A discussion paper to explore the scope for reforming Australian contract law 2012
© Commonwealth of Australia 2012
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FOREWORD BY THE AUSTRALIAN ATTORNEY-GENERAL
The Australian Government is committed to improving Australia’s economic performance through innovative and constructive measures across all sectors of the economy. Our end goal is to develop a seamless national economy that is productive and just and provides optimal trade opportunities within Australia and with the rest of the world.
As Australian Attorney-General, I want to ensure that our core legal framework provides the most efficient and effective environment for industry. It must also offer adequate incentives and protections for small business, consumers and employees. As a Government, we continue to progress a range of significant commercial reforms.
Contracts are a fundamental part of our daily lives. Businesses and consumers would be hamstrung without a law of contract to underpin even basic transactions like buying food items, accessing finance and connecting to the Internet. In recent decades our contract law has undergone vital changes through legislative reform and judicial adjustment. However, uneven development of the law can cause confusion and uncertainty.
Australian contract law owes its origins to English common law, which remains an important source of law for many international commercial transactions. Over time our systems have diverged and alternative legal systems—including those of our major trading partners—are assuming greater importance around the world. As nations look for ways to emerge from the global financial crisis, it is timely for Australia to focus on further reducing business costs and improving our international standing.
The purpose of this paper is to start that discussion in the area of contract law. As with many debates, there is likely to be both champions for reform and defenders of the status quo. The European Commission has identified potential gains of €26 billion from harmonising contract law across the 27 member states of the European Union. This must raise questions as to whether Australian contract law is also in need of renovation.
I welcome your comments in response to this discussion paper and encourage you to provide further information or discussion points for consideration by the Government.
The Hon. Nicola Roxon MP
The Australian Attorney-General’s Department invites you to
contribute to Australian law and justice reforms by making
a submission on this discussion paper
This discussion paper on reforming contract law is aimed at all people and organisations who are interested in improving the efficiency and effectiveness of commercial and consumer transactions. Its purpose is to stimulate discussion among business, consumers, legal practitioners, academics and other stakeholders about the successes and shortcomings of Australian contract law.
The paper is structured to provide readers with a short description of Australian contract law, to outline key issues in contract law and to raise discussion points to be addressed by submissions. Comments may address any one or more of the questions which appear throughout the paper or any other matters relevant to contract law. Submissions are requested no later than Friday 20 July 2012 and may be made in writing to:
Business Law Branch
Robert Garran Offices
3-5 National Circuit
BARTON ACT 2600
Fax: 02 6141 3488
All submissions will be treated as public and may be published on the Attorney-General’s Department website unless the author clearly indicates to the contrary. A request made under the Freedom of Information Act 1982 (Cth) for access to a submission marked confidential will be determined in accordance with that Act.
The Government will take into account the issues raised in the submissions received and stakeholder consultations to gauge support for possible future directions for this project. Organisations and individuals with an interest in this project are encouraged to regularly visit the Attorney-General’s Department’s website (www.ag.gov.au) to access further related information and project updates.
QUESTIONS FOR CONSULTATION
The Australian Government would like to hear your views on the following questions.
1. What are the main problems experienced by users of Australian contract law? Which drivers of reform are the most important for contract law? Are there any other drivers of reform that should be considered?
2. What costs, difficulties, inefficiencies or lost opportunities do businesses experience as a result of the domestic operation of Australian contract law?
3. How can Australian contract law better meet the emerging needs of the digital economy? In what circumstances should online terms and conditions be given effect?
4. To what extent do businesses experience costs, difficulties, inefficiencies or lost opportunities as a result of differences between Australian and foreign contract law?
5. What are the costs and benefits of internationalising Australian contract law?
6. Which reform options (restatement, simplification or substantial reform of contract law) would be preferable? What benefits and costs would result from each?
