was not at fault. The obvious tip is to read any contract before signing it because once it is signed, the law sets up a high barrier to having it changed. This means that contractors should have in place adequate review procedures to ensure that everything is in order before the contract is signed. Ideally, a lawyer will review any contract before it is signed to ensure that the words chosen actually reflects what the parties intend.

¶9.4 Illegitimate pressure Contract law assumes that every person who enters into a contract is independent and freely accepts legal obligations. If that acceptance is coerced or brought about by illegitimate pressure, then the party subject to that pressure has not properly consented to the contract and may get out of it. The law recognises that in reality no one operates completely free from the influence of others. People agree to contracts subject to all kinds of pressure or influence: from friends, family, advertising, the

law, suppliers, customers, commercial competitors, financiers, etc. The law has drawn a line between influence that is legitimate and illegitimate. Contracts that are the result of illegitimate pressure may be avoided. Illegitimate pressure is pressure that goes beyond what is acceptable conduct in contractual dealings. It ranges from overt threats of physical violence, to more subtle and even well-meaning, but disproportionate, influence. This section of the chapter will consider two forms of illegitimate pressure: duress and undue influence. 9.4.1 Duress Duress occurs when a party (“the stronger party”) engages in unlawful conduct, or threatens to do so, to coerce the other party (“the weaker party”) into a contract. It is the unlawfulness of the conduct that makes the pressure illegitimate. The classic case of duress involves physical violence or false imprisonment. It will come as no surprise that a weaker party may get out of a contract if their consent was procured by a gun being pressed against their forehead. The authors hope that contractors will not engage in or experience this kind of duress. However, other forms of duress may be encountered in commercial dealings that may not appear to be unlawful to someone without legal training. Those are unlawful threats to property interests and unlawful threats to economic interests. These kinds of threats may be made by contractors without realising they are unlawful as “unlawful” is not limited to “criminal” conduct. “Unlawful” can also mean unlawful in a civil sense, such as threatening to breach a contract and making demands without any lawful right to do so. To complicate matters, many civil wrongs do not require an actual intent to cause harm and honest and genuine belief in the correctness of one’s conduct is often no defence. Therefore, it may not be apparent that a party has committed, or threatened to commit, a civil wrong until the matter is decided much later by a judge. 9.4.1.1 Threats to goods and property

The most overt form of such duress involving property is when a stronger party threatens to destroy or damage the weaker party’s goods or real property. Such conduct is clearly unlawful because it is criminal. But it is also unlawful to interfere with someone’s lawful right to possession by, for example, seizing property without any lawful right to do so, or refusing to return property to someone who has the lawful right to possession. Although no physical damage may occur in these cases, the law sees any interference with property rights as unlawful. In some cases of interference with property, it will be obvious that the stronger party is acting unlawfully. For example, stealing someone’s property and then refusing to return it until the other party signs a contract is clearly an overt and criminal threat to property. However, there may be circumstances where the stronger party honestly believes that they have a right to interfere with the weaker party’s property.

Example: Bai Enterprises Pty Ltd On Monday, Bai takes his business car to Jack, a mechanic, for a service. Bai makes it clear that Bai Enterprises Pty Ltd is the customer. Jack advises that the car will be ready to pick up on Thursday. The following day, Bai takes his personal car to Jack for a service and makes it clear that this is his personal car. Jack advises that it will be ready for collection on Friday. On Thursday, Bai goes to Jack’s garage to pick up the business car. Bai says that he does not have the company credit card with him and so cannot pay for the service. He asks if he can take the business car and pay for the work when he returns for his personal car. Jack is not happy with this arrangement, but agrees. On Friday, Bai returns to Jack’s garage. Bai forgets to bring the

company credit card again and says that he cannot return to the garage with it until Monday as he was going to directly leave for a weekend away after picking up his personal car. Jack refuses to release Bai’s personal car unless he signs a note promising to pay an extra 10% on the bill for the work on the business car to recognise the inconvenience the late payment has caused Jack. Bai reluctantly signs the note. He also pays for his personal car on his personal credit card, which Jack returns to him. In this case, Bai’s promise to pay 10% extra was brought about by duress. Jack had no lawful right to refuse to release Bai’s personal car. Jack may have thought that this was a “fair” arrangement because Bai had failed to pay for the business car, but, in the eyes of the law, Jack was dealing with two different people: Bai Enterprises the business, and Bai himself. Jack’s dispute was with Bai Enterprises and so to threaten Bai’s personal property was unlawful. Bai Enterprises would not have to pay the extra 10%.

9.4.1.2 Threats to economic interests Threatening purely economic interests can be unlawful. Threatening to breach a contract coupled with a demand is a common example of an unlawful threat to economic interests. For example, if a builder, midway through construction, cynically threatens to repudiate the contract unless the contractor pays more money, then any further promise to pay by the contractor will not be enforceable6. But, again, some cases may not be so clear cut. It may be that the stronger party honestly believes that a contract should be interpreted in a certain way and refuses to perform it unless the weaker party agrees to something different.

Example: National Gas Pty Ltd

National Gas Pty Ltd (“National Gas”) produces and supplies natural gas. It enters into a supply agreement with Eastern Energy, a statutory corporation that generates and supplies electricity to the Eastern half of an Australian State. The agreement provides that National Gas must provide a certain minimum amount of gas on a daily basis. Eastern Energy can request additional gas if necessary and National Gas must use “reasonable endeavours” to meet the additional request. The agreement makes it clear that while the supply of the daily minimum of gas is mandatory, the supply of additional gas is not. National Gas need only use reasonable endeavours to meet additional requests. In particular, it is noted that National Gas is under no obligation to refrain from selling any excess gas it has to third parties, even if that could potentially reduce or eliminate National Gas’s capacity to supply additional gas to Eastern Energy if Eastern Energy were to request it. During the term of the supply agreement, a disaster at a third party gas supplier drastically reduces the amount of natural gas available in the state, which places increased demand on Eastern Energy. Eastern Energy requests additional gas to be made available by National Gas. National Gas has additional gas available but honestly believes that it has a discretion under the contract to refuse the request. It refuses to supply the additional gas and proposes that Eastern Energy enter into a new shortterm supply agreement to purchase the additional gas at more than double the price agreed under the original supply agreement. Eastern Energy, in desperate need for the gas, agrees to the short-term agreement. In this case, if National Gas was wrong concerning its discretion — and this would be a matter of the correct interpretation of the contract — then the short-term agreement was procured by duress. If National Gas refused to use its best endeavours to supply the additional gas as required by the contract, then it has acted unlawfully and applied illegitimate pressure to Eastern Energy. Note that Eastern Energy had no alternative but to agree to the short-term contracts — this is essential to the coercion. It

would make no difference if National Gas honestly believed that its construction of the contract was correct if it was refusing to do what it was legally obliged to.

9.4.1.3 Coercion Example: National Gas Pty Ltd also touches on another defining feature of duress: the weaker party must be coerced. In other words, the illegitimate pressure must be a material reason why the weaker party entered into a contract. If the weaker party agrees to a contract despite, or completely indifferent to, any illegitimate pressure, then they have properly consented to the contract. In Example: National Gas Pty Ltd, Eastern Energy had no choice but to agree to the short term supply agreement. If it had been the case that, at the time National Gas applied its illegitimate pressure, other suppliers could have supplied the additional gas on more competitive terms, then the court would probably find that, rather than Eastern Energy acting under National Gas’s duress, Eastern Energy made a voluntary commercial decision to accept National Gas’s offer. It is important to note, however, that it is the combination of illegitimate pressure and coercion that makes the contract voidable. If, in a commercial dealing, a party applies strong legitimate pressure whereby the other party has no real choice but to agree to the stronger party’s offer, then unless the stronger party crosses any other rule of fair dealing (See, for example, undue influence at ¶9.4.3 or unconscionable conduct at ¶9.5, ¶9.6 and ¶9.7) the contract will stand.

9.4.2 Duress tips The lesson to be learned here is that a contractor must tread carefully when in a contractual relationship and they seek to extract a concession from the other party concerning that contract. Demands that are backed up by unlawful acts or threats — such as refusal to perform the contract — are illegitimate. Accordingly, any agreement made by the weaker party in that context can be avoided7.

If the relationship between the parties has soured because neither is happy with the other’s performance, it may be particularly tempting to make threats concerning the contract or property interests as in the heat of dispute most parties are convinced that they are correct. Such threats should be made cautiously and only after seeking legal advice. If a contractor feels that they are subject to duress, it is useful evidence if: • There is a formal protest against the pressure being applied and, if a contract is signed, that they record in writing that they do not consider the contract binding and will be seeking redress immediately, and • They retain evidence to prove that they had no practical choice but to agree to any demand made. This could include evidence about lack of choice and dire financial consequences that would have resulted if the contractor did not submit to the demand.

9.4.3 Undue influence In addition to duress, the law also recognises that a stronger party may impose other forms of influence that, while not unlawful, are “undue” such that the weaker party did not freely and independently agree to the contract. If the weaker party can show that they agreed to a contract under the undue influence of the stronger party, then the weaker party may get out of the contract. It is difficult to define “undue” influence. “Undue” will depend upon the context. The law recognises that everyone is to some extent influenced by the people around them, so it is not any kind of influence that is undue. The most that can be said is that influence is undue when it goes beyond what is acceptable in the circumstances. It is the application of influence that is disproportionate given the context of the dealing. A telling sign of undue influence is that the stronger party ends up benefiting from the deal at the obvious expense of the weaker party. But it is not necessary that the stronger party benefits, and influence may still be undue even if it results in a fair contract. Typically, cases involving undue influence concern dealings between individuals, rather than businesses. The courts have said that they will closely scrutinise transactions involving people who are timid, suggestible or more easily influenced than the average person. Most of the reported cases on undue influence involve:

