Contract formation

Good faith in negotiating

Is there an obligation to use good faith when negotiating a contract?

There is no general principle in Australian contract law to use good faith when negotiating a contract.

Australian courts have held that an express contractual obligation to negotiate a matter in good faith can be enforceable. However, an express obligation to negotiate in good faith needs to be drafted carefully to ensure the clause is capable of being given meaning.

A requirement to negotiate a contract in good faith has been imposed by law in select circumstances. The Franchising Code of Conduct requires the parties to a franchise agreement to act in good faith towards each other, including in negotiating the franchise agreement.

Although not a good faith obligation, it is important to note that legislation prohibiting misleading and deceptive conduct is also often relevant to contract negotiations. The Australian Consumer Law prohibits a person in trade or commerce engaging in conduct that is misleading or deceptive or likely to mislead or deceive. These laws apply regardless of the contract value or types of supplies. Silence can be misleading. Contract disputes between commercial parties often include claims that a party has been misled into entering a contract through inadequate disclosure of information during negotiations.

‘Battle of the forms’ disputes

How are ‘battle of the forms’ disputes resolved in your jurisdiction?

A battle of the forms scenario arises when each party is trying to impose its standard contract terms on the other party. For example, a supplier may issue a quote on the basis that its standard terms of sale will apply, and the purchaser issues a purchase order stating that its own standard terms of purchase will apply.

Under Australian law, a contract requires an offer and an acceptance. In the battle of the forms scenario described above, the purchaser’s order (on its own terms) will not constitute acceptance, as it is proposing different terms to those contained in the supplier’s offer. In many cases, parties will proceed with the supply and purchase of goods or services without it being clear whether there has been a contract formed and on what terms. Importantly, acceptance may be by conduct.

To determine when the contract was formed and on what terms, the court will consider the communications and conduct as a whole. In many cases, this will result in the court finding that the relevant terms are those in the last offer made, but this is not always the case. If a contract is found to have already been formed, terms contained in subsequent documents are unlikely to be sufficient to vary the agreement.

Language requirements

Is there a legal requirement to draft the contract in the local language?

No, there is no legal requirement to draft a contract in the local language, which is English.

Online contracts

Is it possible to agree a B2B contract online?

Yes, it is possible to agree a contract online. Electronic Transactions Acts are in force in each Australian jurisdiction, which support the ability to form online contracts.

A click-to-accept process can be effective in showing the contract has been formed. The parties are free to agree other ways of entering the contract. However, the party setting the terms and contracting process should ensure they can clearly show how the other party has agreed the terms.

Statutory controls and implied terms

Controls on freedom to agree terms

Are there any statutory or other controls on parties’ freedom to agree terms in contracts between commercial parties in your jurisdiction?

Australian law is based on the principle of ‘freedom to contract’. In B2B contracts, there are very few restrictions on the terms that parties can agree in their contracts.

There are some restrictions on the terms commercial parties can agree for public policy reasons. For example, a restraint of trade clause that prohibits a party from engaging in certain activities after the contract has ended is unenforceable unless the restraint is reasonable.

The Competition and Consumer Act 2010 (Cth) imposes a range of restrictions on the terms parties can agree, to prevent parties from engaging in anticompetitive conduct. Contract restrictions should always be checked for Australian competition law risks, particularly restrictions on selling practices, exclusivity and dealing with third parties.

There are some statutory controls on agreement terms for certain types of contractual relationships, for example, franchise relationships. The Franchising Code of Conduct regulates franchise agreement terms in relation to liability releases, termination, dispute resolution, transfer of business and other matters.

A commercial party can in some cases be deemed to be acquiring supplies as a ‘consumer’ and therefore have certain protections under the Australian Consumer Law. Under these laws, the supplier is subject to restrictions on its ability to limit liability for defective goods or services. A clause attempting to limit liability to a greater extent than permitted is unenforceable. These laws are further explained in question 7.

As discussed in question 6, small businesses also have additional protections against unfair terms in standard form contracts.

Standard form contracts

Are standard form contracts treated differently?