7. How should any reform of contract law be implemented?
8. What next steps should be conducted? Who should be involved?
2 Drivers for reform3
Simplification and removal of technicality3
Setting acceptable standards of conduct4
Maximising participation in the digital economy4
Suitability for small and medium-sized businesses5
3 Challenges of Australian contracting7
Origins of Australian contract law7
Challenges arising from different sources of law7
Applicable law and enforcement9
Challenges relating to Internet contracting9
4 Challenges for international contracting11
Australia’s current trading patterns11
Possible obstacles to greater trading opportunities12
Differences in legal systems of some key trading partners12 5 International approaches15
United Nations Convention on Contracts for the International Sale of Goods15 UNIDROIT Principles16
Developments in the European Union16
Application of international principles of contract law by Australian businesses17 6 Options for reform18
7 Issues for implementation20
Domestic or international contracts?20
Opt-in, opt-out or mandatory?20
8 Next steps22
We live in an era of rapid economic, social and technological change. International mobility of goods, services and people has been enhanced by a range of factors including financial deregulation, removal of trade and investment barriers, and the rise of e-commerce. New technologies have changed the way we communicate and the ways in which we do business. Over recent decades Australia has pursued a range of economic and financial reforms which have transformed it into an open economy integrated with world markets.
1.2Our legal system is a form of infrastructure which is as indispensible to economic growth as transport or energy networks. In addition to providing a just and secure society, the rule of law provides an essential base for economic activity, giving businesses and individuals the certainty and predictability needed to trade and invest with confidence. Statistics from the World Bank show a strong correlation between good governance and the rule of law on the one hand, and increased per capita income on the other.1
3. Contract law forms one of the most important elements of any legal framework. It is the bedrock of modern economies and the basis of many everyday interactions. It is therefore of the utmost importance that Australian contract law maximise the simplicity, efficiency and utility of market interactions for the benefit of all Australians.
1.4 Australia’s system of contract law is based on English common law as developed by Australian courts. These common law rules are supplemented by equitable doctrines, Commonwealth, State and Territory statutes and international law instruments. The terms of contracts themselves also guide the parties’ expectations and performance.
1.5 Our contract law performs well by international standards with Australia ranking 17th out of 183 countries on a measure of the ease with which contracts can be enforced.2 However, this is only one indicator of contractual efficiency; and it is no excuse for complacency. Some centuries-old common law rules of contract survive largely intact, attracting the criticism that elements of Australian contract law are tired and inadequate to contemporary circumstances.3 It is worth considering whether the law could be better suited to the needs of today.
1.6This paper is seeking to stimulate discussion among businesses, legal practitioners, academics and other stakeholders about whether Australian law is fit for its purpose and prepared for the challenges of the future. To facilitate this debate, the paper will:
➢ consider the drivers for reform of Australian contract law
➢ consider the challenges of Australian and international contracting
➢ briefly compare the contract law systems of some of our major trading partners and outline significant developments in international contract law
➢ discuss possible approaches to reform and implementation issues, and
➢ canvass next steps in the reform process.
DRIVERS FOR REFORM
Proposals to reform Australian contract law are not new and date back to before Australian Federation. Consideration of law reform requires a clear understanding of the outcomes to be achieved. In reality, there may be some trade-off between various catalysts for reform; if some are prioritised, other potential gains may be less likely to be achieved. The focus of reform should be on the most important drivers—that is, those improvements which would bring the greatest benefit to users of contract law and the economy as a whole. This focus broadly corresponds with principles identified in the Strategic Framework for Access to Justice4 such as the need for accessibility, efficiency and effectiveness.
2.2 There is an inherent benefit in as many people as possible being able to understand rules which affect them. Greater accessibility would improve the quality of legal advice and reduce user costs. Legal practitioners who are generalists or do not specialise in contract law would be better positioned to give informed and reliable legal advice, potentially at a lower cost. For users, greater accessibility of contract law may also lessen reliance on legal advice in pre- and post-contract formation stages. Reform can aim to improve accessibility by simplifying, restating or reforming the existing legal rules.
2.3 Improving certainty in those areas of contract law which are unsettled or unclear would have a number of benefits. When the legal consequences of actions or omissions are clear and predictable, individuals and businesses have the information they need to make informed choices and to develop long-term plans. Legal certainty also has important economic benefits such as allowing contracting parties to allocate risk more efficiently. Greater certainty in the law lessens the likelihood of disputes arising or being escalated, reducing costs both for parties and for governments. That said, the degree to which certainty is valued may need to be balanced against its potential to produce unfairness.5
Simplification and removal of technicality
2.4 Australian contract law could be simplified by removing outdated or over-technical rules thereby reducing the cost burden of the law on users. The more technical or complicated the rule, the greater the cost required for compliance and the greater the parties’ reliance on legal advice. Rules which are out of step with current commercial practice and expectations undermine predictability because they can later emerge to surprise parties who have acted on the basis of common sense assumptions.
