In Short
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Ensure contracts are enforceable with clear terms, consideration, and intent.
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Contracts can be written, verbal, or implied by actions.
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Understand the implications of breach, including failure to perform and anticipatory breach.
Tips for Businesses
When managing contracts, ensure they’re written clearly and include all necessary terms. Understand both expressed and implied terms to avoid disputes. If a breach occurs, identify the specific failure and be prepared for legal action or negotiation. Seek legal advice early to reduce the risk of costly litigation.
Courts around Australia routinely hear contractual disputes. Quite often, they are costly, time-consuming and rarely straightforward. This article will discuss 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 (i.e. parties have agreed on all the terms necessary to carry out the contract);
- 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, their meaning, 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.
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, this may include any verbal or email communications.
Continue reading this article below the form3. Are There Any Implied Terms?
Implied terms may also bind the parties. As a general rule, the court will only imply a term if 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 uniforms and fabric when a school changes suppliers. Establishing whether this could be the case and what form an implied term would take require investigating the industry.
4. Contractual Breach
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 a party must deliver what they 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.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Key Takeaways
In summary, during a dispute, you must thoroughly assess the legal contract. Doing so may help you avoid incurring significant legal costs. 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 early in the dispute. This can assist with negotiations and, later, preparation for court.
If you need help with a contractual dispute, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A contract needs a form of value, known as ‘consideration’, to be valid. Consideration is an act which involves the passing of said value between the parties to the contract. The most common form of consideration is paying money for goods or services. While money is the most common form of consideration, it is not the only form. Consideration can include an act, a return promise or personal property.
If your contract does not have a form of consideration, it will likely be declared void, and its legal obligations may be unenforceable. For a contract to be legally binding, it must fulfil all of the required elements discussed above. There must be an offer and acceptance, an intention to create a binding relationship, and consideration. Consideration is important because it distinguishes a contract from a promise and a gift, the latter of which is not legal or enforceable in a court.
An express term is a term that the parties express. An express term can be written, or verbal. An implied term is a term that is not written or verbalised by the parties but could be implied by law based on the presumed intention of the parties to the contract. A term can be implied, for example, by taking into account industry standards. An implied term will generally not apply to the contract if an express term contradicts it.
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