Yes, the Australian Consumer Law gives small businesses additional protections against unfair terms in standard form contracts. A small business can be protected as the customer, supplier, distributor, agent or in any other role.

An unfair term is one that (i) would cause significant imbalance in contract parties’ rights and obligations; (ii) is not reasonably necessary to protect a party’s legitimate interest (the advantaged party must show this is not so); and (iii) would cause detriment if relied on. The test takes into account transparency (ie, is the drafting clear?); the contract as a whole; and any other relevant matter. An unfair term is unenforceable. In assessing terms for unfair terms risks, key issues for the business drafting the standard form contract are whether there is a legitimate business need for the term and whether the clause goes further than reasonably required to protect that need.

The small business contract test requires that, at the time the contract is entered into, the ‘small business’ employed less than 20 employees and the price for the supplies (called the ‘upfront price’) does not exceed A$1 million (A$300,000 if the agreement duration is 12 months or less).

Implied terms

What terms are implied by law into the contract? Is it possible to exclude these in a commercial relationship?

Sales of Goods Acts in each Australian state and territory imply certain terms into contracts. These terms can be and usually are expressly excluded.

There are also consumer guarantees under the Australian Consumer Law that will in some cases apply to a commercial relationship, and which cannot be excluded. A person is deemed to acquire goods or services as a consumer and has the consumer guarantee protections if the goods are of a type ordinarily acquired for personal, domestic or household use or consumption regardless of price (ie, are consumer type goods) or if the amount paid or payable for the goods or services does not exceed A$40,000 (regardless of the nature of the goods).

There are some exceptions to the types of B2B transactions that can be deemed consumer transactions. For example, the consumer guarantees do not apply where a person is acquiring goods for the purpose of resupply.

The consumer guarantees are similar to statutory implied terms applicable in other jurisdictions. They are guarantees that:

  • goods:
    • are of acceptable quality (discussed below);
    • correspond with their description;
    • match any demonstration model or sample;
    • are fit for the purpose the supplier said they would be fit for and for any purpose that the customer made known to the supplier before purchasing;
    • come with full title and ownership;
    • do not carry any hidden debts or extra charges;
    • come with undisturbed possession;
    • meet any extra promises made about performance, condition and quality, such as lifetime guarantees and money-back offers; and
    • have spare parts and repair facilities available for a reasonable time after purchase unless the manufacturer has advised otherwise; and
  • services:
    • are provided with acceptable care and skill or technical knowledge and taking all necessary steps to avoid loss and damage;
    • are fit for the purpose or give the results that the customer and supplier agreed; and
    • are delivered within a reasonable time when there is no agreed end date.

Acceptable quality requires that products are safe, are lasting, have no faults, look acceptable and do all the things someone would normally expect them to do. The test of acceptable quality takes into account what would normally be expected for the type of product and cost.

Failure to comply with the consumer guarantees entitles the ‘consumer’ to certain remedies depending on the seriousness of the failure. For material failures, the customer can reject the supplies and require a refund. The customer can also recover damages for any loss suffered if it was reasonably foreseeable that the customer would suffer such loss or damage as a result of such a failure.

A supplier cannot exclude its liability for breach of the consumer guarantees. Importantly, a B2B party may be able to limit its liability to a certain extent. These restrictions and the permitted limitations are discussed in the response to question 11.

It can be misleading conduct in breach of the Australian Consumer Law for a supplier to represent that a customer’s remedies are more limited than offered under the Australian Consumer Law. In addition, a supplier can be subject to penalties for falsely representing to a customer that the customer does not have their statutory protections. As noted above, a ‘consumer’ customer can include a commercial party.

Vienna Convention

Is your jurisdiction a signatory to the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention)?

Yes, Australia is a signatory to the Vienna Convention. Legislation to implement the Vienna Convention has been enacted in each Australian state and territory.

Good faith in entering and peforming

Is there an obligation to use good faith when entering and performing a contract?

There is some uncertainty under Australian contract law about the circumstances in which an obligation to use good faith when entering and performing a contract will be implied. For example, several cases have held there to be an implied obligation to use good faith when exercising a right to terminate for breach (see question 17). However, it is not settled under Australian law that an obligation to use good faith when entering and performing a contract will always be implied.

