Australia: Essential things you should know about contracts – Part III

Here are the last of the key things you should know about contracts – even if you have a lawyer acting for you.

Liability and indemnity clauses

Liability and indemnity clauses are used in contracts to:

  • allocate risk between the parties
  • limit or even exclude liability on the part of a party

These issues are invariably not addressed when the contract is being negotiated and they are often only considered later when negotiating the wording of the contract.

Sometimes they are unnecessary - for example, if your only obligation under the contract is to pay for services provided by the other party, then the risk of incurring liability to the other party beyond that fee is not great and can be easily managed.

In recent times it has become increasingly difficult for parties to limit their liability due to the existence of statutory causes of action for misleading and deceptive conduct – against which they are ineffective.

One particular clause of limited use is a "party/party indemnity". Under this kind of clause, one party agrees to indemnify the other party against a particular loss. Often, this kind of indemnity is not necessary because, in the event of loss, the party suffering the loss can sue the other party anyway - seeking remedies through contract law, negligence or statutory avenues such as misleading and deceptive conduct.

Agreeing to indemnify the other party under this kind of clause can also negate your insurance cover.

A contract may also include a clause for liquidated damages. This is a predetermined amount payable upon a particular breach of the contract by the party which breaches the contract. Sometimes this kind of clause is drafted in a manner which seeks to punish the breaching party for its wrongdoing, in which case it is a penalty clause. Penalty clauses are generally not enforceable. See our blog on this.

Tax

Many lawyers assisting with the negotiation and drafting of commercial contracts do not provide tax advice. When it comes to the tax effects of a particular contract, you may wish to involve specialist tax adviser, particularly during the negotiation stage.

Issues that frequently affect commercial contracts are GST-based. The parties and their lawyers need to be aware whether a supply of goods or services are:

  • taxable – the supply is taxed but the payer can claim input tax credits
  • exempt – for example, charities do not pay GST but can still claim input tax credits
  • input taxed - where the supply is not taxed and the organisation cannot claim input tax credits (or, for some financial products, is limited to claiming 75% of input tax credits) – for example, managed investment scheme fees or interest on mortgages

Prices are taken to be GST inclusive unless the contract specifies otherwise. Your contract must make it clear if GST is not to be included in the quoted price. A case in November 2013 provided valuable lessons on this when a Court had to decide whether the purchase price of a property included GST. The relevant clause in the contract contained ambiguous wording. See our blog on this case for more details.

To ensure internal consistency in your contract, make sure the fees listed (sometimes they are listed in a Schedule to the contract) match any clauses in the contract which provide for the treatment of GST generally.

If you are negotiating a contract for a sale of business, there is no GST payable on the sale, provided the sale is of a going concern. However, there must be written agreement between the parties that the sale is of a going concern. Generally, this would appear in the contract itself.

Execution

Sometimes your lawyer will advise you that your "contract" should in fact be executed as a deed. This is because, if it is not clear that a party giving something up under the agreement is obtaining something in return, you may not have what is known as "consideration" and the contract may not be enforceable at law.

A deed means that the contract should be enforceable regardless of whether there is consideration. Your lawyer may prefer a deed, for example, if you are drawing up a restraint of trade agreement or a personal guarantee. The only real downside to executing as a deed is that the signing process is slightly more complicated.

If the document is to be a deed, it should be referred to as a deed throughout the document.

If the other party is an individual who has an agent signing on their behalf using a Power of Attorney, your lawyer should ask to see the signed Power of Attorney. Careful wording of the execution provision can attract some useful statutory protections if a Power of Attorney is being used by the other side. You can expect that your lawyer would probably have no issues with a properly executed Power of Attorney from interstate - but that they are likely be more wary of an overseas one.

Similar protections are also available where a company executes the document (whether an agreement or a deed) in accordance with section 127 of the Corporations Act 2001. The execution provisions will generally refer to this provision.

Different drafts

Negotiations between parties often lead to there being multiple drafts or versions of a contract before it is finalised. The "Compare Documents" function in Word allows you to check that nothing has slipped into the latest draft, courtesy of the other party, other than what they have explicitly told you about.

You may want to use Word to track changes and make comment on drafts internally in your organisation or between your organisation and its external lawyer. Be careful of this and of forms of metadata associated with the document which you would prefer the other party not to see. Remember, there is a lot more to an electronic document than what immediately meets the eye and you may, as a result, inadvertently give away your negotiating position.

Other common clauses

A contract will often contain a clause stating that the contract is governed by the law of a particular Australian jurisdiction. For most commercial contracts, it is of little consequence which jurisdiction is nominated and it is generally not worth quibbling over.

A contract will also often contain a dispute resolution clause. This sets out in advance the process to be followed should a dispute arise between the parties in relation to the contract, and can be used as an alternative to lengthy and expensive Court cases.

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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