Setting acceptable standards of conduct
2.5 Any just legal system will aim to shape behaviour and set acceptable standards of conduct despite pursuing competing goals. This is especially true of contract law systems which aim to preserve party autonomy and facilitate competition, for example, by discouraging unconscionable behaviour. Standards of acceptable conduct should be unambiguous, simple to understand and take particular account of the needs of people from different cultural backgrounds or experiencing disparate circumstances. Australia’s cultural diversity demands that our contract law should be readily translatable into other languages to facilitate domestic and international trade and improve general public awareness of the law.
2.6 The opportunities available in the modern market are ever-changing. Upholding freedom of contract allows parties to innovate and develop terms and conditions which are best suited to their particular circumstances. Australian contract law generally respects parties’ freedom to contract subject to a range of regulatory limitations. Although most limitations are justifiable on public interest grounds, others reflect historical foundations and may undercut the autonomy and the true intentions of the parties. There is also no place for contract law rules that unjustifiably generate costs. An optimal system of contract law will support parties as they establish new ways of doing business and seek out new commercial opportunities that are capable of adapting to changing circumstances.
Maximising participation in the digital economy
2.7 Supporting Australian consumers and businesses to fully realise the benefits of the digital economy will have economy-wide benefits. In particular, the digital economy may provide consumers with greater choice and costs savings and may improve business opportunities, innovation, and revenue.6 Despite the growing importance of the digital economy, statistics indicate that Australian businesses are not as engaged in the digital marketplace as their international competitors.7 Ensuring that Australian contract law adapts to innovations in technology is one way in which participation in the digital economy can be better facilitated. Businesses and consumers may, for example, have greater confidence in the digital economy if legal doctrines evolve to remain applicable and relevant to new ways of conducting business online.
Suitability for small and medium-sized businesses
2.8 Small and medium-sized businesses are often at a practical disadvantage when contracting. Large corporations may obtain specialised legal advice to help them protect their interests when negotiating contracts while small and medium-sized business are less likely to have access to specialised advice, increasing their greater vulnerability to risk. For example, small businesses are less likely to draw up custom-built or ‘bespoke’ contracts and more likely to adopt publicly available precedents which may or may not suit business needs. Contract law reform may offer an opportunity to better address the needs of small and medium-sized businesses.
2.9 Introducing increased elasticity into the law may help support relational contracts; that is, long-term contracts which support successful continuing relationships. Many contracts involve complex projects which rely on cooperation between the parties over a significant period of time.8 The use of flexible, gap-filling concepts like good faith, reasonableness or adaptation for hardship may be needed to help these contracts work as time passes and circumstances change. Debate about these concepts also raises arguments that the principles are too ‘fuzzy’ and may undermine certainty and predictability of the law.
2.10 Harmonisation of the law across States and Territories could facilitate trade between parties in different jurisdictions. Differences in contract law between different jurisdictions increase the risks and costs involved in cross-border transactions. Currently, Australian contract law differs between Australian jurisdictions in several areas due to the existence of non-uniform State and Territory statutes, imposing additional costs and lessening predictability. Examples of difference include variations between the general Property Acts, the Sale of Goods Acts, and laws governing the legal capacity of minors to contract, the consequences of discharging a contract by frustration, and the ability of third party beneficiaries to enforce contracts.
2.11 Harmonisation could take the form of an internationalisation of Australian contract law. As well as removing indirect barriers to trade and investment, such an approach could make Australian law more attractive for parties from different countries when choosing a system of law to govern their contract. This could help promote Australia as a regional hub for finance and commercial arbitration bringing significant benefits to the Australian economy.
What are the main problems experienced by users of Australian contract law? Which drivers of reform are the most important for contract law? Are there any other drivers of reform that should be considered?
CHALLENGES FOR AUSTRALIAN CONTRACTING
The Australian economy has been resilient notwithstanding the economic shock presented by the global financial crisis. We have adapted well to structural changes in our own economy and in the economies of our neighbours, and are moving towards new ways of doing business in response to technological change. However, legal regulation of transactions remains complex, imposing burdens on business and the not-for-profit sector. Lack of clarity in several areas of the law may mean that businesses and other organisations are left to engage in a substantial amount of guesswork.
