Contracts are the foundation upon which legal rights, obligations and expectations are built. The essential function of a contract is to create a binding legal relationship between contracting parties. In theory, they are designed to clearly define the mutual understanding and commitments made by the contracting parties. However, in practice, this clarity is not always reflected in the final contract terms. This can lead to unnecessary disputes, often resulting in protracted and costly litigation.
It is important to assess your contracts so that you are not stuck in unfavourable circumstances. Below, we highlight some common traps as well as offer practical guidance on how to limit your risk when entering into contractual agreements.
Common traps
Implied acceptance of contract terms
Under well-established principles of contract law, you can be bound by contractual terms without an express agreement simply because your conduct suggests that there is an agreement.
For example, you operate a small business and following prior discussions, you receive a quote by email for the provision of ongoing services from a marketing agency. The quote contains some standard contract terms. In reply, you indicate that you are open to dealing with the marketing agency on those terms, but do not expressly agree to them. However, by allowing work to start, your conduct may give rise to a legally binding agreement even without a signature or making any payment.
Similar risks can also arise where you post a job opening online. In some cases, unscrupulous recruitment agencies may view this as an invitation to submit candidates without any formal engagement. If a candidate is later hired for the advertised position, you may be on the receiving end of a demand for a placement fee and a claim that you accepted the recruiter’s terms of engagement. It is essential that you are clear in whether you accept these terms to protect against such claims.
Termination disputes: Automatic renewal clauses
Contractual disputes also commonly arise in the space of automatic renewal clauses, particularly where the relevant renewal provisions were not carefully reviewed prior to signature and incorrect assumptions were made.
For example, consider your lease of office equipment. You stopped making payments because you assumed that the contract had ended. However, the contract contains an automatic renewal clause to the effect that unless written notice is provided at least 30 days prior to contract expiry, the contract is automatically extended for a further term. Assuming that the unfair contract terms provisions of the Australian Consumer Law (ACL) do not apply, the result is that you are being pursued for outstanding funds and are locked into an agreement that you have no desire to be in.
Conversely, if you have a lease with some options for further terms, those options need to be exercised strictly within set timeframes. Failure to give notice to exercise an option within the stipulated timeframe can result in the lease terminating at the end of the original term.
It is essential to be clear in all respects of your understanding and dealings when contracting whether you are an individual or a business.
Practical guidance
To manage risk and reduce your exposure when contracting or otherwise engaging with other parties:
- do not assume that you will be protected by silence or the state of prior dealings;
- raise terms that you suspect may be problematic down the line prior to commencing work or making payment;
- review all documents such as invoices and purchase orders carefully, as they may contain terms and conditions that are not immediately apparent at first glance;
- diarising key dates, such as dates relating to termination rights and associated notice periods, are good habits to get into;
- read the fine print; and
- if you are unsure, seek independent legal advice as soon as possible.
Contact us
If you are seeking legal advice on a breach or dispute of contract terms, please contact a member of our Litigation & Dispute Resolution team.
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