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Contract Law - Case Update and Recent Developments

Contract Law - Case Update and Recent Developments. Peter Moran P rincipal peter@peerlegal.com.au Katerina Pshenichner S enior Associate katerina@peerlegal.com.au. Overview. Overview. Stay on ‘ipso facto’ clauses - background. Legislation commenced on 1 July 2018

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Contract Law - Case Update and Recent Developments

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  1. Title of presentation | 10 April 2015 |

  2. Contract Law - Case Update and Recent Developments Peter Moran Principal peter@peerlegal.com.au Katerina Pshenichner Senior Associate katerina@peerlegal.com.au

  3. Overview Contract Law – Case Updates and Recent Developments | 22 March 2019

  4. Overview Contract Law – Case Updates and Recent Developments | 22 March 2019

  5. Stay on ‘ipso facto’ clauses - background • Legislation commenced on 1 July 2018 • Explanatory memorandum states… • The Government is reforming Australia’s insolvency laws. Our current insolvent trading laws put too much focus on stigmatising and penalising failure. As part of the National Innovation and Science Agenda (NISA) these reforms aim to promote a culture of entrepreneurship and innovation which will help drive business growth, local jobs and global success. • This reform is aimed at enabling businesses to continue to trade in order to recover from an insolvency event instead of these clauses preventing their successful rehabilitation. Contract Law – Case Updates and Recent Developments | 22 March 2019

  6. Stay on ‘ipso facto’ clauses - legislation • Section 451E of the Corporations Act 2001 (Cth) • (1) A right cannot be enforced against a company for: • (a) the reason that the company has come or is under administration; or • (b) the company's financial position, if the company is under administration; or • (c) a reason, prescribed by the regulations for the purposes of this paragraph, that relates to: • (i) the company coming, or possibly coming, under administration; or • (ii) the company's financial position; • if the company later comes under administration; or • (d) a reason that, in substance, is contrary to this subsection; • if the right arises for that reason by express provision (however described) of a contract, agreement or arrangement. Contract Law – Case Updates and Recent Developments | 22 March 2019

  7. Stay on ‘ipso facto’ clauses - legislation • Rights which arise by virtue of a company: • being in administration; • being subject to a scheme of arrangement; or • having appointed or being about to appoint a controller, are not able to be enforced against that company. Contract Law – Case Updates and Recent Developments | 22 March 2019

  8. Stay on ‘ipso facto’ clauses – sample clause • An Event of Default occurs if: • without the consent of the Secured Party, the Grantor or a Related Party, while solvent and for the purpose of reconstructing or amalgamating the Grantor or the Related Party, enters into, or resolves to enter into, a scheme of arrangement, administration, deed of company arrangement or composition with, or assignment for the benefit of, all or any class of its creditors, or it proposes a reorganisation, moratorium or other administration involving any of them, or the Grantor or the Related Party resolves to wind itself up, or otherwise dissolve itself, or gives notice of intention to do so. Contract Law – Case Updates and Recent Developments | 22 March 2019

  9. Stay on ‘ipso facto’ clauses – useful information • The stay lasts for the period of the administration or when the company is wound up or by order of the court. • Credit rights post-administration cannot be asserted by the company in circumstances where the creditor cannot then enforce their rights against the company by virtue of the stay. • Only applies to rights granted under agreements post 1 July 2018 (and, until 2023, novations, assignments and variations post 1 July 2018 will not bring contracts within the regime). • Rights of set-off are not allowed either. • Step in rights are precluded from being exercised. • See The Corporations Amendment (Stay on Enforcing Certain Rights) Declaration 2018. Contract Law – Case Updates and Recent Developments | 22 March 2019