• husbands and wives • parents and children and other dependants, or similar relationships of a “parent-like” figure with dependent • carers and patients • religious instructors and followers • trusted professional advisers (eg lawyers, doctors) and their clients. In all of these cases, the relationship between the parties is exceptionally close and involves trust and influence, whereby the stronger party has considerable influence, if not control, over the other. Conversely, the weaker party implicitly trusts or relies upon the stronger party to look after their interests. It should be noted here that the influence or control need not be overtly domineering, harmful or exploitative. It is sufficient if the parties are in a loving and supportive relationship whereby one party is easily influenced by the other, because influence may be “undue” whatever its motivation. In other words, it is easy to see how a contract might be the result of the influence of the stronger party rather than the free consent of the weaker party in those contexts. In a purely commercial context, a relationship of closeness and influence is usually missing. If two commercial entities deal at armslength, theoretically neither is really suggestible to the influence of the other to any serious extent. This, of course, does not reflect the reality of commercial life where parties always deal from unequal bargaining positions and often apply considerable commercial pressure to extract the best possible bargain from the other. Nonetheless, here it is important to again bear in mind the context: it is well accepted that commercial dealing is competitive, high stakes and unconditionally self-interested and it is in this context that influence must be assessed as legitimate or undue. Given that it is accepted that overwhelming commercial pressure may not even amount to duress, it is highly unlikely that an ordinary case of commercial dealing will involve undue

influence. Where contractors may encounter problems with undue influence is if their customers are consumers. In this context, the contractor will be dealing with individuals who are almost always in a weaker bargaining position and could have highly suggestible personalities. There are at least three ways that undue influence could be a problem for contractors: 1. If the contractor engages in overly aggressive and persistent direct marketing or sales tactics that is designed to “wear down” the customer such that the influence brought to goes beyond what is acceptable in that context. 2. If the contractor has a close personal relationship with an individual, where the individual comes to trust and rely upon the contractor for advice or guidance. Such a relationship will have to be an exceptionally close one and more than just a relationship where an independent and capable customer values or trusts the advice of an adviser. 3. Where a contractor deals with a family or people in a family-like relationship and it is apparent that one of the family members has a lot of influence over the other, where the other has agreed to enter into a contract with the contractor. This is discussed further below at ¶9.6. In the first example, the contractor should re-evaluate the long-term viability of a self-conscious strategy that aims to wear a customer down. The law may take the view that the influence used by the contractor goes beyond legitimate commercial pressure. Further, such tactics may attract the attention of the Australian Competition and Consumer Commission, or similar statutory body, which may take action against the contractor under the relevant consumer protection legislation. See further below at ¶9.7.2. As to the second and third examples, a contractor in those situations may still contract with the customer, however the contractor must be careful. If the contract is challenged by the customer, the contractor

should be prepared to prove that the customer properly consented to it. This can be done in several ways: • Clearly explaining the transaction in terms that are understood by the customer • Providing the contract in a form that is easy to read and understand • Giving the customer time to consider the contract • Insisting that they speak to someone else who is independent, competent and trustworthy about the contract, who can provide a clear and impartial explanation of the contract. The list above is not exhaustive. The point is to ensure that the customer makes their decision freely and independently and not under the thrall of the contractor. Giving the customer the time to think about it and the capacity to consult with others who are looking out for their interests will prove to the court that the customer made their own decision.

9.4.4 Undue influence tips A contract may be avoided if a stronger party applied influence that was undue such that the weaker party did not freely and independently consent to the contract. It is more likely to be a problem for contractors who deal with consumers and other vulnerable people. • Be careful with sales tactics. The law tolerates a certain level of pressure being applied by a seller, but there are limits. Disproportionately persistent and unusual pressure is not acceptable. • If dealing with a vulnerable person, be prepared to give them time and space to think about transactions. The more complicated the transaction the more time they may need. • If the transaction is particularly complicated or involves the customer assuming onerous obligations or significant risk, take the time to properly explain the transaction or ask them to seek advice from a qualified professional before committing to the contract.

• Keep written records of negotiations with vulnerable people, noting what, if any, explanations were provided to them. If they are advised to seek independent advice, have them sign a written declaration that they received that advice and have the advisor sign to acknowledge that they provided the advice.

9.4.5 Illegitimate pressure under statute Section 50 of the Australian Consumer Law prohibits the use of physical force, or undue harassment or coercion, in connection with the supply or possible supply of goods or services, or payment for them; or the sale or grant, or the possible sale or grant of, an interest in land, or payment for it. That would capture duress as discussed above and some forms of undue influence. If this section is breached then the statutory remedies in the Australian Consumer Law are available to the victim. They are identified at ¶9.9. A similar prohibition on coercion and harassment can be found in other legislation as well. Footnotes 6

Leaving aside for the moment problems with consideration (¶1.2.3) and practical benefit (¶5.3.2).

7

However, anti-competitive conduct may be prohibited. It is beyond the scope of this book to explore that in any detail.

¶9.5 Unconscionable conduct/exploitation The preceding section discussed how a weaker party may avoid a contract if they were coerced or unduly influenced into accepting it. This section will look at how the law protects weaker parties who may not have been improperly influenced by the stronger party, but of whom the stronger party has taken advantage because the weaker party was not able to competently look after their own interests. If a stronger party sees that the other party is unable to look after their own interests and then “swoops” in to take advantage of them, the law

describes that as “unconscionable” or “against good conscience”. Before looking at this principle in detail, two things should be noted at the outset. The first is that what follows is a discussion of how the judge-made common law protects people from exploitation. It sets a minimum standard of conduct for when a stronger party deals with a weaker party who is unable to look after their own interests. These days legislation defines unconscionable conduct more generously than the common law and therefore provides relief for weaker parties in more circumstances than does the common law. However, the legislation does not replace the common law. Rather, it exists alongside it. The legislation will be considered in ¶9.7 and ¶9.8. Second, this principle at times appears indistinguishable from the principle of undue influence discussed above at ¶9.4.3. Both principles are concerned with preventing a stronger party from victimising a weaker party. The conceptual difference between the two is that undue influence is concerned with the quality of the consent of the weaker party, whereas this principle is more concerned with whether a stronger party acted in a predatory way by taking advantage of someone who may have consented to the contract free from undue influence, but was clearly incapable of making a sound decision. However, in reality a case that involves undue influence will also probably involve unconscionable conduct. They are not mutually exclusive and often overlap. 9.5.1 Special disadvantage As stated above, the law will protect a weaker party from being exploited only if, at the time they entered into a contract with a stronger party, they were unable to look after their own interests. If a weaker party is unable to look after their own interests, the law says that they are at a “special disadvantage” vis-à-vis the stronger party. To be in a position of special disadvantage requires more than just having minimal or no bargaining power. The weaker party must be incapable for whatever reason of understanding or making a sound decision about what is in their best interests. This does not require

mental incapacity, although that is a classic case of special disadvantage. A weaker party could be in a position of special disadvantage for any number of reasons and much will depend upon the context. Following is a list of factors that could put someone in a position of special disadvantage: • Mental incapacity — whether due to a medical or psychological condition, the natural effects of ageing, or intoxication • Physical incapacity — such as blindness or inability to read documents, etc • Illiteracy — whether because they are not literate in their native language or they are dealing with a contract in another unfamiliar language • Lack of education • Lack of experience • Improperly influenced by a third party — eg misinformation, coercion, etc • Any combination of the above, or any other matter not listed here which has the effect of impacting on the weaker party’s capacity to look after their own interests.

Example: Vincenzo Vincenzo is a successful property developer. He has a close relationship with Federation Bank (“Federation”). Unfortunately, Vincenzo’s business has not been doing well and Federation is becoming nervous about the business’ ability to repay its debts. Federation presses Vincenzo for further security to sure up his business’ financial position. Vincenzo suggests that his parents could guarantee his business’ debts and provide their home as security. Federation agrees that this is acceptable.

Vincenzo’s parents, Maria and Giuseppe, are elderly Italian migrants. They have been in Australia for several decades. They can speak enough English to get by, but are not confident with it. They have not had any education beyond high school and have minimal business experience. Their only asset is their family home. They are immensely proud of Vincenzo. Vincenzo persuades his parents to guarantee repayment of his business’ debts and to provide their home as security. Vincenzo lies about the financial situation of his business and assures them that Federation would never really enforce the guarantees. He also lies about the terms of the guarantee: he says that the guarantee would only be for six months and for $20,000. In reality, the guarantee is for unlimited time and all moneys owing at any time by Vincenzo’s business. Maria and Giuseppe would do anything for their son, so they readily agree. Vincenzo tells his business manager that his parents have agreed to sign a guarantee and mortgage. The business manager, Hamish, visits the parents. Hamish can see that English is not their first language. He deals mainly with Giuseppe. Hamish places a document in front of Giuseppe of several pages length, that is in small font and full of technical business and legal terms. Giuseppe does not read it and asks “where do we sign, please?”. Hamish shows him. Just before signing Giuseppe says “oh well, it’s only for $20,000.” Hamish stops Giuseppe from signing and explains that the guarantee is for all moneys owing, which could be more than $20,000. Giuseppe just nods. Hamish is concerned, but thinks that he must look after the bank’s interest as it seems likely that Vincenzo’s business would soon be insolvent. He reasons to himself that it is Giuseppe and Maria’s decision to sign and does not probe further. Giuseppe signs the documents and then has Maria do the same. In these facts, there is a strong argument that Federation has unconscientiously exploited Giuseppe and Maria’s special disadvantage. Their special disadvantage was established by the

following factors: • Illiteracy • Lack of education • Lack of experience/complexity of the transaction • Being unduly influenced by their son who misrepresented the extent of their obligations. In no real sense could they make a decision about what is in their best interests: they did not understand the transaction and it was clear that no assistance was forthcoming.

It should be stressed that a special disability can be difficult to prove and mere commercial disadvantage is not sufficient. The High Court has said that: Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests.8 Consider the following examples.

Example: Polly Polly is a fully grown, functional and rational adult. She approaches AustralComms Ltd about a telecommunication service contract for her business she runs from her home as a sole trader. The potential services offered by AustralComms are offered on a take it or leave it basis. Polly is not in a position of “special” disadvantage just because she cannot in any real sense bargain with the company. But at

least she has sufficient insight and intelligence to know whether the offered deal is in her interest or not.

Example: Hiroto and Hisaki Hiroto and Hisaki operate a small sushi restaurant on leased premises in a shopping centre owned by Retail Investments Pty Ltd (“Retail Investments”). Hiroto and Hisaki and some other tenants are currently in an ongoing dispute with Retail Investments about how outgoings are calculated under the lease, but otherwise they are good tenants who observe all the terms of the lease. Unfortunately, their daughter has fallen seriously ill and they have decided to sell the business to look after her full time. Their lease with Retail Investments is coming to an end and they would like to renew it to ensure that they will be able to sell their business. Retail Investments is aware of their personal situation and refuses to renew the lease unless they agree to abandon all claims against them. They consult with their solicitor for advice. Believing that they have no real choice if they want to sell their business for maximum value, they sign a Deed of Release and in return Retail Investments renews their lease for another five years. In this case, Hiroto and Hisaki were at a distinct commercial disadvantage, but not at a special disadvantage. Like Polly in the example above, they had sufficient insight and intelligence to know whether the compromise offered by Retail Investments was in their interest or not. Indeed, they received advice from a solicitor. Retail Investments pressed a commercial advantage; it did not exploit them. Retail Investments was not obliged to renew the lease and it is common practice for a party in a stronger

bargaining to insist on favourable terms before they grant a benefit. The principle does not require the stronger party to look out for the interests of the weaker party, nor forego any legitimate commercial advantage.

