Australia: The Devil is in the Details – two questions you need to consider when entering a contract

When it comes to the law, every contract must contain certain basic elements to be valid. Unfortunately, more often than not, it's easy to ignore these details, and if things go wrong, you can be one small step away from battling it out in court.

The following questions are key when considering forming any contract:

  1. Who are the parties to the agreement?
  2. Who is getting what and for how much?

Who are the parties to the agreement?

A significant number of contracts are entered into by commercially complex legal entities. From individuals or a company through to a trustee or subsidiary – the list is endless! Knowing and understanding who you're actually contracting with is crucial, because if things become litigious, you may not have a claim against who you think you do.

Case Study

Joe Bloggs enters into a Credit Account Contract with ABCDEF Pty Ltd. When completing the Credit Account Application, Joe identifies himself as "Joe Bloggs as Trustee of the ABC Trust."

ABCDEF Pty Ltd supplies Joe Bloggs with materials on account and things go smoothly - until one day they don't and ABCDEF Pty Ltd wants to sue Joe Bloggs. The question is who does ABCDEF Pty Ltd sue - Joe Bloggs or Joe Bloggs as Trustee of the ABC Trust?

If the business successfully sued Joe Bloggs the individual, it could enforce any judgement against Joe's personal assets - his house, car etc. However, if ABCDEF Pty Ltd successfully sued Joe Bloggs as Trustee of the ABC Trust, any judgement would be limited to the assets of the ABC Trust. If the ABC Trust didn't own any assets then ABCDEF Pty Ltd would be unable to recover any outstanding debt.

Ultimately, who ABCDEF Pty Ltd can sue is dependent on the facts and circumstances surrounding the two parties' respective conduct when they entered into the contract.

Given the potential impact on your own business, this case study highlights that you need to know and be comfortable with, from the outset, the identity of who you're contracting with. Ultimately, if you don't and the relationship sours, recovery may prove difficult.

Who is getting what and for how much?

For a contract to exist, something of value must be exchanged (otherwise known as "consideration"). Terms surrounding the exchange of this consideration form the bulk of most contracts.

As some of you may have experienced, even simple clauses are open to interpretation and when things come to a head, a significant amount of time can revolve around trying to untangle who was supposed to get what.

Case Study

Media Pty Ltd entered into a Credit Account Contract with PC Pty Ltd for the supply of industrial media computers, screens and other products. When completing the credit account application Media Pty Ltd handwrote the following provision into the contract: "Products to be supplied: Industrial Media PCs screens and routers"

The Credit Account Contract provided for a Back to Base Warranty system, under which PC Pty Ltd repaired any faulty products at its own cost.

PC Pty Ltd only supplied Media Pty Ltd with Industrial Media PCs. Sometime later, Media Pty Ltd sued PC Pty Ltd for money it had spent repairing faulty units supplied to it by PC Pty Ltd.

In their defence, PC Pty Ltd drew attention to the Back to Base Warranty in the contract. Media Pty Ltd responded that the contract and its terms, including the warranty, didn't apply to the PCs as the handwritten words only included the screens and routers.

In the example above, a Court would establish whether the Back to Base Warranty is applicable to the sale of the PCs by looking at the conduct of the parties in entering the contract as well as throughout the course of their relationship.

As this case study demonstrates, you need to make sure that there is no fundamental misunderstanding between parties you're contracting with in relation to the terms of the contract. Otherwise, a Court may interpret those terms and the general relationship between the parties differently to your own belief and understanding.

Things to do

A simple misunderstanding around any term of a contract you're a party to could potentially expose you to a claim for damages. Therefore:

  • Before putting pen to paper you should always consult a lawyer to ensure not only that the terms of the agreement are suitable to you but that you have a correct understanding of those terms; and
  • once signed, you should regularly check all parties are acting in compliance with their contractual obligations. If at any stage you feel unsure about what your obligations are, you should get legal advice.

When entering into a contractual relationship it's easy to get caught up in the whirlwind of a new endeavour that has a lot of promise. Getting the right advice early and paying attention to the little details at the start can potentially save you hours and money down the track, in addition to keeping you on target to grow your business.

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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