It is often the case that contracts are only reviewed in detail at two critical times:
- when first signed;
- when a dispute arises
Unfortunately, a contract is even more closely scrutinised when a dispute arises, as parties scramble to ascertain what their rights are in a particular circumstance. The process of ‘getting it right’ in contractual dealings should start as soon as you consider entering into or may be approached to enter into a contract, whether with a supplier, financier or a customer. The process of getting it right involves, knowing who you are dealing with, ensuring an enforceable contract has arisen and making sure you have in your contract key clauses that may assist you.
Know who you are dealing with
This may seem to be an obvious one, but often the question of the legal entity and type that entered into the contract with you is problematic if it is not clearly ascertained from the start. You may have been provided with a credit application or contract that has not been fully or properly completed or an ACN that is incorrect or does not marry up with the name of the entity given. Rather than accepting the document as is, it is important to review the details and verify the information given before you start dealing with a customer or enter into the contract. A free ASIC and ABN will assist you with some basic details.
Do I have an enforceable contract?
The basics required for an enforceable contract are:
- intention to create a legal relationship
In a contract signed by both parties it may be easier to ascertain the elements of offer and acceptance but it becomes more challenging when an oral contract is formed or the communications are a chain of emails. At what point is the contract formed? Does the conduct of the parties indicate there has been acceptance? Looking at whether the material terms of the agreement were concluded will provide some guidance on this. Sometimes parties exchange documents containing their own set of terms and, without any agreement specifying which terms prevail, it becomes a ‘battle of the forms’. In such a case the courts will look at the particular circumstances of each case, but it may well come down to ‘who fired the last shot’, as to which terms prevail.
Consideration is sometimes called the cost of a promise. It is what is a party giving in exchange for what they are receiving. Usually this will be the price, but price is used in a broad sense and it is not always monetary nor does it have to be substantial. Sometimes, but not always, the existence of consideration will also provide evidence of the parties’ intention to enter into legal relations.
Personal Guarantees – to give or not to give?
A personal guarantee is a personal obligation by a guarantor that if primary party fails to pay, the guarantor will step up to the plate and pay. It is common for directors to be asked to provide personal guarantees when the primary contracting party is a company and a personal guarantee is required in respect of that primary contracting party’s obligations. A guarantee is not considered providing ‘security’ in itself but does provide an extra avenue for recovery if a contracting party defaults. A guarantee may also be an indemnity to cover the loss suffered by a party where the contracting party defaults. A guarantee can contain charging clauses in which the guarantor charges either their personal property or real property (or both) as security for the performance obligations they are undertaking. It is not unusual for a business to refuse to deal with a corporate entity without one, particularly where there may be a concern that the entity may not be able to meet its obligations.
Useful contractual clauses
A contract should have clauses that cover off on the basic terms on which goods or services may be provided, including orders, deliveries, risk, title, liability, payment, default, and termination. However, there are some other key terms, that may prove useful.
The Force Majeure clause
This clause has been drawn upon especially during the current pandemic. It is intended to relief a contracting party from liability for the duration of a force majeure event. This type of clauses is intended to cover circumstances beyond on the reasonable control of a party. The COVID-19 pandemic certainly presented itself as such a circumstances, but whether a party could gain the full benefit of the clause to seek relief from having to perform contractual obligations during the duration of the force majeure event depends on the wording of the clause.
How a force majeure event is defined is important to the efficacy of the clause. Does it cover events that are ‘unexpected’ or just ‘unforeseeable’? Is any given list of events intended to be exhaustive or limited. Often the clause will still require a party to perform its obligations to the extent possible such as finding an alternative solution as well as having to give notice of the estimated duration of the event. Finally, the clause may give a right to termination if the duration of the force majeure event extends beyond a specified agreed timeframe.
Dealing with ‘Consumers’
We know that when supplying goods and / or services to a ‘consumer’, there are certain warranties implied into a contract. A consumer can be a person or business but up until 1 July 2021 the monetary threshold for the supply to a consumer based on the value of the goods or services and regardless of type was $40,000. On 1 July 2021 this monetary threshold was increased to $100,000, thereby potentially capturing a greater number of the transactions including B2B transactions. It is important to be aware of the change and consider this in any contracts entered into with another party.
Fair Trading Act 1987 (NSW)
Section 147A of the Fair Trading Act 1987 (NSW) brought with it on 1 July 2020 additional disclosure obligations when supplying goods or services to consumers in New South Wales. Now a supplier must take reasonable steps to ensure consumer is aware of the substance and effect of any term that may be ‘substantially prejudicial’ to the interests of consumer. No method on how to achieve this is mandated however some useful guidance and examples are provided by Fair Trading NSW.
Security Interests and the Personal Property Securities Act 2009 (Cth) (PPSA)
Australia has had this significant piece of legislation in place since 30 January 2012 that deals with security interests taken in personal property. It turned the concept of ownership on its head and required a variety of parties to think in terms of security interests and what to do to protect a security interest. The PPSA and its accompanying regulations prescribe a system for the taking, perfection and enforcement of security interests and also requires consideration of various time frames in which to act to effectively protect your security interest in personal property. Case law has shown since 2012 that a lack of care, understanding and timeliness is often the reason that why a party claiming a security interest in personal property loses out in priority to another secured party or loses their claim to personal property they have supplied to customer on that customer’s insolvency. The moral of the story with PPSA is to seek advice and training to ensure that your business is protecting its assets and interests.
We recommend a due diligence approach is taken to all contractual dealings. By checking and verifying early and knowing your rights and obligations, this will stand you in good stead at each stage of the contractual process. Knowing who you are dealing with will become crucial if legal action needs to be taken or if registering security interests on the Personal Property Securities Register. We also recommend reviewing your contracts with a ‘worst case scenario’ approach, that is, ask ‘what if this happened?’ to see how your contract may deal with that scenario.
How can we help?
If you have questions or require assistance with your key contractual documents, please do not hesitate to contact a member the Coleman Greig’s Commercial Advice Team who would be more than happy to assist you.
This material is provided by Coleman Greig Lawyers as general information only in summary form on legal topics current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.