Origins of Australian contract law
3.2 Australian contract law is primarily based upon common law and equitable principles developed by judicial decisions in individual cases. As we have a unified system of common law, most principles apply uniformly throughout Australia.9 These can be considered under the broad themes set out in the Attachment to this paper, namely, formation, content and scope, performance and termination, avoidance of obligations and fair dealing, remedies and alternative dispute resolution.
3.3 Legal principles are supplemented and, in some cases, altered by Commonwealth, State and Territory legislation. International instruments may play a role in the interpretation of the law in some matters. Finally, the terms of contract also contribute to the legal framework for performance and enforcement.10
Challenges arising from different sources of law
3.4 The interrelationship between common law rules, equitable doctrines and statute means that it is difficult to draw boundary lines around contract law. Even if a contracting party is aware of the basic rules, that party is often unlikely to be able to confidently predict the outcome of any dispute arising under contract.
3.5 Rules of contract law are found in a great number of court cases. It would be futile to attempt to quantify the number of common law or equitable rules or to describe their minutiae in this paper. For statutes, this task can be similarly difficult. There are over 150 Commonwealth, State and Territory statutes relevant to contract law. Many contain substantive rules while others deal with procedural matters but still have an impact on the law of contract.
3.6 Legislative provisions affecting general contract law are often found in unexpected places. For example, all States and Territories have a Property Law Act, Conveyancing Act or equivalent.11 Although these statutes—as their names indicate—deal largely with property law (particularly real property law), they also include important general provisions such as rules on the assignment of contractual rights and the effect of time stipulations. It may be difficult for non-experts to find all the statutory rules relevant to their case.
3.7 Some common statutes enacted by States and Territories, such as the Sale of Goods Acts, contain minor refinements that give rise to differences between the jurisdictions. Consequently, contracting parties cannot assume that these laws give rise to the same outcomes in all cases. Additionally, there may be a general lack of awareness of, and misunderstandings about, some significant statutes even within the legal profession. One example is the State and Territory Acts which incorporate the United Nations Convention on the International Sale of Goods.12
3.8 The interrelationship between contract law and new Commonwealth laws such as the Australian Consumer Law, the National Consumer Credit Protection Act 2009 (Cth) and the Personal Property Securities Act 2009 (Cth) may present some new sources of intricacy for parties at least during the early stages of implementation.
3.9 Where a dispute arises between contracting parties, a fact scenario may give rise to a common law claim, a claim in equity and grounds for statutory relief. For example, commercial contractors need to be aware of the Australian Consumer Law since it includes provisions which also apply to commercial transactions (for example, the general prohibition on misleading or deceptive conduct in trade or commerce).
3.10 Contractual interpretation and doctrinal differences play an important role in many cases, and some important principles remain unclear. Notable examples include when evidence of the surrounding circumstances in which the contract was made can be admitted to assist the interpretation of the written words, and the nature and scope of the obligation to act in good faith in Australian contract law.
What costs, inefficiencies, difficulties or lost opportunities do businesses experience as a result of the domestic operation of Australian contract law?
Applicable law and enforcement
3.11 Every contract has a ‘proper law’. This means that the contract is governed by a particular legal system (for example, Western Australian law or Chinese law) under which the contract has binding force and according to which its meaning is interpreted.
3.12 An express (or implied) choice of law will usually be recognised by the courts, even if the system chosen has little or no objective connection to the transaction or the parties. Thus, if legal action were commenced in respect of a contract expressly governed by the law of Singapore, an Australian court would generally apply Singaporean law and not Australian case law or legislation. However, some Commonwealth, State and Territory statutes override the parties’ ability to choose a foreign system of law,13 or will apply irrespective of the parties’ express choice of law.14 An Australian court will apply such ‘overriding’ statutes.
3.13 Where the parties have not stipulated which jurisdiction’s laws will apply, the contract will be governed by the system of law ‘with which the transaction has its closest and most real connection.’15 Which system has the ‘closest and most real connection’ will depend on various factors including where the contract was made, the place of its performance, the jurisdiction in which the parties reside or conduct business, and the subject matter of the contract.16
Challenges relating to Internet contracting
3.14 The Internet is now used for an increasing number of transactions—affecting commercial and consumer contracts. Arguably, Australian contract law has been slow to adapt to new methods of business-to-business communication and the widespread use of the Internet for business and leisure purposes. The passage of Commonwealth, State and Territory Electronic Transactions Acts17 made clear that formal requirements for validity such as writing or signature could be fulfilled electronically, but other important issues remain unanswered. Traditional rules may be unsuitable in this new context or their applicability may be unclear.
