Australia: Essential things you should know about contracts - Part I

Essential things you should know about contracts – Part I

Even if you engage lawyers to draft or review your contracts, there are some essential things you should know.

  1. The contract document does not necessarily reflect the whole agreement.

Even if its heading includes the word "contract" or "agreement", the document is merely evidence of the existence of a contract between two (or more) parties. It is not itself the contract. Other terms of your contract or agreement may be found in other places.

Some terms may not be expressly stated but rather implied. They may be implied by Courts or by statutory regimes. For example, the Fair Work Act 2009 implies terms in some contracts. Industry standards, customs or norms may also form implied terms in a contract.

Conversely, some statutory regimes may render terms in your document void and unenforceable. An example of this is the prohibition on unfair terms in consumer contracts, which stems from the Competition and Consumer Act 2010 and, in the case of financial services, from the ASIC Act 2001. Similarly, Courts will not enforce lengthy restraints of trade.

Other terms of the contract may be reflected in communications between the parties such as letters, emails, telephone conversations and meetings.

That said, the written contract is presumed to reflect the agreement reached between the parties and it can be very difficult to prove that it contains a mistake or omission.

A comprehensive written agreement prepared by lawyers is always a good idea to document commercial arrangements.

  1. The contract document can expressly state that it reflects the whole agreement.

Sometimes, a contract document will contain a clause stating that the document reflects all the terms of the agreement between the parties (an "entire agreement" clause). It is tempting to use such a clause for the sake of certainty – although it, obviously, will not help with statutory inclusions or exclusions.

But be wary. You might want the other party to be bound by representations it has made during negotiations or as part of a tender process. If you use an entire agreement clause, they won't be.

As a corollary to this, be mindful of the representations you make during negotiations, particularly if the contract document is not going to include an entire agreement clause. You may be held to them.

  1. The contract document should reflect the parties to the contract.

Make sure that your document shows the names of the legal entities which are making the agreement – not just their business names.

If a party is contracting in its capacity as trustee of a trust, the contract may reflect that but it doesn't have to. It is also possible (providing the parties agree) for the trustee to limit its contractual liabilities to recourse against the trust.

  1. The contract document should readily identify the essence of the contract.

Often, your contract document will contain a preliminary section called "Recitals" outlining the key purpose of the contract.

With a well drafted contract it should be possible to identify the essence of the contract relatively easily from the first few clauses. This key purpose or essence will consist of a combination of obligations and entitlements for each party. Be aware that an agreement may have more than one aspect to it. For example, a lease agreement may also contain a personal guarantee from the lessee's directors.

Many of the terms in a contract document (for example, dispute resolution clauses and governing law clauses) are important to the legality and functionality of the contract but extraneous to its key purpose.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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