If parties to a commercial contract wish to impose a good-faith obligation, then they should draft this. When drafting good-faith obligations, parties should pay particular attention to what they are required to do to discharge the good-faith obligation.

See question 1 on specific regulation of acting in good faith with respect to franchise agreements.

Limiting liability

Prohibition on exclusions and limitations

What liabilities cannot be excluded or limited by a supplier in a contract?

As noted in question 7, a supplier cannot exclude its liability for breach of the consumer guarantees. Importantly, a B2B party may be able to limit its liability to a certain extent. These restrictions and the permitted limitations are discussed in the response to question 11.

More generally, when drafting clauses limiting or excluding liability, it is important to use clear language. It is preferable to spell out the areas of liability being limited or excluded. If a clause seeking to exclude or limit liability is ambiguous or unclear, a court will construe it against the interests of the party seeking to exclude or limit its liability.

If the parties are seeking to exclude liability for serious matters such as negligence or repudiation, the contract should explicitly identify that liability for those matters is excluded. General wording such as ‘all liability is excluded’ will ordinarily not be construed to apply liability limitations or exclusions to liability for negligence or repudiation.

For franchise agreements, the Franchising Code of Conduct prevents the franchisor obtaining a general release or waiver from a franchisee. Such clauses are of no effect.

Finally, if a party engaged in misleading conduct (in breach of the Australian Consumer Law) to induce the other party to enter the contract, the limitations and exclusions of liability included for the benefit of the party who engaged in the misleading conduct are unlikely to be enforceable.

Financial caps

Are there any statutory controls on using financial caps to limit liability for breach of contract?

Subject to the Australian Consumer Law, parties are generally free to agree contractual liability limitations.

Under the Australian Consumer Law, a supplier cannot exclude its liability for breach of the consumer guarantees. However, for B2B-type supplies (ie, not goods or services ordinarily acquired for personal, domestic, household use or consumption), the supplier can usually limit its liability to:

  • replacement of the goods or the supply of equivalent goods;
  • repair of the goods;
  • payment of the cost of replacing the goods or of acquiring equivalent goods;
  • payment of the cost of having the goods repaired;
  • supplying of the services again; or
  • payment of the cost of having the services supplied again.

The supplier cannot rely on these limitations if it would be unreasonable to do so.

Indemnities

Are there any statutory controls on indemnities used to cover liability risks in contracts?

An indemnity is a promise by a party to be responsible for another party’s loss or damage arising from or associated with specific events. An indemnity claim is different from a contract damages claim because the common law rules that apply to contract damages claims, such as the obligation on a party to mitigate its loss, do not apply to the indemnity claim unless drafted into the clause.

There are a few statutory controls on indemnities. For example, under the Australian Consumer Law, if both the supplier (eg, retailer) and manufacturer are liable for a breach of a consumer guarantee (eg, if the product is defective) and the consumer takes action against the supplier, the supplier is protected by a statutory indemnity given by the manufacturer. A manufacturer cannot exclude its liability under the indemnity.

Australia has statutory controls on proportionate liability, which can impact indemnities. Proportionate liability legislation operates so that, where there is more than one concurrent wrongdoer for an apportionable claim, the legislation will allocate liability between the wrongdoers in proportion to their level of fault.

The legislation differs between jurisdictions. A key difference to be aware of in the context of an indemnity is that, in some cases, the parties can contract out of the proportionate liability legislation. For example, in West Australia and New South Wales, the parties are free to agree a contractual indemnity that overrides the liability that would have otherwise been allocated under the legislation. In other jurisdictions, the parties cannot contract out of the legislation. For example, in Queensland, a concurrent wrongdoer cannot be required to indemnify any other concurrent wrongdoer.

Liquidated damages

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

If it is not a penalty, a liquidated damages clause is enforceable under Australian law.

Liquidated damages clauses are commonly used in commercial contracts. A liquidated damages clause enables the parties to agree a payment of a fixed sum for a specified breach. This avoids the need for a party to bring a claim before the courts. Common examples of liquidated damages provisions include payments of service credits or the payment of a fixed sum for each day of delay if a supplier fails to meet a contracted delivery date.