3.15 New technologies have also transformed consumer behaviour with a large number of sales taking place over the Internet. In the case of cross-border Internet transactions, it will often be unclear what legal system is the governing law. Even if Australian law applies, there may be difficulties. Internet users are often presented with an on-screen list of terms and conditions and asked to click a box stating ‘I agree’. Alternatively, the terms and conditions for use of a website may be available somewhere on that site (often under a hyperlink) but the user is not expressly required to assent to them. In many such cases, it may be unclear whether a contract was even formed.
How can Australian contract law better meet the emerging needs of the digital economy? In what circumstances should online terms and conditions be given effect?
CHALLENGES FOR INTERNATIONAL CONTRACTING
Australia is an open economy heavily dependent upon international trade for its prosperity, particularly on trade within our own region. Commercial transactions vary in complexity for several reasons including the nature and value of the product or service traded, the sophistication of the parties, the level of legal advice obtained (if any), and whether the transaction is domestic or has an international element. International trade brings substantial benefits to Australia but also entails extra risk and costs for exporters and importers.
Australia’s current trading patterns
4.2 Increasingly Australians are trading with entities from other nations, and in higher volumes. Our patterns of trade are also changing with the expansion of key Asian economies and changes in their social composition. In 2010 Australia’s external trade accounted for $552.4 billion with the value of imports and exports spread reasonably equally.18 Australia is a major exporter of primary products (mostly resource commodities) and services (notably education and tourism), and an importer of manufactured goods and services.
4.3 In terms of our position worldwide, in 2010, Australia was the 19th largest exporting nation and the 21st largest importing nation.19 It is estimated that around one in five Australian jobs is related to international trade.20
4.4 Our major two-way trading partners were China, Japan, the United States of America, the Republic of Korea, the United Kingdom, India, Singapore, New Zealand, Thailand and Malaysia.21 Australia also engaged in significant trade with the European Union (EU). When treated as a bloc, the EU accounted for 14.1 per cent of Australia’s two-way trade.
Figure 1: Australian trade with our major trading partners
Possible obstacles to greater trading opportunities
4.5 One potential obstacle to greater economic integration with our main trading partners is constituted by the differences between their systems of contract law and our own. In recent times, the Australian Government has urged that Australia needs to do more to adapt to the ‘Asian Century’.22 Three of Australia’s top four trading partners—China, Japan, and the Republic of Korea—have systems of contract law that differ significantly from Australia’s. Table 2 sets out the key features of the legal systems of our major trading partners including the EU.
4.6 Differences in legal frameworks may lead to some international trade being priced out even when it would otherwise be the most efficient use of resources. This may be particularly significant to small and medium-sized businesses who cannot take advantage of economies of scale to lessen the costs involved.
4.7 A study analysing trade across OECD countries has found that—controlling for factors such as distance, a shared border and shared language—countries with legal systems of a common origin had, on average, 40 per cent larger trade flows than countries whose legal systems were unrelated.23 However, the study did not deal with contract law specifically, and some academic commentary disputes the importance of contract law as an obstacle to trade.24 Here again, more information about businesses’ experience would be extremely useful.
Differences in legal systems of some key trading partners
4.8 The framework for contract law in our trading partners varies considerably with a number of countries having embarked upon codifications or restatements of contract law in an effort to simplify and consolidate the principles that govern contractual disputes.
4.9 The United States (US), for example, has a largely codified system of contract law. The Uniform Commercial Code (‘UCC’) is a uniform statute applying in each of the 50 American states subject to a small number of ‘non-uniform amendments’ adopted on a state-by-state basis.25 The UCC applies to sales and commercial transactions with the objective of promoting uniformity in this area of law given the prevalence of interstate sales and commercial transactions. The UCC provides rules relating to key matters such as contract formation, implied terms, and termination.