It would be very unusual for a business of any size to assert that it is in a position of disadvantage, as the law would say that it is capable of looking after its own interests (Although see Unconscionable conduct in legislation below at ¶9.7), especially if it received professional advice before agreeing to a contract. Historically the principle has protected individuals from exploitation and this is reflected in the list above at ¶9.5.1. The factors listed above tend to relate to characteristics held by individuals. For this reason, exploitation is more likely to be a problem for contractors who deal with vulnerable members of the public rather than those who tend to deal only with other businesses. 9.5.2 Knowledge If a weaker party would like to avoid a contract because of the stronger party’s unconscionable conduct, they must demonstrate that the stronger party was aware of their special disadvantage at the time the contract was formed. This is because the law only assists the weaker party if there has been conscious exploitation by the stronger party. The courts have said that the stronger party must have “a predatory state of mind”9. For example, if a contractor is dealing with a customer who has severe mental issues, but those issues are not apparent to the contractor during the course of pre-contractual negotiations, the weaker party will not be able to avoid the contract. However, the law also equates “wilful blindness” with actual knowledge. Wilful blindness is where a person learns enough facts to become strongly suspicious that “something is wrong”, but then deliberately chooses not to investigate just in case their suspicion is confirmed. In Example: Vincenzo above, Hamish could clearly see that English was not Maria and Giuseppe’s first language and that,

most likely, they would not be able to understand the document that they were signing. When Giuseppe demonstrated his misunderstanding of the amount for which they would be liable, Hamish was positively on notice that something was awry. However, he chose not to look further in case his fears were realised. The law would say that wilful blindness was actual knowledge of their special disadvantage. 9.5.3 Unconscionable conduct If a stronger party is aware that they are dealing with someone who cannot look out for their own interests, that does not mean that they cannot deal with the weaker party. It is possible to deal with a weaker party without exploiting them. It is conscious exploitation by the stronger party that allows the weaker party to get out of the contract. If the contract is fair, just and reasonable, then the weaker party cannot avoid it. Therefore, a stronger party should be prepared to prove that any transaction with someone at a special disadvantage is fair, just and reasonable. “Fair, just and reasonable” evokes the following ideas: • The consideration paid is at market value and not extravagant • The contract was easy to comprehend • The terms reasonably balance the interests of both parties • The weaker party obtains a real and undeniable benefit from the transaction • The conduct of the stronger party was in accordance with ordinary business practices • The weaker party had the advantage of time to make the decision and assistance from independent third parties who looked out for the weaker party’s interests. It is important to note that the law does not require a contractor to specifically look out for the interests of vulnerable people, or to put the

interests of a vulnerable customer before their own commercial interests. A contractor is entitled to act in their own interest, however they cannot exploit someone who is in a position of special disadvantage. This means that dealing with vulnerable people requires the contractor to be diligent with fair business practices. In the appropriate case, this may mean refusing to contract until the proposed customer has sought advice from disinterested third parties.

9.5.4 Unconscionable conduct/exploitation tips The law will not let a stronger party exploit a weaker party by taking advantage of their special disadvantage. Like undue influence, this principle will most likely be relevant to a contract if they regularly deal with consumers who are particularly vulnerable, such as the elderly, illiterate, unwell or indigenous. • If a contractor suspects that they are dealing with someone who is incapable of looking after their own interests, they must act fairly and not see it as an opportunity for an easy sale. • Be prepared to give a vulnerable customer time and space to think about transactions. The more complicated the transaction the more time they may need. • If the transaction is particularly complicated or involves the customer assuming onerous obligations or significant risk, take the time to properly explain the transaction or ask them to seek advice from a qualified professional before committing to the contract. • It is not sufficient for a stronger party to say that they did not apply any pressure on the weaker party and that they just passively accepted an offer made by the weaker party. If the weaker party clearly is unable to look after their own interests, in the appropriate case the best course may be to refuse to contract with the weaker party until they have sought advice from disinterested third parties. • Keep written records of negotiations with vulnerable people, noting what, if any, explanations were provided to them. If they are advised to seek independent advice, have them sign a written declaration that they received that advice and have the advisor sign to acknowledge that they provided the advice. • The terms of the contract will provide evidence of whether a weaker party has been exploited. If the terms are unduly onerous, unnecessary to protect the interests of the stronger party or give the stronger party unilateral powers to change the contract, then it will be harder to show that it is fair, just and reasonable. • The Australian Competition and Consumer Commission provides information for businesses in relation to dealing with consumers generally. This includes a

section dealing with unconscionable conduct. It also provides examples of conduct that is not acceptable. See www.accc.gov.au generally, and for business see www.accc.gov.au/business. State and territory governments also provide online information on acceptable fair trading practices.

Footnotes 8

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, [10] (Gleeson CJ).

9

Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392, [161] (The Court).

¶9.6 Third party influence It is clearly established that the use of illegitimate pressure (¶9.4) or unconscionable conduct (¶9.5) by a stronger party to a contract will allow the weaker party to get out of the contract. The discussion of these principles so far has assumed that a stronger party has taken advantage of a weaker party and that they are both parties to the same contract. But what about the situation where the stronger party is not a party to the contract? For example, if A agrees to enter into a contract with a contractor because B (a third party) has threatened to injure A if they do not, can the contractor insist that the contract be performed? The answer is that the weaker party will be able to get out of the contract if they can show that the contractor was aware of the third party’s wrong doing. It will not be good enough for the contractor to declare that they did nothing wrong.

Example: Roshanara

Roshanara owned a recently constructed investment house. She entered into an oral agreement to sell the house to friends of her family, Mohammed and Farisha. Roshanara agreed that they could move in straight away and pay rent until the house was completely fitted-out and the contract was settled. Mohammed and Farisha moved in to the house. They paid rent for a few weeks, but also made certain demands that Roshanara fix minor problems before they purchased the house. They also insisted that, as tenants, they were not liable for certain rates and outgoings. Relations cooled between the parties. Roshanara decided that she did not want to proceed with the sale of the house. She demanded that Mohammed and Farisha leave. This created a crisis between the two families. As a matter of law, Roshanara could evict Mohammed and Farisha as the sale agreement was oral and needed to be in writing to be enforceable (See Chapter 3). However, the repudiation of the agreement was seen by friends and family of Roshanara, Mohammed and Farisha as being dishonourable and contrary to their common faith. A meeting is called by concerned friends and family to see if the matter could be settled amicably. The local clergyman is also invited to provide advice and lend gravitas to the proceeding. Initially, Roshanara is adamant that she does not want to sell the house to Mohammed and Farisha. However, the meeting is a long one under which Roshanara is subject to sustained pressure from her family to proceed with the sale. The clergyman also counsels her that if she honours this agreement she will be rewarded in the afterlife. Mohammed and Farisha are present, but they stay on the sidelines and do not actively get involved. After several hours, Roshanara buckles and agrees to sign a contract. Mohammed and Farisha immediately produce a contract and have Roshanara sign on the spot. In this case, Roshanara was subjected to undue influence by her family and the clergyman. It looks like her decision to sign a

contract was not because of her free and independent agreement, but because she was subjected to hours of pressure by people whom she trusted and respected. Note that Mohammed and Farisha did not actively apply pressure themselves. However, they were present and could clearly see that Roshanara was subject to undue influence. They took advantage of the third parties’ undue influence and had Roshanara sign the contract while she was clearly still under that influence. They did not give her the opportunity to reflect on what she wanted to do free from their influence.

In Example: Roshanara, the purchasers were present at and consciously took advantage of the third parties’ undue influence over the seller. But a contractor does not have to be that closely implicated in a third party’s undue influence before the weaker party will be able to get out of a contract with the contractor. For example, refer to Example: Vincenzo provided at ¶9.5.1. Although this example was provided as an example of unconscionable conduct, whereby the bank took advantage of Giuseppe and Maria’s special disadvantage, another way to look at it is that the bank was aware that they had been unduly influenced by Vincenzo. The bank would be aware of the undue influence despite the fact that it was not actually present when Vincenzo lied to his parents about the extent of the guarantee. The bank would be put “on notice” because: • Giuseppe revealed his misunderstanding of the guarantee when he said that “oh well, it’s only for $20,000.” • The bank was aware of the full extent of Vincenzo’s business financial problems and the parents had undertaken a foolish risk by agreeing to provide their only major asset — their home — as security. • The bank knew that his parents did not speak English well and that they would trust and rely on their son for guidance in respect of

the guarantee. • Given Vincenzo’s business’s dire financial situation, there was a real risk that Vincenzo might take advantage of his parents to secure their consent to the guarantee. The combination of the above factors known to the bank should have made it question whether the parents had freely and independently agreed to sign the guarantee. The “red flag” should have been that two elderly people were undertaking an enormous risk with their only major asset, in circumstances where the only advice they had received was from the one person who would benefit from them signing the guarantee. Even though the bank did not witness the actual undue influence of Vincenzo, the circumstances strongly suggested that it had occurred and it would be incumbent on the bank to address that risk before entering into the contract. If the bank turned a blind eye to this — ie were wilfully blind — once again the law would not allow that as a defence. If a contractor is aware of improper conduct by a third party on the other party to the contract, or the circumstances suggest that it is a real possibility, then they must address that risk. This does not mean that the contractor has to get involved with the relationship between the parties. This means no more than taking reasonable steps to ensure that the other party is fully informed about the transaction and that they make the decision freely and independently. In most cases, this means insisting that the other party receive independent advice from a qualified professional. For example, returning to Example: Vincenzo, while the bank would not be expected to advise the parents not to sign the guarantee — the bank is allowed to look out for its own interests — they should have at least made sure that Giuseppe and Maria understood what they were doing. They could do this by properly explaining the agreement to them or, better still, asking that they take independent advice from a qualified professional. It is important that in situations such as this the contractor keeps records of the steps they have taken to ensure that the other party has

freely and independently agreed to the contract. Often, contractors require the other party to seek advice from an independent professional and have the professional and the other party sign documentation declaring that independent advice has been received and that the other party understands the transaction. 9.6.1 Protection for wives A point should be made about the protection that is extended to wives who guarantee the obligations of their husbands. If a contractor enters into a contract with a husband and the wife agrees to guarantee that her husband will perform the contract, then the contractor must ensure that the wife understands the obligations that she is undertaking. The reason for this is that, if the wife did not adequately understand the arrangement, the contractor will not be able to enforce the guarantee against the wife if the husband defaults. The reason that the law extends this protection to a wife is because it assumes that, if it is left to the husband to obtain the signature of the wife where she will be agreeing to an arrangement from which she obtains no benefit, the husband may deliberately or innocently mislead his wife, or at least just fail to explain the nature and extent of the guarantee. The principle operates similarly to the principle discussed above: that a party to a contract may get out of it if the contractor knew about a third party’s improper conduct when the contract was made. But whereas that principle depends upon knowledge of wrongdoing, the only notice required for the wife-protection principle is that a wife is guaranteeing the obligations of her husband.

Example: Jonas Jonas operates a business through his company J & S Enterprises Pty Ltd (“J & S”). Jonas and his wife, Stella, each hold one share and are the directors of it. In reality, Jonas runs the entire business and Stella has no input. If Jonas asks her to

sign a document concerned with the business, she signs it without reading it or asking for any explanations. Stella leaves it to Jonas to do everything. J & S needs capital so it takes a loan from OzBank Ltd. OzBank requires that both Jonas and Stella personally guarantee that the loan will be repaid. It also insists upon the family home, which is registered in both of their names, be provided as security. In this instance, the bare fact that OzBank knows that Stella will guarantee the debts of her husband’s company is sufficient to require it to ensure that she fully understands the obligations she is undertaking. If it fails to do this, and the documents are signed “as usual” by Jonas asking her to sign without offering any explanations, then she will be able to get out of the guarantee (Jonas would continue to be bound by his guarantee).

The protection is only provided to wives who guarantee the debts of their husbands, not the reverse. It is unclear whether a husband, or a woman in a de facto relationship would receive the same protection, or partners in a same-sex relationship. This principle comes from the judge-made common law and the courts have only specifically identified that wives are protected in this way. If a contractor is aware that a wife is guaranteeing the obligations of their husband, then, as already noted, the contract must make sure that the wife understands the guarantee. It can do this by fully explaining the document to her, or, better still, having the wife seek independent advice from a qualified professional.

