Your contract has expired? Watch out for these potential legal landmines

by Ian Bloemendal, Natalie Watson, Erica Flude

14 Apr 2016

The key to ensuring that an expired contract isn't kept on foot is to engage in good contract management.

In the commercial world there exist myriad fixed term goods and services contracts. Towards the end of a contract, parties may come together to discuss an extension to the current contract or entering into a new contract. Sometimes, however, a contract may expire without the parties realising and without any express statements made as to what will govern future dealings between the parties.

If they continue to perform the subject matter of an expired contract there are three possible legal outcomes:

  1. There is a new contract;
  2. The old contract continues on the same or varied terms; or
  3. There is no contract - just a duty to pay a reasonable sum.

It is the conduct of the parties (judged objectively and with an eye to how consistent it is with the terms of the old contract) that is the key to establishing which of these three will be the outcome. A few examples from the cases help to illustrate differing results.

Example 1: tacit consent and terms locked in

In Bullock v The Wimmera Fellmongery and Woolscouring Co Ltd (1879) 5 V.L.R. (L) 362, an appointment that had been expressed to be for one year only, and then to be at the option of the shareholders, ran on without interruption for 15 months before a notice of termination was issued.

The court held that there was "tacit consent" on both sides to a continuance of the engagement. As the shareholders did not alter the terms of that engagement, there were just grounds for maintaining that the terms continued as before. An implied contract arose for a period of service for another year on the same conditions as those binding on the parties in the previous year.

This meant that not only were the terms of the expired contract deemed to continue, but the contract was held to run for another full year fixed term.

This could be concerning for services providers where a fixed term contract for a single year might not contain any price review or price escalation provisions. A receiver of services might be equally concerned if the expired contract related to the provision of services on an exclusive basis. This may have further implications for corporations or public entities which have given undertakings or have other obligations to re-tender for such contracts. It is therefore important to clearly state the basis on which ongoing work is to occur.

Example 2: an indemnity survives the end of the contract

In Brambles v Wail [2002] VSCA 150, an expired contract contained indemnity provisions in favour of one party, limiting its losses if they had contributed to a loss or were negligent in relation to a loss. The court held that the indemnity provisions remained in force and binding upon the parties because after the written contract expired, both parties continued to perform as though they were still governed by the terms of the original contract - subject to termination on reasonable notice.

Due to the paucity in Australian case law, the Australian courts have looked to American, Canadian and English jurisprudence for guidance. A recent English case held that a telephone conversation between the parties to a contract and a follow-up email, was sufficient to find that the terms of the original (expired) agreement applied to any continued performance, even though the follow-up email did not elicit any comment or denial from the other party, demonstrating the relative ease with which an expired contract could be implied and affirmed by conduct.

What to do if you think you have affirmed an expired contract

If you realise that a contract has expired, and you wish to renew, you may consider entering into a new contract backdated to commence at the expiration of the original contract. This new contract would expressly govern conduct following the expiration of the original contract and provide the parties with certainty for all future acts.

If performance of an expired contract has continued, and the conduct of the parties may be interpreted as affirming this post-expiration contractual relationship, it is important that neither party simply ceases performing. This could lead to potential breaches of any new implied contract and could ultimately result in an order for damages or specific performance. This is because the courts are likely to imply a term that it is terminable on reasonable notice. What amounts to reasonable notice in the circumstances depends upon matters such as the length of the original contract, third party obligations arising from supply under the contract, whether there has been extraordinary expenditure to enable the contract to be performed, and the time to redeploy labour and equipment.

If you don't want the terms of a contract to continue to apply after the stated expiration date you should not stay silent. Similarly, you should take care to avoid making representations about the continuance of the contract.

You should also seek advice before taking any action to deal with desired (or threatened) termination of a potentially affirmed contract. There may be strategic benefits to relying a term of the contract or upon the common law. There may also be (in some States) an implied obligation to exercise a contractual right of termination reasonably and in good faith. Damages could also flow from uninformed conduct.

How to avoid accidentally extending an expired contract

The key to ensuring that an expired contract isn't kept on foot is to engage in good contract management. Know your contract and monitor contract performance. Be aware of deadlines and notice period, and communicate and document any changes.

Create an email savvy culture, as careless words can lead to an outcome that no one expected or wanted. Ensure that all correspondence is checked carefully and sufficiently conditioned if necessary, this way communication can be made without prejudice or limited in its contractual force to avoid creating implied new contracts if this is not desired.

If in doubt, seek advice. Strategic input could be invaluable.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.