Table 2: Australia’s major trading partners: trade and legal framework
|Country |Value |% of Aust |Official |Common |Civil |Codified |Key source of law | | |AUD |trade |Language |law jurisdiction|law jurisdiction |contract law| | | |billion | | | | | | | |United States |49.8 |9.0 |English |( |( |( |Uniform Commercial Code | |of America | | | | | | |Restatement of the Law | | | | | | | | |(Second) Contracts | |United Kingdom |22.6 |4.1 |English |( |( |( |Common law and various | | | | | | | | |specific subject matter | | | | | | | | |statutes | |Singapore |21.6 |3.9 |Mandarin English|( |( |( |Common law and various | | | | |Malay | | | |specific subject matter | | | | |Tamil | | | |statutes | |Thailand |19.8 |3.6 |Thai |( |( |( |Civil and Commercial Code |
4.10 In addition to the UCC, current US law has been guided by non-binding restatements of contract law promulgated by the American Law Institute.26 The United States Restatement of the Law (Second) Contracts, (‘the Restatement’), which was published in 1981, articulates general principles of contract law. The Restatement distils and harmonises common law jurisprudence to restate the principles and rules applicable under the common law, giving preferred solutions to areas which were previously matters of controversy. Despite its non-binding nature, the Restatement is considered highly persuasive and is generally treated with deference by judges considering contract disputes. 4.11 Although US contract law is recognisably derived from English common law, on several points US law is closer to civil systems. For example: there are limitations on when offers can be retracted at will; parties are under a duty of good faith and fair dealing in the performance and enforcement of contracts; and existing contracts can be modified without consideration.
4.12 In 1999 China enacted a nationally applicable unified Contract Law as part of a suite of reforms to Chinese civil law. China’s uniform Contract Law provides a consolidated statement of Chinese contract law. The uniform law is influenced by both civil and common law, and also by the international UNIDROIT principles (see Chapter 5).
4.13 Indian contract law is governed by the Indian Contract Act 1872. This Act codified English contract law as contained in common law principles though, in certain respects, it departed from and simplified the then applicable law. In 1950 Malaysia enacted the Contracts Act 1950 which is based on the Indian Contract Act.
4.14 The law of England and Wales is the leading example of a non-codified common law system. It is also the law of choice for many high-value international contracts. A recent survey of leading international companies indicated that 40 per cent of those companies most frequently chose English law as the proper law of the contract. English law was far ahead of the second most frequent choice—the law of New York—at 17 per cent.27 This may be partly due to the character of English contract law, although it also reflects the concentration of specialised expertise and infrastructure for commercial dispute resolution available in London.
4.15 While Australian contract law remains in many ways similar to English law, particularly in its common law fundamentals, other elements of Australian law now resemble US law. Equitable doctrines such as promissory estoppel—which are established in Australia and the US—have not been developed to the same extent in England. And in England, unlike Australia, there is no general statutory prohibition on misleading or deceptive conduct. This may explain why English law is attractive to high-end commercial users. However, it may be capable of producing harsh results in other domestic commercial settings.
To what extent do businesses experience significant costs, inefficiencies, difficulties or lost opportunities as a result of the differences between Australian and foreign contract law?
Responding to difficulties arising from different national systems of contract law, international projects have focussed on distilling internationally applicable contract law principles into binding and non-binding instruments. Prominent international organisations have been active in developing instruments relating to the international sale of goods and international commercial contracts. Projects within the European Union (EU) also illustrate new approaches to responding to problems faced by parties contracting across borders. These projects are significant to Australia because they hold the potential to reduce the costs and risks associated with international contracting.
United Nations Convention on Contracts for the International Sale of Goods
5.2 The United Nations Convention on Contracts for the International Sale of Goods28 (‘Vienna Convention’) provides uniform principles applicable to international sale of goods transactions. The Vienna Convention rules apply wherever a international contract for the sale of goods is concluded in the jurisdiction of a State Party to the Convention, or with a contractual party in that territory. The Convention also applies to contracts (even if they are not within this category) where the parties elect to be governed by its terms. However, the Convention does not apply to certain contracts, for example, contracts governing sales of goods to consumers or to contracts for services.
5.3 In Australia, State and Territory legislation implements the provisions of the Vienna Convention.29 Under this legislation, the Convention applies to international sales contracts unless the parties agree to exclude its application.30
5.4 The UNILEX database (an unofficial collection of case law) indicates that, as at February 2012, there have only been 12 cases which have considered the application of the Vienna Convention to contractual disputes before Australian courts. The paucity of case law may reflect the frequency with which parties opt out of the Vienna Convention. Some cases suggest that there is a lack of understanding about the operation of this international instrument in Australia.31
5.5 In 1980 the International Institute for the Unification of Private Law (‘UNIDROIT’) established an intergovernmental working group of contract law experts from a variety of domestic legal systems to prepare the UNIDROIT Principles of International Commercial Contracts (‘UNIDROIT Principles’). The Group’s objective was to develop internationally agreed principles of contract law to provide a framework for commercial contracts which would be acceptable to parties from different legal systems.