When drafting a liquidated damages clause, it is important to ensure the damages agreed upon are a ‘genuine pre-estimate of damage’ and not a penalty. Penalties are unenforceable under contract law. Some indicators of when a liquidated damages clause is a penalty are if the sum set out is extravagant and unconscionable or greater than the sum outstanding, or if it is to be uniformly applied to a series of breaches of differing severity.

An area of uncertainty in Australia in recent years is whether certain ‘non-breach’ payments under a contract can be unenforceable penalties. For example, fees payable for early termination or bad debt charges. If the amount of a fee is extravagant then it can risk being a penalty and accordingly being unenforceable.

Payment terms

Statutory time limits on payments

Are there statutory time limits for paying invoices? Is it possible to agree a different payment period?

There are no general statutory time limits for paying invoices.

However, in certain circumstances, security of payment legislation applies a process to ensure that suppliers carrying out construction work or providing related goods or services can receive and recover payments. Parties cannot contract out of the security of payment legislation. If a customer is required under security of payment laws to pay an invoice, this does not prevent the customer later challenging whether the supplier was entitled to payment.

Late payment interest

Is statutory interest charged on late payments? Is it possible to agree a different rate of interest?

There is no statutory rate of interest, but parties commonly agree a rate of interest by reference to a particular set rate, for example ‘at a rate of one and 1.5 per cent above the prevailing base lending rate quoted by the [name of bank]’.

Parties agreeing a rate of interest should be careful that the agreed rate is reasonable and would not be considered a penalty. If the rate of interest is extravagant and unconscionable, it is likely to be considered a penalty and therefore unenforceable (see question 13, regarding liquidated damages clauses, for more detail).

Civil penalties

What are the civil penalties for failing to comply with statutory interest rate or late payment of invoices?

There are no civil penalties, but the supplier can be entitled to recover contractually agreed interest and any pre-judgment interest that the court may include in its judgment (calculated at a rate the court thinks fit), as well as legal costs, if it is successful in legal action for non-payment. If a judgment debt is not paid within 28 days, the party entitled to receive the payment may claim a post-judgment interest at a rate that is 6 per cent above the cash rate last published by the Reserve Bank of Australia (currently 7.5 per cent).

Termination

Implied terms

Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?

A commercial contract will generally include some circumstances in which either party will have the right to terminate.

In some cases there may be an implied obligation to act in ‘good faith’ when exercising an express right to terminate. For example, Australian courts have held that, in a commercial contract, there can be implied terms of good faith and reasonableness, especially in a standard form contract containing a general power of termination for breach.

A clause excluding all implied terms can be effective to exclude any implied obligation, including to act in good faith when exercising termination rights.

The Franchising Code of Conduct sets timing and content rules for the notice requirements when a franchisor exercises a right to terminate for breach or convenience.

Note that in contrast with some jurisdictions, there is no requirement under Australian law that an agent or distributor is entitled to receive certain payments on termination.

Notice period

If a contract does not include a notice period to terminate a contract, how is it calculated?

If an agreement is silent on how it may be terminated or does not permit termination other than for breach, then a number of considerations apply. Generally, the law will permit the agreement to be terminated on ‘reasonable notice’. This is often an issue for distribution and agency agreements.

What constitutes reasonable notice in terminating a commercial agreement depends on the circumstances existing when the notice is given. The period of notice must be sufficiently long to enable the recipient of the termination notice to wind down the existing business. Winding down the business may involve handing over management in order to transfer outstanding deliveries or preserve customer relations for the business, making alternative business or employment arrangements if the recipient is dependent on the agreement, negotiating new agreements, clearing stock held by the recipient under the contract, and winding down any existing business relationships arising out of the agreement, including subcontracts or negotiations.

It is also relevant whether the recipient has outlaid any extraordinary expenditure or effort in relation to the agreement before the commencement of the notice period. The length of time that is considered reasonable to account for these factors will also depend on the nature of the business, as well as the nature of the relationship between the parties and the industry in which they operate.