¶9.7 Unconscionable conduct in legislation The preceding three sections of this chapter have looked at when the judge-made common law will allow a weaker party to get out of a contract because they did not freely consent to it (illegitimate pressure (¶9.4)), or they were unable to look after their own interests and the stronger party took advantage of them (unconscionable conduct

(¶9.5)). The thresholds set by the common law for relief from a contract on those grounds can be difficult to meet. If a party is a rational adult, or a business, they will be unlikely to avoid a contract under any of those principles. Because the judge-made common law has fixed notions of what amounts to illegitimate pressure or unconscionable conduct in contractual dealings, it has failed to keep up with modern unfair business practices that, while they may stop short of illegitimate pressure or unconscionable conduct in the common law sense, nonetheless could be considered deeply unfair or unethical. For this reason, in the twentieth century the parliaments of Australia enacted legislation to provide protection to consumers and small businesses in ways that are more comprehensive than the common law. This section of the chapter will consider the impact that this has had on contracts. 9.7.1 Overview Legislation addressing unconscionable conduct in commercial dealings has been enacted by the various state parliaments and the federal parliament. The legislation has been enacted piecemeal, targeting specific industries and business practices as problem areas are identified. So, for example, there is legislation moderating unconscionable conduct concerning: • Contracts with consumers10 • Contracts with small businesses11 • Credit and financial service contracts12 • Retail tenancies13 • Contracts with farmers14 • Industrial relations15 • Contracts in respect of retirement villages16

• Contracts in respect of strata scheme management17. It is beyond the scope of this book to identify and analyse every Act and section that provides relief against a contract procured by unconscionable conduct. Instead, this chapter will look at the most prominent legislation: the Australian Consumer Law (“ACL”). It focuses on this legislation for several reasons. First, the Australian Consumer Law has been enacted as the law of all states and territories. Second, it is legislation which applies to any contract entered into that is “in trade or commerce”, unless the contract concerns a financial product or service. Contracts concerning financial products or services are regulated under identically worded sections in the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”). Significantly, it is not necessary to be a natural person or a consumer to seek relief from unconscionable conduct under either of these Acts. Indeed, any natural person or even companies may seek relief under these Acts, except for publicly listed companies. Therefore, contractors should take note of this section from two perspectives: as a business that may engage in, or be on the receiving end of, statutory unconscionable conduct. Third, the unconscionable conduct provisions of the ACL are some of the most litigated legislative provisions concerning unconscionable conduct and therefore judicial pronouncements on them have informed and shaped how “unconscionable conduct” is defined in all the other Acts. Indeed, because the ASIC Act contains identically worded sections, the law as it exists under the ACL is the same under the ASIC Act. Contractors operating in New South Wales should also be aware of the Contracts Review Act 1980 (NSW). It is legislation of general application that protects consumers and farmers from contracts that are “unjust”. The definition of “unjust” is similar to “unconscionable” as it will be discussed in this section. For this reason, it is not further analysed in this book, but should be taken into account by contractors operating in New South Wales.

9.7.2 The Australian Consumer Law The Australian Consumer Law contains two sections that prohibit unconscionable conduct: s 20 and 2118. Section 20 prohibits a person engaging in unconscionable conduct “within the meaning of the unwritten law”. The “unwritten law” means the judge-made common law — the principles that were discussed earlier at Illegitimate pressure (¶9.4) to Third party influence (¶9.6). This means that s 20 of the Australian Consumer Law gives statutory force to the common law’s definition of illegitimate pressure and unconscionable conduct, which then provides statutory remedies if it is breached. Statutory remedies are discussed at ¶9.9. Section 21, on the other hand, expressly prohibits unconscionable conduct beyond the realms of unconscionable conduct as defined by the common law. This is the real innovation concerning unconscionable conduct as its scope is not limited to discrete categories, unlike the common law. It provides as follows: “(1) A person must not, in trade or commerce, in connection with: (a) the supply or possible supply of goods or services to a person (other than a listed public company); or (b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company); engage in conduct that is, in all the circumstances, unconscionable.” 9.7.2.1 Unconscionable The word “unconscionable” is not defined in the ACL. Judges have said that what is required is conduct by the stronger party which is overtly unjust, unethical, unreasonable or irreconcilable with good conscience. It has been further noted that, because the word is not defined, conduct that answers the description “unconscionable” under s 21 will reflect community norms as they develop over time. However, it has also been noted that the conduct has to be more than “merely” unfair or unreasonable; it has to be a real departure from accepted

norms of conduct. Section 2219 provides insight into what can be unconscionable conduct by providing a list of factors that can be taken into account when working out whether a stronger party has engaged in unconscionable conduct. The list is not a complete list of factors and the court is free to look at all relevant circumstances. Nor is it necessary that the stronger party engage in all or even some of the listed factors. The list merely contains indicators of what could constitute unconscionable conduct to aid the court to make a judgment on the conduct. Section 22 says that the court may consider: • the relative strengths of the bargaining positions of the parties • whether the weaker party, as a result of conduct engaged in by the stronger party, was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the stronger party • whether the weaker party was able to understand any documents relating to the supply or acquisition of the goods or services • whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the weaker party • the amount for which, and the circumstances under which, the weaker party could have acquired or sold identical or equivalent goods or services • the extent to which the stronger party’s conduct towards the weaker party was consistent with the stronger party’s conduct in similar transactions • the requirements of any applicable industry code • the extent to which the stronger party unreasonably failed to disclose to the weaker party any intended conduct of the stronger party that might affect the interests of the weaker party; and any

risks to the weaker party arising from the stronger party’s intended conduct • the terms and conditions of the contract and the extent to which the stronger party was willing to negotiate them. In particular, whether the stronger party has a contractual right to vary unilaterally a term or condition of a contract • whether the form and language of the contract was easily understood by the weaker party • the conduct of the parties in complying with the contract or in connection with their commercial relationship after they entered into the contract, and • the extent to which the parties acted in good faith. It can be seen that a court may take into account factors far beyond what the common law takes into account. It is also apparent that themes relevant to the common law principles of duress, undue influence and unconscionable conduct have been incorporated. Section 21 further provides that when considering whether conduct to which a contract relates is unconscionable, the court may take into account the terms of the contract and the manner in which and the extent to which the contract is carried out. This point is very significant because it widens the field of inquiry when compared to the common law. At common law, the court could only look at what happened when the contract was formed; under the ACL the court can consider both how a stronger party acted in respect of contract formation, and also the stronger party’s conduct while performing the contract. Therefore, contractors who seal the deal with charm and platitudes, but then act ruthlessly and unconscientiously when performing it may breach s 21 of the ACL. Following are two examples of actual cases where a party was found to act unconscientiously according to s 21 of the ACL, which may not have succeeded according to common law principles.

Examples: National Exchange National Exchange Pty Ltd (“National Exchange”) ran a business whereby it contacted shareholders of large public companies that had recently demutualised and offered to buy their shares at significant undervalue. Many of the shareholders had become members in the company because of the demutualisation and not because they actively purchased the shares for an investment. Often they had no experience in investing in shares and did not realise the value of them. However, there was no evidence that any of them was in a position of special disadvantage and even if some of them were, National Exchange did not have any direct contact with them so it could not be aware of any disadvantage. Neither did National Exchange apply any pressure to sell. The letter sent to the shareholders was short, easy to understand and included the actual current value of the shares on the Australian Stock Exchange. They included prepaid reply envelopes to facilitate the sales. The court found that National Exchange deliberately and systematically targeted vulnerable shareholders who had limited experience and were likely to act irrationally. The court observed that “this is not a case of obtaining a low price by shrewd negotiation. It is predatory conduct designed to take advantage of inexperienced offerees.”20 Therefore, the conduct was unconscionable.

Example: Coles Coles is well-known in Australia as one of the two major supermarket retailers. Because of its size, Coles bargains from a

position of vastly superior strength when dealing with many of its suppliers. In late 2014, Coles was found to have engaged in unconscionable conduct by imposing an “Active Retail Collaboration Rebate” on certain suppliers and demanding payments to which it was not entitled. The suppliers were identified by Coles as “Tier 3” suppliers, being suppliers who tended to be small businesses. The Active Retail Collaboration Rebate was a payment made from a supplier to Coles, calculated as a percentage of the price Coles paid for the products and deducted by Coles from monies owed to the supplier for products that it had already supplied to Coles. The Rebate was calculated by Coles internally by applying a standard formula to all Tier 3 suppliers without taking into account any of their individual circumstances, based on assumptions made by Coles about the suppliers that were not verified. In other words, the suppliers had no input into how the rebate was calculated. The means by which Coles sought to have the Tier 3 suppliers sign up to the Rebate was found to be “deliberate, orchestrated and relentless”. Initially, the suppliers were asked to voluntarily agree to the rebate. Those that refused were then subjected to increasing commercial pressure that sometimes involved threats, such as threats not to promote the suppliers product or not to continue purchasing its products. Coles ignored any protests that the Rebate was based on false assumptions or failed to take into account a supplier’s particular circumstances. In substance, Coles used its superior bargaining position to coerce certain suppliers to agree to the Rebate or make other payments to which it had no right, irrespective of the impact that it would have on the suppliers. The court found Coles’ conduct to be deliberately ruthless and unconscionable. It observed that its conduct was of a kind that merited a severe penalty. Coles was ordered to pay $10m in fines and to establish a system to permit those harmed by Coles’

conduct to recover compensation.

If a company breaches s 21 or s 22 of the ACL, a wide variety of remedies are available for the other party. They are discussed below at ¶9.9.

9.7.2.2 ACL tips It is hard to provide tips on how not to breach s 22 of the ACL because of its scope. Many of the tips provided under the sections on illegitimate pressure (¶9.4), unconscionable conduct (¶9.5) and third party influence (¶9.6) would apply here as well. Contractors should be aware that unconscionable conduct beyond the recognised common law categories is prohibited. Contractors that engage in dishonest, heavyhanded, unreasonable or sharp practice may find that they have contravened s 22 and opened themselves up to liability, both in terms of having to compensate any weaker parties for loss and also potentially to civil or criminal liability should the Australian Competition and Consumer Commission or the Australian Securities and Investments Commission decide to prosecute.

Footnotes 10

For example, The Australian Consumer Law, Australian Securities and Investments Commission Act 2001 (Cth), Contracts Review Act 1980 (NSW).

11

For example, The Australian Consumer Law, Australian Securities and Investments Commission Act 2001 (Cth).

12

For example, Australian Securities and Investments Commission Act 2001 (Cth); National Consumer Credit Act 2009 (Cth).

13

For example, Retail Leases Act 1994 (NSW).

14

For example, Contracts Review Act 1980 (NSW).

15

For example, Industrial Relations Act 1994 (NSW).

16

For example, Retirement Villages Act 1999 (NSW).

17

For example, Strata Schemes Management Act 2015 (NSW).

18

The equivalent sections in the Australian Securities and Investments Commission Act 2001 (Cth) are s 12CA and 12CB.

19

Australian Securities and Investments Commission Act 2001 (Cth), s 12CC.

20

Australian Securities & Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132, [43].