5.6 The UNIDROIT Principles are extensive and cover contract formation, content, interpretation, performance and remedies as well as matters relating to third party rights, assignment and limitation periods. The Principles are based upon a number of core principles including party autonomy, favor contractus (that is, a principle of preference for interpretations that will lead to the continuation and fulfilment of the contract rather than to termination), and good faith and fair dealing.
5.7 The UNIDROIT Principles are gaining influence in both the international and domestic contracting spheres. Although the Principles only apply with obligatory force where the contract provides for them to do so, they are increasingly used by arbitral tribunals and courts striving to determine the issues in dispute before them in accordance with principles of international best practice.32 In addition, the Principles have influenced reforms to domestic contract law in a number of jurisdictions, including Russia and China.
Developments in the European Union
5.8 The existence of significant differences between the private law systems of the 27 member states of the EU, including differences in their contract law, is an obstacle to the development of a truly seamless internal market in Europe. A number of measures have been taken to address this problem. The EU has issued minimum harmonisation directives establishing baseline requirements for all member states for certain types of contracts (such as consumer credit contracts) and in certain areas of contract law (such as unfair terms).
5.9 More ambitiously, the European Commission has sponsored the creation of a Draft Common Frame of Reference (DCFR). Published in 2009, this six-volume work contains model European rules of private law with a particular focus on contract law. Some legislators see the DCFR as forming the basis for a future European Civil Code, although there is significant resistance to such a project.
5.10 In October 2011 the European Commission proposed an opt-in Common European Sales Law. The Sales Law would exist in parallel to parties’ domestic systems of contract law and would apply to cross-border sales contracts where the parties agree to its application. Although the law as proposed would only be applicable for contracts for the sale of goods, the content of the law would include general contract law rules as well as specific sales-related provisions. Potentially the Sales Law could be extended to other types of contracts and perhaps evolve into a general European contract law.
Application of international principles of contract law by Australian businesses
5.11 Although empirical data is limited, there seems to have been relatively little use of the international principles by Australian business involved in making international contracts. Parties routinely opt out of the Vienna Convention,33 while the UNIDROIT principles have received relatively little attention in Australia outside academic circles.34 This may reflect a lack of familiarity with the international developments and general suspicion of legal principles which have their origin in civil law systems. These concerns need to be weighed against the benefits which could follow if Australia were to be an early adapter of the developing ‘international law of commerce.’ This might not merely reduce the costs involved in foreign trade but might also make Australia a more attractive venue for international commercial arbitration and litigation as well as giving Australian lawyers a greater ability to advise internationally.
What are the costs and benefits of internationalising Australian contract law?
OPTIONS FOR REFORM
Contract law reform is not an ‘all or nothing’ affair. There is a wide spectrum of possible options lying in between ‘no action’ and ‘radical overhaul’ and, even then, ranging from less to more far-reaching change. The pace of change is another variable; all desired reforms could be implemented in one legislative package, or more limited changes could be made as the first step to further reform in the future.
6.2 For the purposes of this paper, three possible approaches will be considered:
➢ restatement of the current law in a new form
➢ simplification of the current law in certain areas, and
➢ reform of the current law.
6.3 Although each of these options involves a type of reform, only the last constitutes ‘reform’ involving wide-ranging changes to the content of Australian contract law.
Spectrum of options for contract law reform
6.4 Broadly speaking, a restatement would seek to express the existing law in a single text without attempting to change the substance of the law except, perhaps, to resolve inconsistencies or a lack of clarity. A restatement could take the form of a non-binding US-style restatement or a binding codification. Such an approach would make sense if accessibility is prioritised as the major driver for reform. One issue to consider would be the extent to which a restatement or codification should seek to go into detail (lessening its accessibility) or should confine itself to high-level principles (which might undermine predictability).
