Understanding Contracts


Understanding Contracts

We talk about contracts daily. Whether it’s our favourite footballer signing that new million dollar agreement or that thousand page document our supplier requires us to sign – contracts are everywhere. Yet, despite their prevalence, the term contract is inherently misunderstood. A contract is also referred to as an agreement – the words are interchangeable.

This article will dispel some common misconceptions about contracts.

Myth #1: A contract is only enforceable if it is signed

A contract exists if four essential elements are present – offer, acceptance, consideration and an intention to be bound by the contract. While a signed contract has countless benefits, failure to sign a contract is not fatal to its existence or enforcement. Contracts can take many forms. They can be verbal, in writing or arise from conduct. We form a contract every time we make a purchase or obtain a service, even, for example, when we buy a take-away coffee.

Myth #2: You need to sign a contract with a pen

Online contracts have become the standard in many areas, including smartphone apps and social media. For example:

1. Click-wrap agreements – where we must click a box to indicate acceptance of terms and conditions (T&Cs); and

2. Browse-wrap agreements – where we “accept” the T&Cs merely by accessing a website.

Click-wrap agreements are generally binding contracts. This is because we have notice of the existence of T&Cs and have actively agreed to click the acceptance button. In this situation, clicking “agree” is the equivalent to signing a paper.

Browse wrap agreements are more controversial, as we are not presented with the T&Cs before we open the website. However, browse-wrap agreements are very commonly used. Many businesses proceed as if they are legally effective, on the basis that most users have basic internet literacy and know that T&Cs apply to every commercial website.

Myth #3: If it’s in the contract, you can rely on it

Clauses in a contract can be unenforceable or illegal. Unfair contract provisions may be voidable. A clause may be classified as unfair if it causes a significant imbalance between the parties’ rights and obligations in the contract. The Federal Court recently found hair regrowth company, Ashley & Martin’s contracts contained an unfair provision. The provision required consumers to pay for all treatment before they received, or could properly consider, medical advice. This was unfair, as it was unreasonable to penalise consumers for exiting a treatment plan if to do so was necessary following medical advice.

Similarly, excessively wide exclusion of liability clauses can be treated as unfair or interpreted against the interest of the drafter. That is, the court will interpret the clause strictly and construe any ambiguity against the party seeking to rely on it.

Myth #4: A contract will always last until its specified expiry date

There are a number of ways a contract can end before its term expires.

1. Termination – Most contracts contain termination clauses that allow a party to end a contract if a specified default occurs. For example, an employment contract may allow an employer to terminate its contract with an employee if the employee arrives at work intoxicated.

Even if a contract does not contain a termination clause, a party might have a right to terminate if a condition is breached. However, not all breaches give rise to right to terminate – the breach must be sufficiently serious.

2. Repudiation – This occurs when one party is unwilling or unable to perform its obligations under a contract. A repudiation by one party gives the other party a choice. It can elect to continue on with the contract or accept the repudiation and terminate. A repudiation does not of itself end the contract. If a party wrongfully assumes that the other party has repudiated and terminates based on this assumption, it may have actually repudiated the contract itself.

3. Frustration – A contract is frustrated if, without the fault of either party, it becomes incapable of being performed. The consequence of frustration is that the contract is automatically terminated at the point of frustration. Future obligations are discharged. Contract frustration is a pertinent issue amidst the Covid-19 pandemic, as the substance of many contracts cannot be performed. However, whether a contract is frustrated is complex and the case law is of almost no assistance due to the novelty of Covid-19. An example from Hong Kong during the SARS pandemic was that the inability to use leased premises for 2 weeks did not frustrate the contract, because it only affected a small portion of the lease term. A finding of contract frustration will depend on how substantially the contract is affected.

Myth #5: If I’m right according to the contract so I’ll be fine

Ultimately, the value of a contract is only as good as the credit-worthiness of the other party to the contract. This is why leases often require security deposits or bank guarantees. While you may obtain a judgement that upholds your contractual rights, you may not receive any remedy if the other party is insolvent. It is important to undertake some due diligence before entering into a contract to ensure that the other party is reputable and able to perform its obligations.

 

Contracts are fundamental to business operations and are being tested more than ever in the current climate. As always, do not hesitate to contact our commercial or litigation teams with any contract related queries.

 

Christian Mennilli – Graduate at Law

Our Corporate and Commercial Lawyers