Given the obvious uncertainty in assessing what would be a reasonable time, commercial parties should always address in their contracts the period of the contract and how it can be brought to an end.

Automatic termination on insolvency

Will a commercial contract terminate automatically on insolvency of the other party?

No. Insolvency legislation in Australia does not terminate a commercial contract automatically on insolvency of the other party.

For contracts entered into after 1 July 2018, there will be a statutory stay on enforcement of contractual rights against a company that arise only because:

  • the company enters, or proposes to enter, into an arrangement or compromise in order to avoid an insolvent winding up;
  • a receiver, receiver and manager, controller, mortgagee in possession or agent for the mortgagee in possession is appointed to the property of the company; or
  • the company enters into administration.

Certain rights (including rights of set off, rights to performance or enforce performance, rights of assignment or novation and rights to payment under an indemnity) are excepted from the statutory stay. Other rights (such as rights to suspend performance, step-in or terminate) will be unenforceable until the statutory stay on enforcement is lifted by a court order, or consent to enforcement is given by the counterparty (or the administrator, scheme administrator or managing controller appointed to the counterparty).

It is still appropriate to include express rights of termination arising upon the insolvency of the other party, as these rights are not void but merely unenforceable during the period of the statutory stay. However, parties should consider including more specific termination triggers (for example, triggered by non-performance or non-payment) in order to retain an immediately enforceable termination right.

Termination for financial distress

Are there restrictions on terminating a contract if the other party is in financial distress?

In addition to the statutory stay described in question 19, there is a restriction on suppliers of essential services (being electricity, gas, water or carriage services) terminating a contract for financial distress. Subject to these exceptions, there are no general restrictions on terminating a contract if the other party is in financial distress.

Force majeure

Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?

Force majeure is not a recognised concept at common law. As a result, parties wishing to make provision for force majeure must draft the intended provisions into the contract, including the consequences of a force majeure event.

When drafting a force majeure clause, parties should ensure that the definition of ‘force majeure event’ or ‘force majeure circumstance’ accurately reflects the intention of the parties, as this will determine when the restraint on the right of termination will operate.

A force majeure event must be outside the control of the parties. If circumstances are specified that are not, on an objective analysis, outside the reasonable control of the party concerned, then the clause may be regarded as a liability exemption clause, in which case the clause will be interpreted strictly against the party seeking to rely on it. Force majeure clauses usually list various events by way of example but not limitation. Generally, a person who seeks to rely on a force majeure clause is obliged to do everything that is reasonable to obviate the force majeure event.

A force majeure clause commonly operates to suspend the party’s affected obligations during the period that the force majeure continues, subject to the party giving notice of the force majeure and taking all reasonable steps to limit the effect of the force majeure. Further provisions might be appropriate in some circumstances. For example, a provision might be included authorising the other party to make alternative arrangements while the delay occurs and specifying a time after which the unaffected party (or either party) may terminate the contract, even though the force majeure continues.

Subcontracting, assignment and third-party rights

Subcontracting without consent

May a supplier subcontract its obligations under the contract without seeking consent from the other party?

Yes, if a contract is silent on the issue of consent, a party can subcontract without recourse to the counterparty; there is no need to notify or obtain consent from the counterparty in respect of the subcontracting.

Statutory rules

Are there any statutory rules that apply to subcontracting in your jurisdiction?

No, there are generally no statutory rules. The parties are free to agree in their contract if consent or notice is required. Sometimes a party may insist on approving subcontractors. Some industries, such as construction, have security of payment statutory protections for subcontractors that can impact the contract between the prime and the customer.

Assignment of rights and obligations

May a party assign its rights and obligations under the contract without seeking the other party’s consent?

Under Australian law, in most cases, the rights under a contract may be assigned. However, there are circumstances where a party may not be able to assign its rights under the contract. It is generally accepted that certain rights, including rights of a purely personal nature, are not assignable. For example, assignment may be precluded by the materiality of the identity of the original party to the contract or the ‘inseparability’ of the rights under the contract.

In contrast, the obligations under a contract must be novated, which technically involves termination of the original contract and its replacement with a new contract.