¶9.8 Further impacts of legislation A running theme through all of the unconscionable conduct provisions is a desire by the parliaments to protect those who typically bargain from a weak position when dealing with modern day businesses. The judge-made common law rules of contract law were developed at a time when commerce was conducted between sole traders and partnerships and the idea of a “consumer” did not exist. Today, wellresourced corporations with significant bargaining power dominate the markets and can get away with a domineering “take it or leave it” attitude. To counter unfair business tactics and to create a more equal relationship between businesses, consumers and others who lack bargaining power, the parliaments have enacted legislation moderating how certain classes of parties can do business. One way

this is done is by prohibiting “unconscionable conduct” in trade or commerce, as was discussed in ¶9.7. Another way to moderate precontractual conduct is by imposing specific positive obligations on one of the parties that they must observe during negotiations. For example, legislation can oblige a party to: • Disclose information • Provide contracts in a form that is legible and easy to understand • Provide a cooling-off period whereby the consumer can elect to unconditionally rescind an agreement • Provide limits to the amount of time that can be spent with a consumer, or when or how a consumer may be contacted • Include certain warranties about the quality of a good or service that could not be contracted out of, etc • Follow industry codes of practice. The list could go on. While consumers benefit from most of the legislation, legislation has also been enacted to protect small businesses. For example, legislation exists in respect of franchising and retail tenancies that oblige prospective franchisors and landlords to disclose certain information before entering into an agreement. The obligations try and address the informational imbalance that can exist when a party of lesser bargaining power enters into a contract with a larger and more sophisticated party. They also feed back into and inform what is meant by “unconscionable conduct” by setting standards that society expects certain businesses to meet in their dealings. Failure to observe these standards can be compelling evidence of unconscionable conduct. It is beyond the scope of this book to identify and analyse every piece of legislation that may impact on the negotiation stage of a contract. It is incumbent on a business to seek legal advice to ensure that they comply with any particular legislative disclosure or procedural obligations.

¶9.9 Remedies The law provides several remedies to a party whose consent was improperly obtained. A distinction should be drawn here between the remedies provided by the common law (ie judge-made law) and remedies that are provided by legislation. 9.9.1 Common law remedies The general remedy provided by the common law is “rescission” of the contract. Rescission was addressed in Chapter 6 at ¶6.4. If the contract is rescinded, then it disappears — none of the terms bind the parties any more. This means that if property or money has been transferred, they must be returned. The parties must be restored to their pre-contractual positions. A party needs to elect to rescind a contract (See Chapter 7, ¶7.4). The contract is not automatically rescinded just by virtue of the improperly obtained consent. This means that the party with the right to rescind may elect to affirm the contract, in which case both parties will be obliged to continue performance. There are some important limitations on the right to elect to rescind. As noted above, after the contract is rescinded they must be returned to their pre-contractual positions. This means that if it is not possible to restore the parties then the contract cannot be rescinded. 9.9.2 Statutory remedies There are many more remedies available under statute and generally the relief they provide is much more flexible. Whereas the common law only allows a party to rescind the contract if their consent has been improperly obtained, statutory remedies do much more. The relevant statute itself will spell out what remedies are available and they may vary. Commonly, they give courts the power to make any order that will meet the justice of the case. As most of this chapter has focussed on the Australian Consumer Law, what follows is a brief overview of the remedies available there. If a party has engaged in any conduct that is captured by the

Australian Consumer Law — misleading or deceptive conduct, undue harassment, unconscionable conduct, or any of the other prohibited business practices found within — the Australian Consumer Law offers the following: • Rescission — or all or part of the contract • Damages for loss • Injunctions • Rewrite terms of the contract • Ordering the offending party to return money or property, or repair faulty goods or supply a promised service. Because of the range and flexibility of statutory remedies, if one is available under statute it is usually preferable to pursue that over a common law remedy. Also see the discussion of remedies in Chapter 10.

CHAPTER 10 — REMEDIES FOR BREACH AND DISPUTE RESOLUTION ¶10.1 Introduction Sadly, performance of a contract does not always go according to plan. If one party (“the defaulting party”) does not perform their obligations properly the law provides certain remedies to the other party (the “innocent party”). One potential remedy is termination of the contract. Termination for breach was discussed in Chapter 8. Termination is remedial in the sense that it relieves parties from continuing performance of the contract. However, as a “remedy” it has two shortcomings. First, in the absence of agreement to the contrary, it is only available for serious breaches of the contract. So a breach of an unimportant term like a warranty will not allow termination. Second, it does nothing to compensate for any loss suffered by the innocent party for the breach of the contract by the defaulting party. Given the limited utility of termination, the law provides other remedies for breach of contract. It is well-known that if a defaulting party breaches a contract then the innocent party may receive “damages”, being money paid by the defaulting party to compensate for the breach. Damages are available for any breach of contract, no matter if the term breached is important (a condition) or not (a warranty). However, a right to damages is not the same as winning the lottery. The law does not order the defaulting party to pay the innocent party to punish the defaulting party. Rather, the law has rules it applies to calculate how much the defaulting party must pay to do no more than compensate for any benefits lost because of the breach. Parties can avoid the technicalities of a damages claim by agreeing in

advance as to how much must be paid if the contract has been breached. Agreed damages clauses (also known as liquidated damages clauses) are very common in commercial contracts as a way to circumvent the need to prove damages. However, courts are wary of them and will only enforce them if they are a genuine pre-estimate of loss, rather than a penalty to frighten the other party into performance. But sometimes an innocent party would prefer either that the contract is performed or that the defaulting party be prevented from breaching the contract. The law can also help out here. The innocent party may ask for an order of specific performance or that a court issue an injunction ordering that the contract not be breached. However, unlike damages, these remedies are not always available so an innocent party cannot count on obtaining these remedies. This chapter will look at the above remedies in more detail. All of them presuppose that the relationship between the parties has irretrievably broken down and they have ended up in court. However, not all disputes end up there. Indeed, ideally they do not as court proceedings can be prohibitively expensive. There are alternative methods of dispute resolution that parties may prefer to utilise such as mediation or arbitration. This chapter will briefly consider those as well.

¶10.2 Damages The ordinary remedy for a breach of contract is “damages”, being a payment by the defaulting party to compensate any loss to the innocent party caused by the defaulting party’s breach. This remedy is available for any breach of contract, as long as the innocent party can prove that they have lost something of value because of the breach of contract. Although other remedies are available (See at ¶10.6), the courts prefer to award damages for breach because it is a simple way to finalise disputes between the parties: the defaulting party is ordered to pay money and that is the end of it. The right to damages for breach is implied into every contract by law. This means that the parties do not have to agree to terms allowing

damages to be paid if the contract is breached. However, this implied right to damages can be modified by the agreement itself. This is discussed further in the next section (¶10.5). The following discussion assumes that the default rule has not been modified. The overriding principle for an award of damages for breach of contract is compensation. It is not correct to assume that a breach of contract results in a windfall sum of money for the innocent party. The courts do not set out to punish the defaulting party for their breach, rather they will carefully calculate a sum of money to reflect the loss suffered by the innocent party and then order the defaulting party to pay it. This may be less than expected by the innocent party. 10.2.1 How damages are calculated There are certain rules by which the courts will calculate the amount of damages the defaulting party must pay. It is worth knowing about how a court will award damages to moderate any unrealistic expectations in light of a breach. They are as follows. First, the innocent party must prove any loss that resulted from the breach. The innocent party must do this by proving to the court the benefits that they would have received if the contract had not been breached and their actual position in light of the breach. By doing this, the court will be able to compare how much worse off the innocent party is because of the breach. It will then calculate an amount of money that reflects the difference between the two positions and order that the defaulting party pay that to the innocent party. This is why damages for breach of contract are sometimes called “expectation damages” — they are awarded to compensate for expected benefits that are lost because of the breach. The corollary of the above principle is that, if the innocent party either is in fact not worse off for a breach, or does not provide evidence to demonstrate how much worse off they are, they will not receive any damages. This recalls the principle that damages are about compensation, not punishment. If the innocent party has not lost anything because of the breach, then there is no reason for the defaulting party to pay anything. However, there is a difference between difficulty in calculating loss and failure to provide evidence to

prove loss. If it is difficult to calculate the loss, the court will do its best to come up with an amount based upon the evidence tendered by the innocent party. But if the innocent party provides no evidence of loss, the court will not make up a figure out of thin air. Contractors who are hoping for an arbitrary payment for a trivial breach of contract will be disappointed. Second, once an innocent party has identified the loss, they must also convince the court that the loss for which damages are being claimed was actually caused by the breach of contract. This means that if the loss to the innocent party would have occurred despite the breach, then there is not the necessary connection between the breach and the loss, which means that the defaulting party is not liable.

Example: Anashe On Monday, Antony agrees to sell his car to Anashe for $15,000. Anashe agrees to buy it and pick it up and pay for it the following Saturday. On Tuesday, Dara offers to buy the same car from Antony for $16,000. She says that she can pay for it on the spot. Antony agrees to this. Dara hands over a cheque and takes the car. That afternoon, there is a terrible bushfire that sweeps through the area and totally destroys Antony’s house and personal property. If the car had been there it would have been destroyed as well. In this case, if Anashe attempted to sue Antony for repudiating their contract by selling the car to Dara, then Anashe would not be successful. She would need to prove that had the contract been properly performed she would have possession of the car and that Antony’s failure to perform the contract is the reason why she does not possess it. But it is clear that, even if Antony had not sold the car to Dara, Anashe would not possess the car as it would have been destroyed by the bushfire. As she would have lost the car irrespective of the breach by Antony, Antony is not

liable to Anashe.

Third, even if it is possible to establish a causal link between a breach and identified loss that does not mean that the defaulting party will be liable for all of the loss. The defaulting party will not be liable for loss that is too “remote”. Loss that is too remote is loss that is so far removed from the breach — even if caused by it — that the court says it is not fair for the defaulting party to pay for it. This principle may take contractors by surprise and result in an award of damages that is less than expected. The court judges whether loss if too remote by asking whether the loss was reasonably foreseeable at the time that the contract was made. If it was obvious that the loss being claimed for would result from the contract being breached, then the court will allow that to be compensated. But if the loss being claimed was not foreseeable and likely to occur, then the court will refuse to compensate for it.

Example: School Apparel School Apparel Pty Ltd (“School Apparel”) runs a factory in which it manufactures school uniforms for a number of primary and high schools in Australia. One of its industrial textile machines breaks down so it contracts with Industrial Mechanics Pty Ltd (“Industrial Mechanics”) to remove the machinery for repair. The contract stipulates that the machinery must be returned within three months. Unfortunately, Industrial Mechanics encounters problems with the repair work it sub-contracts to a third party. This results in the machinery not being returned until five months later. Because of the late delivery of the repaired machinery, School Apparel missed out on several school uniform contracts with some of its regular clients. It also missed out on a highly lucrative

uniform contract with the Australian Government for its new Border Brigade. School Apparel had been hoping to expand its business beyond its usual school uniform lines. In this case, if School Apparel were to sue Industrial Mechanics for the lost contracts, the court may not award damages for both the lost school uniform contracts and the lost Border Brigade contract. Damages would be available for the lost school uniform contracts as they form part of the usual business of School Apparel and it was obvious when they entered into the repair contract that if the machinery was not returned on time then School Apparel would miss out on those kinds of contracts. However, the contract with the Australian Government was different — it was out of the ordinary — and arguably not foreseeable to Industrial Mechanics. If it was not foreseeable loss then it is too remote and School Apparel cannot claim for it.