  10. Stay on ‘ipso facto’ clauses - exceptions • Regulation 5.3A.50 of the Corporations Regulation 2001 (Cth) • The stay does not apply, amongst others, when: • The right was granted after the administration commenced. • The administrator/liquidator consents to the enforcement of the right. • Contract relates to Australia’s national security, border protection or defence. • Contract relates to supply of goods or services to or by a public hospital. • Contract is for supply of essential works for government. • Contracts for derivatives, securities financing transactions, underwriting of securities, financial products, bonds, promissory notes or syndicated loans, margin lending facility, management of financial investments. • Contract for a special purpose vehicle for public-private partnership, securitization and certain project finance arrangements. Contract Law – Case Updates and Recent Developments | 22 March 2019

  11. Small business unfair contract terms regime tested – quick refresher • Regime applies to contracts entered into (including renewals and variations) after 12 November 2016. • A term of a small business contract is void if the term is unfair and the contract is a standard form contract – section 23(1) of the Australian Consumer Law. • A contract is standard form unless it is proved otherwise (section 27(1)). • A small business contract is: • a contract for goods or services; • at least one party to the contract employs less than 20 people; and • the upfront price in the contract does not exceed $300,000 or, for contracts with a duration of more than 12 months, $1,000,000. Contract Law – Case Updates and Recent Developments | 22 March 2019

  12. Small business unfair contract terms regime tested – quick refresher • A contract is unfair if: • It would cause significant imbalance in the parties’ rights and obligations under the contract (section 24(1)(a)). • It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (s 24(1)(b)). • It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on (s24(1)(c)). Contract Law – Case Updates and Recent Developments | 22 March 2019

  13. Small business unfair contract terms regime tested – quick refresher • A court may take into account such matters as it thinks relevant, but must take into account the extent which the term is transparent. • Transparency means whether the term is: • expressed in reasonably plain language; • legible; • presented clearly; and • readily available to any party affected by the term. • Section 25 sets out at length examples of clauses that would be unfair. Contract Law – Case Updates and Recent Developments | 22 March 2019

  14. Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 • JJ Richards had entered into 26,000 waste management services contracts with small businesses. • 8 different standard clauses were held to be unfair. • Automatic renewal clause - Created imbalance because the renewal term was the same as the term. No obligation on JJR to inform customer. Exacerbated by the price variation, exclusivity and termination clauses. • Price variation clause - JJR could increase by providing 30 days’ notice. Created imbalance because there was no corresponding right to terminate or obtain a change in scope or scale of service. • Agreed times clause - JJR had protection for not completing services at required times even if circumstances beyond control of client. Created imbalance by absolving JJR of performance obligations and requiring customers to assume risk of non-performance. Contract Law – Case Updates and Recent Developments | 22 March 2019

  15. Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 • No credit without notification – JJR could charge for attending premises but being unable to perform the services. • Exclusivity clause – JJR had exclusive rights to the removal of waste, even if client seeking additional services beyond those provided by JJR. Created imbalance. • Credit terms clause – requires counterparty to pay within 7 days and JJR can continue charging whilst providing no services. No corresponding right to withhold payment if no services provided by JJR. • Indemnity clause – creates an unlimited indemnity in favour of JJR even where loss is not fault of the counterparty or could have been avoided or mitigated by JJR. Not corresponding benefit to counterparty. • Termination clause – prevents a termination by counterparties if there are amounts owing and entitle JJR to continue charging even if no services being provided. Created imabalance. No corresponding right. Contract Law – Case Updates and Recent Developments | 22 March 2019

  16. Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 • Transparency • The terms were not transparent because: • Written in legal language, not plain English. • Could have been presented in a clearer manner. • Could have been more readily available. • Printed in a very small font. • A densely packed page of small print terms and conditions. • Obiter - Lack of transparency is not essential to showing terms are unfair. • Obiter - Interaction between the clauses in increasing the unfairness was important too. Contract Law – Case Updates and Recent Developments | 22 March 2019

