12 Jun 2014

Doing Business in Australia: Contract law

by Matthew Johnson, Julia Millar

The basic principle of Australian contract law is freedom of contract, but there are some restrictions on that freedom.

Australian contract law is based on the English common law, rather than on any codified or statute law. The basic principle of Australian contract law is freedom of contract, under which parties are at liberty to strike whatever bargain they choose.

It is good practice to record the terms of a contract in writing – no special forms or procedures are required – and Australian courts will give considerable weight to the expression of the parties’ intentions evidenced in documentary form.

These broad statements of principle are affected by some important legislation, notably, the Competition and Consumer Act 2010 (Cth), which cannot be contracted out of and may result in legislative rights which override contractual rights in certain circumstances.

Parties

Under Australian contract law, with certain limited exceptions, those who are not parties to a contract cannot be bound by it. This is known as the privity rule.

If a corporation which is registered under the Corporations Act is a party, its registered number – an Australian Company Number (ACN), Australian Registered Business Number (ARBN) or Australian Business Number (ABN) – must also be cited for that party in all public documents.

Security over, or title to, assets

If a security interest is created over any assets which are “personal property” then the Personal Property Securities Act 2009 (Cth) (PPSA) will apply. To preserve the interest of the security holder, the interest should be registered on the Personal Property Securities Register within the applicable time period. Personal property includes all property that is not land, or certain rights granted by Commonwealth or State Governments (for example, a mining licence).

The PPSA covers a broad range of security interests, including traditional forms of security as well as interests created under retention of title provisions, hire purchase agreements and certain leasing arrangements.

The registration of security interests is governed by the PPSA, relevant provisions of the Corporations Act 2001 (Cth) and associated subsidiary legislation.

Restrictions on penalties in contracts

Under the general law of contract, it is permissible for parties to agree upon a sum of liquidated damages, or the method of calculation of such a sum, payable by one party to the other in the event of defined breaches of contract. This may be useful where monetary damages may be difficult to calculate, and the parties wish to avoid the cost of dispute resolution or litigation. Such an agreement on liquidated damages must represent a genuine attempt to estimate the likely damages which may be suffered.

If it is imposed by one party merely as a threat to enforce compliance, is excessive, or is specified to arise in circumstances which are vague, or may be triggered arbitrarily, then the provision may be regarded as a mere penalty and not enforced by a court.

Restrictions on restraints of trade

Any restriction upon the dealing by a party to a contract (or deed) with third parties, including employment by a third party, directly or indirectly, whether during or after the term of a contract:

  • may constitute exclusive dealing, conduct regulated by the anti-trust provisions of the Competition and Consumer Act 2010 (Cth); or
  • may be a restraint of trade at common law, which if unnecessarily broad in the conduct restrained, the time period of the restraint or the area over which the restraint operates, will be void, and unenforceable by a court.

In the State of New South Wales (only), the Restraints of Trade Act 1976 (NSW) permits the Supreme Court of New South Wales to limit the operation of a restraint to the extent that the court considers reasonable.

Limitations and exclusions of liability

Subject to the operation of the Competition and Consumer Act 2010 (Cth) and the equivalent sale of goods and fair trading legislation of the States and Territories, parties to a contract are free to limit or exclude liability for breaches of contract, or in other circumstances. The party seeking to rely on an exclusion or limitation of liability clause will, however, need to convince the court that the clause in question, properly construed, is as that party contends.

Resolution of disputes

Australia is a party to the New York Convention on the recognition and enforcement of Foreign Arbitral Awards. Accordingly, the award of an arbitrator (which can usually give any legal, equitable and statutory remedies) will be recognised and enforced in the Federal Court or any of Australia’s

State or Territory Courts as if it were a judgment of that Court.

International Contracts For The Sale Of Goods

Australia is a signatory to the Vienna Convention on Contracts for the International Sale of Goods. This provides for uniform rules which govern the formation and performance of contracts for the international sale of goods and sets up a framework of rules specifying the obligations of parties to them.

The parties to a contract for the international sale of goods may agree that the Convention is not to apply, and may select the laws of one of the parties’ home jurisdictions as the governing law of their contract. If they do not do so, however, then the Convention will apply, and incorporate into the contract the rules set out in the Convention.

This article is taken from Clayton Utz's Doing Business in Australia, the essential guide for investors and business exploring commercial opportunities in Australia.

 

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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.