In the above example, the foreseeable loss was claimable but the unforeseeable loss was not. If it had been the case that School Apparel was aware at the time it entered the contract with Industrial Mechanics that it was going to tender for the Border Brigade uniform contract then it should have let Industrial Mechanics know what was at stake. School Apparel would then be making that extraordinary loss foreseeable by telling Industrial Mechanics of its special situation. By telling Industrial Mechanics of its special situation, that would give Industrial Mechanics the opportunity to decide whether it wanted to take responsibility for that special loss, or to protect itself by negotiating an exclusion clause into the contract. But if Industrial Mechanics had no knowledge of that special situation then it would not be liable for it. In all when the court applies the principles of causation and remoteness, the court tries to set limits on what a defaulting party should pay that is fair to both parties. Any loss claimed must be

sufficiently connected with the breach of contract to be claimable. Above all any assessment will be based on the evidence of loss submitted by the innocent party. Something should be said about the kinds of things that can be claimed by an innocent party. An innocent party can claim, among other things: • Expenses associated with replacing a promised good or service • Expenses associated with repairing work that is not up to standard • Expenses associated with preparing to perform, or actually performing, a contract • A sum of money to reflect lost opportunities to enter into other profitable contracts or other lost potential income • Expenses associated with liability to third parties that have arisen because the defaulting party breached the contract, and • Medical expenses resulting from physical or mental injury. A claim for damages can involve any or all of the above. Whatever the claim is, the court will carefully scrutinise it to make sure that the innocent party is not overcompensated, recalling that the point of damages is to compensate for lost benefits and not to put the innocent party in a better position that they expected to be in had the contract been properly performed. Consider the following examples.

Example: Sally Sally is a specialist carpenter that makes custom-made furniture. She enters into a contract where she promises to build a custommade dining table and chairs set for Henry. They agree that Henry will pay $17,000 for it. Scenario 1

Henry repudiates the contract the day after it is agreed. At this stage Sally has not spent any money on performing the contract. Sally will be able to claim $7,000 from Henry. If the contract had been performed she would have made $7,000, so Henry must pay that amount to put her in the position she would have been had the contract been performed. Scenario 2 Henry repudiates the contract while Sally is working on the furniture. She has spent $5,000 performing the contract and the work she has done to date is not saleable. Sally would be able to claim $12,000 from Henry. Her claim would consist of: 1. $5,000 wasted expenditure on performing the contract, and 2. $7,000 being the profit she expected to make. The payment would put her in the position that she expected to be had the contract been performed. Scenario 3 Sally completes all the work spending $10,000 as predicted to do the work. Henry repudiates the contract and refuses to take and pay for the set. She is able to sell the table to someone else for $16,000. Sally would be able to claim $1,000 from Henry. By selling the set for $16,000 she has already recuperated all of the expenses associated with preparing the dining set. However, she has $1,000 less that what she expected had the contract with Henry been performed. Therefore, she can claim the difference from Henry. Scenario 4 Sally completes all the work. Henry repudiates the contract. She is able to sell the table for $17,500. She would have no claim against Henry. She is, in fact, in a better

position than she would have been had the contract with Henry been performed.

Generally, only economic loss is compensated. The law does not award damages for emotions experienced because of a breach, such as stress or disappointment. It is possible to seek compensation for recognised psychological illness that is caused by a breach, but that is more focused on covering medical bills and lost income, rather than a lump sum amount given for the actual condition.

¶10.3 Obligation to act reasonably Contractors should be aware that the law expects an innocent party to act reasonably in light of a breach. This means that, when faced with a breach, an innocent party should take reasonable steps to stem any loss that results from a breach. They certainly should not cynically refuse to act, or deliberately aggravate the loss, in the false belief that the defaulting party will pay for it. So, for example, if a purchaser wrongly refuses to take and pay for a good, then the seller should try and sell the good to someone else if there is a ready market for the good. If the seller were to, for example, refuse a generous offer made by a third party and instead let the good go to waste thinking that the defaulting party can pay for all of the loss, then the seller will be disappointed. In this scenario, the law would say that, after the generous third party offer was refused, any loss incurred by the innocent party was caused by the actions of the innocent party, not the defaulting party. The emphasis here is on “reasonable” steps. The law does not expect an innocent party to take risky steps that might reduce loss. Sometimes doing nothing is the only reasonable option open to an innocent party. Rather, the law expects that, if a reasonable opportunity to reduce loss becomes available in the ordinary course of business, then the innocent party should act on it.

¶10.4 Damages tips

Ideally, a contractor will not have to make a claim for damages because the contract will be properly performed. However, a few tips can be offered. Before the contract is signed If a contractor is relying on the other party to properly perform the contract because they stand to incur a loss that is unusual or not reasonably foreseeable, then the contractor should let the other party know what is at stake. This could be achieved by negotiating a term into the contract whereby the parties acknowledge the identified special circumstances of the contractor. Conversely, a contractor that is warned about special loss should consider negotiating an exclusion clause into the contract to protect against a claim for damages. If the contract is breached Contractors should be mindful that they will be expected to mitigate any loss if the contract is breached. They should not unreasonably refuse to take advantage of opportunities to reduce the damage if they are available. Contractors should also keep any records of loss that has resulted from the breach (eg retaining receipts for expenses incurred dealing with the breach, correspondence related to lost commercial opportunities, etc). If the matter goes to court they will need to prove their loss.

¶10.5 Remedies provided by the contract A claim for damages as described above involves litigation and the need to persuade the court of your case for damages. That is a very expensive process. Indeed, it may be so expensive that it renders the claim for damages useless. Parties can (hopefully) avoid the court process by agreeing in advance what must happen if the contract is breached. There are several ways that this can happen. 10.5.1 Agreed damages clauses and penalties Parties can include in the contract terms that calculate the loss that arises from a breach of it. This type of term is called an agreed damages clause, or a liquidated damages clause. There are several benefits to agreed damages clauses.

First, they provide for a simple procedure in the event of breach. If the contract is breached, the innocent party can claim the damages as calculated by the contract as a debt owing, rather than mount a damages claim. If it comes to litigation, the process of claiming a debt owed is much more simple and, hopefully, less time-consuming and expensive than a claim for damages. Second, they provide certainty. They spell out exactly the risk and cost of a breach to either or both parties and thus planning for a breach is easier. A claim for damages is subject to the decision of the court, which may be more or less than expected. Third, they can be useful to address loss that may be difficult to prove or calculate should the breach occur. Again, if the contract is breached, the innocent party sues on the contract as a debt owing rather than having to gather evidence, which may be difficult to obtain, to prove their case in court. However, the law draws a line between agreed damages clauses that are genuine pre-estimates of loss and agreed damages clauses that serve no purpose other than to terrify a party into performance. The second type of clause is a “penalty” and is unenforceable. The classic penalty is one that requires a grossly unfair payment to be paid by a defaulting party if they breach the contract. To be a penalty, the amount to be paid must in no way reflect the actual loss that would be suffered by the innocent party. For example, if someone borrows $100,000 and there is a term that provides that if repayments are not made on time the debt increases to $200,000, then that is clearly a penalty and unenforceable. The purpose of the term is to terrify the borrower to properly perform the loan contract or else face paying a substantial penalty. The arbitrary additional $100,000 bears absolutely no relation to the possible loss that would accrue to the lender. It is not a genuine pre-estimate of loss. Although the classic penalty provides for a payment, that is not always the case. A penalty may also provide that property owned (or to be owned) by the defaulting party will be forfeited on breach, or that the defaulting party will lose a valuable legal interest in property.

If a defaulting party believes that an agreed damages clause is a penalty, then they will need to persuade the court that is the case. The court will look at the substance of the term and assess it as at the time the parties entered into the contract, not at the time that it is enforced against the defaulting party. If the court is convinced that it is a genuine pre-estimate of loss, then it will be enforced even if the amount to be paid is more than the actual loss encountered by the innocent party. If it is found to be a penalty, that will not preclude the defaulting party from making a claim for ordinary damages as described about at ¶10.2. 10.5.2 Exclusion and limitation of liability clauses The second way that parties can provide for a claim of damages for breach is to include an exclusion or limitation of liability clause in the contract. These were considered in Chapter 4. Rather than aid in the calculation of damages to be paid in the event of breach, exclusion and limitation of liability clauses relieve a defaulting party from having to compensate for a breach of contract. By outright excluding liability, this avoids the compensation question altogether. Such clauses may also provide for other types of compensation in place of payment of money by the defaulting party. For example, a contract for the sale of a good may provide that if the seller breaches the contract by failing to provide something that is fit for purpose, the only remedy available to the purchaser is for the seller to replace the good (if faulty) or provide another good in its place.

10.5.3 Remedies provided by the contract tips Parties may like to plan for breach by including an agreed damages clause in their contracts. Such a clause can be very useful if it would be difficult for a contractor to prove loss in light of a breach because evidence would be difficult to obtain. They can also simplify disputes if there is prior agreement on what is owed. However, it will only be enforced if it is a genuine attempt to estimate loss. Alternatively, parties may prefer to avoid the compensation question altogether by including an exclusion or limitation of liability clause in the contract.

¶10.6 Other remedial orders: specific performance and injunctions An innocent party’s right to damages is a legal right. This means that, in the absence of agreement to the contrary in the contract, for every breach of contract the court will award damages as of right. Indeed, as mentioned in the introduction, awarding damages is the courts’ preferred remedy as it decisively disposes of the dispute: the defaulting party is ordered to pay a sum of money and the matter is closed. However, the courts recognise that in some circumstances payment of a sum of money is not an adequate remedy. In some cases, it will be better for an innocent party if they can have the contract actually performed as promised or if the defaulting party can be ordered not to breach it. The court has the power to make these orders under the remedies of specific performance and injunctions. An order for specific performance is as it sounds: it is an order that a party actually perform their obligations. The purpose of the order is to ensure that the defaulting party performs the contract to completion. A very common example of when specific performance is ordered is in the context of contracts for the sale of land. If either the purchaser or the seller refuses to complete the contract, the usual remedy is for the innocent party to ask a court to order that the defaulting party complete the sale. An order for specific performance is useful when: • The subject matter of the contract is unique; ie not easily replaced by purchasing an alternative in the market (eg land, art, custommade furniture) • The defaulting party is unable to pay damages, but is capable of completing the contract • It is difficult for the innocent party to prove the loss due to inability to provide evidence. An injunction is similar to an order of specific performance. But rather than be an order to perform a contract, injunctions are typically orders

not to do something. Injunctions are often sought to prevent the breach of particular terms. For example, restraints of trade are often enforced by injunctions (See Chapter 4). If the convenantor (the party who agreed to be restrained) threatens to engage in the activity that they promised that they would not engage in, then the convenantee (the other party) will seek an injunction that orders the convenantor not to engage in that activity. But because the courts would prefer to order damages be paid to finally settle the matter, these remedies are not available as of right. It is not sufficient for an innocent party to decide that they would prefer an order for specific performance or an injunction. The innocent party must persuade the court to make either order and ultimately the court may, in its discretion, refuse to order them. Indeed, the court must first be convinced that an award of damages is insufficient to meet the justice of the case before it will consider any of the other remedies. One significant problem with the remedies is that they may not finally resolve the dispute between the parties and that a new series of disputes will then arise about whether the orders have been complied with. The court would rather avoid this outcome. In addition to the requirement that they be superior to an award of damages, specific performance and injunctions will not be ordered if any of the following applies: • The order would be impossible to perform • It would cause undue hardship to the defaulting party • The innocent party has acted fraudulently or unconscientiously in relation to the contract • The innocent party is seeking specific performance of a contract for personal services (eg employment) • The innocent party is seeking an order that the defaulting party undertake an activity of significant duration or complexity (eg operate a business on a leased premises for another two years)

• The innocent party is seeking specific performance of a contract in circumstances where it would not make a similar order for the defaulting party • The innocent party is not ready, willing and able to perform their own obligations properly. If any of the above considerations apply, then the court will just order damages instead.