  17. Australian Competition and Consumer Commission (ACCC) v Servcorp Ltd [2018] FCA 1044 • Servcorp provided serviced and virtual offices services. • Contracts pre-dated regime but were renewed after. • Clauses held to be unfair: • Renewal clause – if notice not given, Servcorp could unilaterally increase price and client lcoked in for between 6 and 12 months. No obligation on Servcorp to notify. • Limitation of liability clause – could exclude liability for loss, theft or damage caused by Servcorp. Limitation for suing landlord, even where legitimate claim. No reciprocal limitation. • Variation of services and price – Servcorp can unilaterally vary the services provided and the charges, with no requirement to provide notice, act reasonably or consult with the client. • Notice clause - clause which allows Servcorp to determine if it has been served by having to provide a confirmation of receipt. The corresponding service clause did not have this requirement. Contract Law – Case Updates and Recent Developments | 22 March 2019

  18. Australian Competition and Consumer Commission (ACCC) v Servcorp Ltd [2018] FCA 1044 • Termination right – clause allowing immediate termination without notice if not complying with laws, regulations and procedures. Therefore, a termination could occur without a material breach, an opportunity to rectify or even a notification of the breach. • Termination right – can terminate without cause or compensation on one month’s notice. Very limited termination rights for the counterparty. • Deposit clause – no obligation on Servcorp to return the deposit or provide notification of forfeiture of deposit. • Limitation on liability - unlimited limitation of liability clause for Servcorp except in case of gross negligence or wilful misconduct. There is then a corresponding indemnity back to Servcorp. • Penalty clause – Servcorp can demand a penalty of $15,000 for the counterparty for two years after the contract enticing someone to use someone other than Servcorp. Payment is regardless of whether loss is suffered. Counterparty may have little ability to know if someone is a customer of Servcorp. Contract Law – Case Updates and Recent Developments | 22 March 2019

  19. Small business unfair contract terms regime tested - lessons • Clauses without a corresponding right for the counterparty could be problematic. • How the contract is presented matters (eg the size of the font or how easy it is to find). • Interaction between clauses matters in potentially increasing the unfairness. • Plain English drafting matters. • Terms can still be unfair even if they are transparent. • “A term is less likely to give rise to a significant imbalance if there is a meaningful relationship between the term and the protection of a party, and that relationship is reasonably foreseeable at the time of contracting. The fact that a party might profit from breaches of contract by a customer, without the customer in breach acquiring something in return, would not alone be sufficient to allow it to be concluded that the term caused a significant imbalance in the parties’ rights and obligations arising under the contract.” – J Moshinsky from JJR Richards Contract Law – Case Updates and Recent Developments | 22 March 2019

  20. Termination and repudiation Contract Law – Case Updates and Recent Developments | 22 March 2019

  21. Termination and repudiation Contract Law – Case Updates and Recent Developments | 22 March 2019

  22. Brand2Content Pty Ltd t/as Franchise Works v Solar Australia Pty Ltd [2018] NSWSC 56 • Solar Australia argued it could terminate because Franchise Works had breached a number of non-essential terms and terms of collateral contracts that, taken together, deprived Solar Australia of a substantial part of the benefit of the contact. • Solar Australia relied on Koompahtooincluding a statement of Gleeson CJ in the transcript of argument: • The contractual obligation is not of itself of such an essential nature that you can say any breach of it, however trivial, justifies termination, but repeated breaches of that obligation, regardless of what it conveys about the intention of the party in breach, can bring you to a situation where the other party can say, “That is the last straw”. Contract Law – Case Updates and Recent Developments | 22 March 2019

  23. Brand2Content Pty Ltd t/as Franchise Works v Solar Australia Pty Ltd [2018] NSWSC 56 • Ball J rejected this argument on two grounds: • Statements made during the course of argument are not authority for anything. • Gleeson CJ’s statement was directed to multiple breaches of a single term, not breaches of a number of terms, including terms of collateral contracts. Contract Law – Case Updates and Recent Developments | 22 March 2019

  24. Brand2Content Pty Ltd t/as Franchise Works v Solar Australia Pty Ltd [2018] NSWSC 56 • Result: • Solar Australia was not entitled to terminate the Agreement and so its conduct was repudiatory. • Lessons: • It is safer to terminate based on an express right in the contract. • If you wrongly terminate, your conduct could be repudiatory. • Approach any termination based on intermediary terms with caution. Contract Law – Case Updates and Recent Developments | 22 March 2019

