Courts around Australia routinely hear contractual disputes. Quite often, they are costly, time-consuming and rarely straightforward. Below, we set out four questions dispute lawyers ask when determining whether a party has breached the contract.
1. Is There an Enforceable Contract?
A contract is a legally binding promise. An enforceable contract requires the following elements:
- an agreement between the parties that is sufficiently certain and complete,
- consideration (i.e. parties exchange something of value), and
- intention to create legal relations.
Parties should set out the terms of their arrangement in writing. If a signed written agreement does not exist, a court will look at the surrounding circumstances to determine what the parties agreed to.
2. What are the Terms of the Contract?
If a court is required to resolve a dispute, it must first identify the terms of the contract, the meaning of those terms and their legal effect. A contract does not need to be in writing for a party to enforce its terms, and can be either:
• in writing, • verbal, • implied (for instance, through a party’s actions), or • a combination of the above.
Construction refers to the process of determining the meaning and effect of a term in a contract. The aim of construction is to give effect to the objective intention of the parties under the contract. A court will typically consider:
- the plain and ordinary meaning of the words in a contract, and
- the position of the term in the context of the entire contract.
A court will only look at the surrounding circumstances of the contract if the language is ambiguous. Rather, a court will first look at what the parties explicitly agreed to, for example, anything communicated in emails or verbally.
3. Are There Any Implied Terms?
Implied terms may also bind the parties. As a general rule, the court will only imply a term if it is necessary. An implied term must also satisfy the five criteria set out by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, namely the term is:
- reasonable and equitable,
- necessary to give business efficacy to the contract,
- so obvious it goes without saying,
- capable of clear expression, and
- consistent with the express terms of the contract.
The court may also imply a term that an industry accepts as standard. For example, longer termination notice periods or contractual arrangements dealing with leftover uniform and fabric when a school changes supplier. Establishing whether this could be the case and what form an implied term would take require investigating the industry.
4. Has the Contract Been Breached?
There are two primary ways in which a party can breach a contract:
- failure to perform – a party fails to do something required under the contract at a specified time, and
- termination for anticipatory breach – one party terminates the contract on the basis that another party, by words or actions, indicated that it would not do something required under the contract at a future time (also known as repudiation).
A party must demonstrate that the other party’s performance has fallen short of the expected standard to establish a breach by failing to perform under the contract. The standard may be strict meaning that a party must deliver what they exactly promised. For example, the payment of money. Alternatively, a standard may involve some degree of care, skill or diligence. In each case, the applicable standard depends on the construction of the contract.
Before you launch into litigation and start incurring significant costs, it is important to get practical advice on the terms of your contract. Many court proceedings involve parties fighting over the true meaning of a contract, or indeed whether they entered into a contract at all. It is useful to have this information at an early stage of the dispute. This can assist with negotiations and later, preparation for court.