¶10.7 Alternative dispute resolution (ADR) mechanisms The discussion to this point in the chapter has assumed that a party is seeking a legal remedy for a breach of contract. The reality is that enforcing legal rights is expensive, time-consuming and often stressful. Moreover, once the lawyers are involved it can seem to the parties that they have lost control of the dispute. The parties may feel that they have surrendered to a process that seems unnecessarily technical and expensive, but which is essential to the administration of justice. Once a proceeding is commenced, the outcome will result in a winner and a loser that is decided by a distant third party. If the proceeding catches the eye of the media, the parties may find that the details of the dispute are reported to the public, where judgment by public opinion will also take place. At the end of it all the victor may not feel like they have won anything at all. Court proceedings are the last resort in a dispute. A contractor would only pursue a legal remedy if they have decided that the commercial relationship is no longer salvageable and that the benefit of a legal remedy will outweigh the cost of achieving it. For this reason alternative dispute resolution processes are very popular. Given the success of ADR, courts are now increasingly involved in it. It is possible for mediation to take place under the supervision of the court (“court annexed mediation”) and it is possible for courts to order the parties to undertake ADR if the judge feels that the parties would benefit from it. Therefore, even if a contractor is only interested in proceeding directly to court to resolve a dispute, they should be aware

of ADR. An ADR process is a process that does not involve determination of a dispute by a court of law. The varieties of ADR processes can range from informal, where the parties work it out for themselves, to a formal process that resembles a judicial proceeding where an independent third party makes a ruling that binds all the parties. There are several advantages to using an ADR process to resolve a dispute. First, often, but not always, they are cheaper than full litigation in a court of law. That said, where the ADR process employed requires the input of third parties, the costs start to increase. An involved proceeding such as arbitration may be just as expensive as going to court. Indeed, if the ADR process fails the parties may find that they end up in court anyway incurring additional expenses. Second, even though the process might be as expensive as litigation, another benefit — perhaps one worth paying for — is that ADR processes are private and confidential. This can be useful for contractors hoping to avoid public controversy. Third, ADR processes can be quicker and less technical than the court process. This informality may be conducive to resolution of the dispute. Rather than resolving disputes in an intimidating court room where a strict hierarchy of authority is observed, parties can choose where they meet and the manner in which the negotiations are undertaken. This leads to the last benefit of ADR. Fourth, the parties often feel like they have much more control over ADR processes. Because they are not bound by court rules and the laws of evidence, ADR processes can bring to light and resolve the “real” issues between the parties, which may be personal or commercial, rather than breaking the issues down into purely legal ones. The parties can also have a greater say over the final result and “orders” that are made. If parties feel like they have retained control over the process and consented to a final result, rather than have one imposed upon them, then they may feel much more satisfied with the final result. Indeed, the process of working together may even result in the commercial relationship being repaired.

That said, ADR will not be appropriate for all disputes. If ADR was superior to the court process then the commercial divisions of the courts would not exist. ADR really depends upon both parties being willing to negotiate in good faith. A party may prefer to pay “the lawyers” to sort out the problem, rather than take ownership of the dispute. And it cannot be denied that sometimes well-resourced parties use ADR not as a means of working out differences, but as a way to bleed the other party dry so that they eventually agree to terms that are more favourable to the stronger party. There is a large variety of ADR procedures available for parties in a contractual dispute. They range from the most informal (voluntary/advisory/facilitative) to formal and binding (determinative). Following are some common types of ADR. 10.7.1 Negotiation Negotiation is the simplest form of ADR. It is where parties sit down and resolve the dispute without the assistance of third parties except, perhaps, lawyers who can advise on the legal consequences of any compromises reached. Many contracts require that, if a dispute arises, the parties are to first try and resolve it by negotiation in good faith before resorting to a court. The outcome of negotiation may be that a party provides an agreed compensation for a breach or that the principal contract is varied to accommodate the breach. The involvement of lawyers would be useful to ensure that any agreement reached is properly recorded and made binding. While negotiation may afford the parties the greatest level of flexibility and autonomy, sometimes a dispute will be too deeply entrenched for the parties to resolve on their own and it may be necessary to involve a third party. 10.7.2 Mediation Mediation is an ADR process that involves a little more formality. In mediation, the parties still negotiate their own solution, however they agree to a neutral mediator to sit in on the negotiations. The mediator is a facilitator. Their role is not to force anything onto the parties, but to

listen to each side’s complaints and help the parties to identify common ground and areas where they can reach agreement. 10.7.3 Conciliation In a conciliation, the conciliator takes on a more active role than a mediator by considering submissions made by the parties and then proposing solutions for the parties to consider. While the conciliator thus takes a much more active role in the negotiations, they cannot impose a solution on the parties. Ultimately, the parties must come to a mutually satisfactory agreement. The conciliator’s proposals can be useful starting points for discussion. 10.7.4 Expert determination Expert determination is distinct from the ADR processes considered so far as it involves a third party that makes a binding decision for the parties. Expert determination is useful for simple disputes that involve highly technical matters or a matter that requires the input of an expert in their field (eg scientific, engineering, building, accounting, etc). If parties cannot come to agreement on a matter on which experts may disagree, they can agree to make submissions to an expert (or a panel of experts) and be bound by their decision. 10.7.5 Arbitration Arbitration is the most formal form of ADR and also the process with a long established pedigree dating back to the beginning of the twentieth century in Australia. Arbitration is the most “court-like” form of ADR, except with the benefit of privacy. If parties agree to arbitration then they agree to engage in adversarial litigation. Although unlike litigation in a courtroom where the parties have no say over the court process and rules of evidence to be applied, the parties in arbitration retain some control over the processes and can agree to what extent it resembles a court proceeding. Each party must present their evidence and case to an impartial adjudicator (or a panel of adjudicators) who will make a decision that is binding. That decision can be enforced in a court of law. Because arbitration can result in a process that is similar to a court proceeding, the costs and time involved can be equivalent to a

court proceeding. 10.7.6 Resources There are many resources available to contractors who are interested in pursuing ADR as an alternative to litigation. The two peak bodies in Australia are the Resolution Institute (the result of the amalgamation of the Institute of Arbitrator and Mediators Australia (IAMA), and the Leading Edge Alternative Dispute Resolvers (LEADR)) and the Australian Disputes Centre. Both provide information on ADR processes as well as the facilities and networks to undertake ADR. ADR processes are also provided by many other government, community and private organisations.

10.7.7 ADR tips Before agreeing to a contract it may be worth considering including dispute resolution clauses in the contract that directs parties to undertake private ADR before taking a dispute to the courts. This can range from obliging parties to meet and negotiate any grievances in good faith to obliging the parties to undertake arbitration.

INDEX All references are to paragraph numbers.

A Agents capacity to contract

¶3.5.2

Alcohol

¶3.5.7

Alternative dispute resolution (ADR)

¶10.7

arbitration

¶10.7.5

conciliation

¶10.7.3

expert determination

¶10.7.4

mediation

¶10.7.2

negotiation

¶10.7.1

resources

¶10.7.6

tips

¶10.7.7

Arbitration alternative dispute resolution Assignment tips Assignment clauses

B

¶10.7.5 ¶5.6; ¶5.6.1 ¶5.6.3 ¶4.6

Bankrupts capacity to contract Binding of contract commercial issues to consider — making note of when contract entered tips contractual statements — contractual offers tips

¶3.5.6 ¶2.4 ¶2.4.3 ¶2.4.3.1 ¶2.4.1 ¶2.4.1.1

non-contractual statements

¶2.4.1

reaching agreement

¶2.4.2

Boilerplate clauses

¶4.6

assignment clauses

¶4.6

calculation of time clauses

¶4.6

confidentiality clauses

¶4.6

dispute resolution clauses

¶4.6

entire agreement clauses

¶4.6

force majeure clauses

¶4.6

interpretation clauses

¶4.6

jurisdiction or choice of law clauses

¶4.6

notification clauses

¶4.6

novation clauses

¶4.6

waiver clauses

¶4.6

Business contracts

¶1.1

contract law

¶1.2

— accepting an offer

¶1.2.2

— capacity

¶1.2.8

— commencement

¶1.2.7

— formal writing requirements

¶1.2.9

— genuine consent — giving consideration — illegality

¶1.2.11 ¶1.2.3 ¶1.2.10

— legally binding contract, intention to create

¶1.2.4

— making an offer

¶1.2.1

— parties bound by it

¶1.2.5

— terms and complete contracts

¶1.2.6

C Calculation of time clauses Capacity to contract

¶4.6 ¶1.2.8; ¶3.5

agents

¶3.5.2

bankrupts

¶3.5.6

companies

¶3.5.3

government entities

¶3.5.5

minors

¶3.5.1

— dealing with minor tips

¶3.5.1.1

partnerships

¶3.5.4

persons affected by mental illness, drugs or alcohol

¶3.5.7

— dealing with persons affected by mental illness tips

¶3.5.7.1

Changing the contract assignment — tips estoppel — tips novation — tips

¶5.1 ¶5.6; ¶5.6.1 ¶5.6.3 ¶5.5; ¶5.5.2 ¶5.5.3 ¶5.6; ¶5.6.2 ¶5.6.3

terms allowing the scope of obligations

¶5.4

varying terms of a contract

¶5.3

— practical benefit

¶5.3.3

— variation clauses

¶5.3.1

— variations and consideration

¶5.3.2

varying terms or scope of obligations

¶5.2

waiver

¶5.5; ¶5.5.1

— tips

¶5.5.3

Companies capacity to contract

¶3.5.3

Conciliation alternative dispute resolution

¶10.7.3

Confidentiality clauses

¶4.6

Consideration for a contract

¶2.5

dealing with a failure Contract negotiations

¶2.5.1 ¶2.1

balancing specific v general statements binding of contract

¶2.3.1 ¶2.4

— commercial issues to consider

¶2.4.3

— contractual and non-contractual statements

¶2.4.1

— reaching agreement

¶2.4.2

consideration for a contract — dealing with a failure illegal contracts

¶2.5 ¶2.5.1 ¶2.7

incomplete contracts

¶2.3.2

incorporation of standard terms tip

¶2.3.3

intention to contract

¶2.6

— general

¶2.6.1

— preliminary documents

¶2.6.2

parties

¶2.3

severance clauses

¶2.3.5

uncertain terms

¶2.3.4

who negotiates

¶2.2

Contracts

¶1.1

contracts v contract law

¶1.4

dispelling contract law myths

¶1.3

making note of when contract entered, tips

¶2.4.3.1

D Damages

¶10.2

calculation tips Dispute resolution clauses Drugs

¶10.2.1 ¶10.4 ¶4.6 ¶3.5.7

E Ending the contract by agreement

¶6.1

legal consequences

¶6.4

termination by agreement

¶6.2

— implied termination

¶6.2.3

— mutual release

¶6.2.1

— tips

¶6.2.4

— unilateral release

¶6.2.2

termination pursuant to a term

¶6.3

— contingent conditions

¶6.3.2

— evergreen contracts

¶6.3.6

— force majeure clauses

¶6.3.4

— implied power

¶6.3.5

— restraints on the power to terminate

¶6.3.7

— termination at will

¶6.3.1

— termination for breach

¶6.3.3

— termination tips

¶6.3.8

Ending the contract due to failure to perform — see Failure to

perform Ending the contract due to unexpected disruptions — see Unexpected disruptions Entire agreement clauses Estoppel