  25. Anticipatory breach • Upside Property Group Pty Ltd v Tekin[2017] NSWCA 336 • The parties entered into a contract for the sale of land. After the time for completion had passed, MrTekin (the vendor) issued a notice to complete and later purported to terminate the contract for failure to comply with that notice. • Upside Property (the purchaser) argued that this was wrongful repudiation and elected to terminate the contract and brought an action for anticipatory breach of contract seeking substantial damages for loss of bargain (or, alternatively, loss of profit). Contract Law – Case Updates and Recent Developments | 22 March 2019

  26. Upside Property Group Pty Ltd v Tekin [2017] NSWCA 336 • The court held that there are three possible entitlements when it comes to anticipatory breach: • Entitlement to terminate, in order to be discharged from future performance and recover any deposit. • Entitlement to bring a cause of action in damages for anticipatory breach. • Entitlement to recover substantial damages for loss of bargain in such an action. Contract Law – Case Updates and Recent Developments | 22 March 2019

  27. Anticipatory breach • Entitlement to terminate • The view that a party wishing to terminate a contract for anticipatory breach must be ready and willing to perform its obligations has been questioned as not justified by principle or common sense. • Uncertainty remains about this point, unresolved by the court. Contract Law – Case Updates and Recent Developments | 22 March 2019

  28. Anticipatory breach Contract Law – Case Updates and Recent Developments | 22 March 2019

  29. Anticipatory breach • Entitlement to recover substantial damages for loss of bargain in such an action. • The innocent party must have proof that more probably than not completion would have occurred in the events which happened, other than the repudiation and its consequences. Contract Law – Case Updates and Recent Developments | 22 March 2019

  30. Anticipatory breach • Result • Appeal dismissed. • The court was not satisfied that, at the time of termination, Upside Property was not substantially incapacitated from completing. • Lessons • Entitlement to bring a cause of action in damages depends on the innocent party’s ability to show that it is willing and able to perform its obligations • It is unclear if the innocent party can accept a repudiation and terminate if it is not willing and able to perform. Contract Law – Case Updates and Recent Developments | 22 March 2019

  31. Termination on public policy grounds Contract Law – Case Updates and Recent Developments | 22 March 2019

  32. Termination on public policy grounds Contract Law – Case Updates and Recent Developments | 22 March 2019

  33. Termination on public policy grounds Contract Law – Case Updates and Recent Developments | 22 March 2019

  34. Termination on public policy grounds Contract Law – Case Updates and Recent Developments | 22 March 2019

  35. Termination on public policy grounds Contract Law – Case Updates and Recent Developments | 22 March 2019

  36. Termination on public policy grounds Contract Law – Case Updates and Recent Developments | 22 March 2019

  37. Part performance • Earl of Selborne LC in Maddison v Alderson (1883) 8 App Cas 467 at 478: • “…the acts relied upon as part performance must be unequivocally, and in their own nature, referable to some such agreement as that alleged.“ Contract Law – Case Updates and Recent Developments | 22 March 2019

  38. Part performance Contract Law – Case Updates and Recent Developments | 22 March 2019

  39. Part performance Contract Law – Case Updates and Recent Developments | 22 March 2019

  40. Part performance Contract Law – Case Updates and Recent Developments | 22 March 2019

  41. Part performance • Pipikos v Trayans[2018] HCA 39 • Result • The High Court held that it would be inappropriate to relax the requirement of the doctrine of part performance that the acts relied upon as part performance must be unequivocally, and in their own nature, referable to an agreement of the kind alleged. • Neither party performed any act that was unequivocally referable to the property in question. There was no giving or taking of possession of that land. There were no other acts indicative of a change in the respective positions of the parties in relation to the land. • Leon was unsuccessful. Contract Law – Case Updates and Recent Developments | 22 March 2019

  42. Contract Law - Case Update and Recent Developments Peter Moran Principal peter@peerlegal.com.au Katerina Pshenichner Senior Associate katerina@peerlegal.com.au

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