If both the rights and obligations need to be transferred then the contract must be novated, which involves consent (express or implied) of the original counterparty to the release of the leaving party from its obligations and the transfer to the new party of the obligations. In practice, this is usually achieved by a tripartite agreement.

What statutory controls apply to the assignment of rights or obligations under a supply contract?

There are no statutory controls applicable. However, under the Personal Property Securities Act 2009, any term in a contract between an account debtor and a transferor that imposes certain restrictions on the transfer of an account or chattel paper binds the transferor to the extent of making the transferor liable in damages for breach of contract, but is unenforceable against third parties.

Enforcement by third party

How may a third party enforce a term of the contract?

The general rule under Australian law is that only the parties to a contract are bound by its terms and entitled to benefit and enforce the rights granted by it. This is known as the doctrine of privity of contract.

Australia does not have legislation to allow third parties to enforce contracts generally. However, some jurisdictions in Australia have legislation that allows third parties to enforce contracts in certain circumstances - for example, in the context of insurance contracts.

Despite the Australian common law position, it is fairly common in contracts for one party to attempt to give benefits to someone else who is not a party to the contract. For example, a customer may be asked to agree that the liability limitations and exclusions apply to the liability of entities who are not a party to the contract. Care needs to be taken in drafting these clauses as they may not be enforceable to benefit the third parties. There may be a drafting solution that can be found (eg, to deem the liability of the third party to the contract).

Disputes

Limitation periods

What are the limitation periods for breach of contract claims? Is it possible to agree a shorter limitation period?

The limitation period for a claim for a breach of contract is six years from the date of the breach. However, if the contract is executed as a deed, the limitation period may be up to 20 years in some jurisdictions.

It is possible to agree a shorter limitation period, but such a clause might be an unfair term and unenforceable if applied to a small business standard form contract.

Choice-of-law clauses

Do your courts recognise and respect choice-of-law clauses stipulating a foreign law?

Yes, the parties to a contract are free to choose the governing law for the contract. Australian courts will generally not interfere with the parties’ choice of governing law for a commercial agreement provided that one of the parties has a sufficient connection to that jurisdiction (eg, is incorporated in that jurisdiction).

However, there are some mandatory laws that will apply to the contract if Australian jurisdiction is triggered. For example, if the Australian Consumer Law or Franchising Code of Conduct has jurisdiction, then those laws cannot be excluded despite the stipulated contract governing law.

Do your courts recognise and respect choice-of-jurisdiction clauses stipulating a foreign jurisdiction?

Yes, the same considerations apply here as apply in question 28. Although it is possible for the chosen governing law to be different from the jurisdiction, this will cause practical difficulties and significantly increase the cost and complexity of any dispute.

Efficiency of local legal system

How efficient and cost-effective is the local legal system in dealing with commercial disputes?

Australian courts are experienced in dealing with contract disputes. There is an established set of procedural rules to encourage an efficient dispute resolution process including, in most cases, mandatory requirements to mediate. Dealing with the court system can be expensive.

New York Convention

Is your jurisdiction a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Which arbitration rules are commonly used in your jurisdiction?

Yes, Australia is a signatory to the New York Convention. The Australian Centre of International Commercial Arbitration arbitration rules are commonly used, but a range of other rules are also often used, including the rules of international arbitration bodies such as the International Chamber of Commerce Court of Arbitration Rules.

Remedies

Available remedies

What remedies may a court or other adjudicator grant? Are punitive damages awarded for a breach of contract claim in your jurisdiction?

The most common remedy is financial damages to compensate a party for its loss and put it in a position as if the contract had been performed. Damages are the most commonly pursued remedy and may be awarded by a court or any other adjudicator.

A court may also award some equitable remedies such as specific performance or an injunction (but usually only where damages are seen as not an adequate remedy). Specific performance is a court order compelling a party to perform a specific obligation such as continued delivery of services or products. An injunction is a court order restraining a party from a future breach.

Exemplary or punitive damages are not awarded for a breach of contract claim.

Update and trends

Recent developments

Are there any other current developments or emerging trends that should be noted?

No updates at this time.