¶4.6 ¶5.5; ¶5.5.2

tips

¶5.5.3

Evergreen contracts

¶6.3.6

Expert determination alternative dispute resolution

¶10.7.4

F Failure to perform

¶7.1

consequences of termination

¶7.5

how to terminate

¶7.4

implied right

¶7.2

— failure to perform on time

¶7.2.2

— repudiation

¶7.2.3

— termination for breach

¶7.2.1

termination tips

¶7.6

terms dealing with breach

¶7.3

Failure to perform on time implied right to terminate

¶7.2.2

Finalising the contract

¶3.1

capacity to contract

¶3.5

— agents

¶3.5.2

— bankrupts

¶3.5.6

— companies

¶3.5.3

— government entities

¶3.5.5

— minors

¶3.5.1

— partnerships

¶3.5.4

— persons affected by mental illness, drugs or alcohol

¶3.5.7

conditions to the contract — tips form requirements — incorporation of other documents tips

¶3.8 ¶3.8.1 ¶3.7 ¶3.7.1

parties

¶3.3

relationship between current contract and prior agreements

¶3.6

— general

¶3.6.1

— preliminary agreements

¶3.6.2

signature blocks — signing tips structure of contract

¶3.4 ¶3.4.1 ¶3.2

— formatting

¶3.2.1

— formatting tips

¶3.2.2

— putting of contracts together

¶3.2.3

summary

¶3.9

Force majeure clauses boilerplate clauses risk accounted for in the contract termination pursuant to a term

¶4.6 ¶8.4.1.1 ¶6.3.4

Frustration unexpected disruptions

¶8.1

— consequences

¶8.6

— test

¶8.2

G Government entities capacity to contract

¶3.5.5

I Illegal contracts contract negotiation

¶2.7

Illegitimate pressure

¶9.4

duress

¶9.4.1

— coercion

¶9.4.1.3

— threats to economic interests

¶9.4.1.2

— threats to goods and property

¶9.4.1.1

duress tips

¶9.4.2

under statute

¶9.4.5

undue influence

¶9.4.3

— tips

¶9.4.4

Incomplete contracts

¶2.3.2

Intention to contract general

¶2.6 ¶2.6.1

— letter of comfort tips

¶2.6.1.1

preliminary documents

¶2.6.2

— tips

¶2.6.2.1

Interpretation clauses

¶4.6

Interpretation of contractual terms

¶4.7

exclusion and limitation clauses tip

¶4.7.3

general approach

¶4.7.1

provisions that help manage risk and liability under the contract

¶4.7.2

Interruptions

¶7.2

failure to perform on time

¶7.2.2

repudiation

¶7.2.3

termination for breach

¶7.2.1

J Jurisdiction or choice of law clauses

M

¶4.6

Manner of performance

¶4.8.3

example sub-contracting clauses

¶4.8.3.4

right person performed the obligation

¶4.8.3.3

standard of performance required

¶4.8.3.1

standard of performance tips

¶4.8.3.2

Mediation alternative dispute resolution Mental illness, drugs or alcohol dealing with persons affected by mental illness, tips

¶10.7.2 ¶3.5.7 ¶3.5.7.1

Minors capacity to contract — dealing with minors, tips Misleading conduct

¶3.5.1 ¶3.5.1.1 ¶9.2

legislation

¶9.2.1

misleading or deceptive conduct, definition

¶9.2.2

opinions and promises

¶9.2.4

silence

¶9.2.3

tips

¶9.2.5

Mistakes

¶9.3

effect on contract

¶9.3.1

tips

¶9.3.3

written documents

¶9.3.2

N Negotiations — see also Contract negotiations alternative dispute resolution Notification clauses Novation tips Novation clauses

¶10.7.1 ¶4.6 ¶5.6; ¶5.6.2 ¶5.6.3 ¶4.6

O Offer and acceptance

¶2.4.2

acceptance of offer

¶2.4.2.3

battle of the forms

¶2.4.2.5

contractual offer, constitutes

¶2.4.2.1

contrasting a contractual offer from non-contractual statements

¶2.4.2.2

entire agreement clause tips

¶2.4.2.6

period of acceptance

¶2.4.2.4

Opinions misleading conduct

P Partnerships

¶9.2.4

capacity to contract

¶3.5.4

Performing the contract

¶4.1

boilerplate clauses

¶4.6

commercial considerations in assessing performance

¶4.10

failure to perform — see Failure to perform importance of contract terms — distinguishing terms and warranties, tips interpretation of contractual terms

¶4.3 ¶4.3.1 ¶4.7

— exclusion and limitation clauses tip

¶4.7.3

— general approach

¶4.7.1

— provisions that help manage risk and liability under the contract

¶4.7.2

performing multiple obligations — duty to act in good faith

¶4.9 ¶4.9.1

statements made before signing of contract

¶4.4

terms implied automatically into business contracts

¶4.5

terms of contract

¶4.2

— incorporating documents tips

¶4.2.1

— incorporating terms tips

¶4.2.2

verification of adequate performance

¶4.8

— general

¶4.8.1

— manner of performance

¶4.8.3

— timing of performance

¶4.8.2

Problems with consent

¶9.1

further impacts of legislation

¶9.8

illegitimate pressure — see Illegitimate pressure misleading conduct — see Misleading conduct mistakes — see Mistakes remedies — see Remedies third party influence — protection for wives

¶9.6 ¶9.6.1

unconscionable conduct/exploitation — see Unconscionable conduct/exploitation Promises misleading conduct

¶9.2.4

R Reaching agreement — see Offer and acceptance Remedies

¶9.9

common law

¶9.9.1

statutory

¶9.9.2

Remedies for breach and dispute resolution

¶10.1

alternative dispute resolution (ADR) mechanisms — see Alternative dispute resolution (ADR) damages — calculation

¶10.2 ¶10.2.1

— tips

¶10.4

obligation to act reasonably

¶10.3

other remedial orders — specific performance and injunctions

¶10.6

remedies provided by the contract

¶10.5

— agreed damages clauses and penalties

¶10.5.1

— liability clauses, exclusion and limitation

¶10.5.2

— tips

¶10.5.3

Repudiation implied right to terminate

¶7.2.3

Rescission legal consequences

¶6.4

Resources alternative dispute resolution

¶10.7.6

S Severance clauses

¶2.3.5

Silence misleading conduct Structure of contract

¶9.2.3 ¶3.2

formatting

¶3.2.1

— tips

¶3.2.2

putting of contracts together

¶3.2.3

T

Termination legal consequences

¶6.4

Termination by agreement

¶6.2

implied termination

¶6.2.3

mutual release

¶6.2.1

tips

¶6.2.4

unilateral release

¶6.2.2

Termination for breach implied right to terminate Termination pursuant to a term

¶7.2.1 ¶6.3

contingent conditions

¶6.3.2

evergreen contracts

¶6.3.6

force majeure clauses

¶6.3.4

implied power

¶6.3.5

restraints on the power to terminate

¶6.3.7

termination at will

¶6.3.1

termination for breach

¶6.3.3

termination tips

¶6.3.8

Terms business contract

¶4.2

— incorporating documents tips

¶4.2.1

— incorporating terms tips

¶4.2.2

consideration

¶5.3.2

implied automatically into business contracts

¶4.5

incorporation of standard terms tips

¶2.3.3

practical benefit

¶5.3.3

uncertain

¶2.3.4

variation — clauses — scope of obligation Timing of performance

¶5.2; ¶5.3 ¶5.3.1 ¶5.4 ¶4.8.2

Tips ACL

¶9.7.2.2

ADR

¶10.7.7

assignment and novation

¶5.6.3

conditions to the contract

¶3.8.1

contractual offers damages

¶2.4.1.1 ¶10.4

dealing with minors

¶3.5.1.1

dealing with persons affected by mental illness

¶3.5.7.1

distinguishing terms and warranties

¶4.3.1

duress

¶9.4.2

ending the contract due to unexpected disruptions entire agreement clause

¶8.7 ¶2.4.2.6

exclusion and limitation clauses

¶4.7.3

formatting

¶3.2.2

incorporating documents

¶4.2.1

incorporating terms

¶4.2.2

incorporation of other documents

¶3.7.1

incorporation of standard terms

¶2.3.3

letter of comfort

¶2.6.1.1

making note of when contract entered

¶2.4.3.1

misleading conduct

¶9.2.5

mistakes

¶9.3.3

preliminary documents signing standard of performance termination

¶2.6.2.1 ¶3.4.1 ¶4.8.3.2 ¶6.3.8; ¶7.6

termination by agreement

¶6.2.4

unconscionable conduct/exploitation

¶9.5.4

undue influence

¶9.4.4

variations, waiver and estoppel

¶5.5.3

U Unconscionable conduct, legislation Australian Consumer Law

¶9.7 ¶9.7.2

— ACL tips

¶9.7.2.2

— definition of unconscionable

¶9.7.2.1

overview Unconscionable conduct/exploitation knowledge

¶9.7.1 ¶9.5 ¶9.5.2

special disadvantage

¶9.5.1

tips

¶9.5.4

unconscionable conduct

¶9.5.3

Unexpected disruptions

¶8.1

common foundation is destroyed

¶8.3.3

contract physically or lawfully impossible to perform

¶8.3.1

frustration consequences frustration requires more than loss or reduced benefits

¶8.6 ¶8.3.4

frustration test

¶8.2

not self-induced

¶8.5

performance delayed

¶8.3.2

supervening event

¶8.2

tips

¶8.7

unexpected/foreseeability

¶8.4

— risk accounted for

¶8.4.1

— risk not accounted for

¶8.4.2

V Variation

¶5.1

clauses

¶5.3.1

consideration

¶5.3.2

practical benefit

¶5.3.3

scope of obligations

¶5.2; ¶5.4

terms

¶5.2; ¶5.3

tips

¶5.5.3

Variation clauses changing the contract Verification of adequate performance

¶5.3.1 ¶4.8

general

¶4.8.1

manner of performance

¶4.8.3

timing of performance

¶4.8.2

W Waiver tips Waiver clauses

¶5.5; ¶5.5.1 ¶5.5.3 ¶4.6