6.5 Simplification would involve changes to the law to eliminate unnecessary complexity without attempting a general overhaul. An example of a relatively cautious form of simplification could involve national harmonisation on topics where there is non-uniform State and Territory legislation. Simplification could resolve lack of clarity in the common law, and abolish technical rules which are out of step with current commercial practice. While generally mirroring the content of the current Australian law, a binding or non-binding codification could incorporate some simplifications.
6.6 A more ambitious proposal would seek to reform the substance of contract law involving significant changes to its content. The law could be updated to respond to technological change and the growing prominence of e-commerce. If bringing our law of contract into line with international trends is considered desirable, inspiration could be taken from the UNIDROIT Principles or the contract law frameworks of our major trading partners. Reforms could be implemented without codification but the more far-reaching the reform the lower the cost of combining it with a general codification of contract law as a whole.
Which reform options (restatement, simplification or substantial reform of contract law) would be preferable? What benefits and costs would result from each?
ISSUES FOR IMPLEMENTATION
Regardless of the reform objectives prioritised and the position taken on the reform continuum, a number of practical questions regarding implementation will arise. These include: whether reform should distinguish between domestic and international contracts; whether reform should be based on an opt-in, opt-out or mandatory model; and the constitutional basis for reform.
Domestic or international contracts?
7.2 If the internationalisation of Australian contract law were considered to be a priority, it may be appropriate to limit the application of reforms so that they apply only to international contracts, at least initially. The new law could later be extended to deal with purely domestic contracts as well, if desired. This would limit initial transition costs for most users of contract law. Such an approach would have to be weighed against the increased complexity of having two separate systems of contract law in force.
Opt-in, opt-out or mandatory?
7.3 Reform proposals could be implemented on an opt-in, opt-out or mandatory basis.
7.4 The implementation of an opt-in model would minimise the risks involved in reform under this model, the reformed system would apply to contracts only where agreed by the parties; otherwise, contracts would be governed by the current law. Users of contract law would make their own assessment of the merits of the new rules. If an opt-in model can provide an effective way of reducing costs without compromising outcomes, parties may be inclined to use the new rules more and more over time.
7.5 An opt-in model does, however, have drawbacks. Large businesses with sizeable legal departments which conduct a significant amount of international business may be comfortable choosing between different contract regimes, but may be cautious about using something new. Small and medium sized businesses and individuals may be less likely to have the legal sophistication required to elect to use opt-in rules. It is also possible that the new rules may be neglected even if it is in parties’ interests to use them. Education would be necessary to give parties and practitioners the ability to assess the new rules on their merits.
7.6 An opt-out model could avoid these problems. In an opt-out model, new rules would apply to contracts governed by the law of an Australian State or Territory except where the contract excludes their application. Under such a model, the new rules are the default position, and are therefore more likely to apply to a broader range of contracts (although many small businesses use standard forms which may include opt-out clauses). This greatly increases the benefits of the changes if they work well, although this also means that the costs will be higher if the changes prove less just or economically efficient than the current system. Experience suggests that, unless awareness of the new rules is promoted, it is quite likely that there will be a high opt-out rate as is currently the case with the Vienna Convention.35
7.7 In a mandatory model, the new rules would apply to all contracts governed by the law of an Australian State or Territory to the greatest extent possible under the Australian Constitution. Mandatory implementation of the new rules, replacing the current system, would ensure the parties applied the new rules, maximising the possible benefit but also the possible risk. Mandatory reform would be most attractive if the reform was relatively small-scale or involved discrete areas of law, in which case having more than one system running in parallel could potentially be a waste of resources.
7.8 The Commonwealth Parliament has power to enact legislation which is supported by one or more ‘heads of power’ in the Constitution and is not prohibited by any constitutional limitation. There is no head of Commonwealth legislative power dealing specifically with contract law. However, there is a range of powers which may be relevant to the regulation of contracts including: corporations (section 51(xx)); trade and commerce (section 51(i)); telecommunications (section 51(v)); banking (section 51(xiii)); insurance (section 51(xiv)); bills of exchange (section 51(xvi)); copyright, patents and trademarks (section 51(xviii)); external affairs (section 51(xxix)); and territories (section 122).
7.9 Possible reform models covering all contracts could involve the cooperation of States and Territories either under a referral of power to the Commonwealth Parliament (section 51(xxxvii)) or through the enactment of model laws in all jurisdictions.
7.10 A non-binding Restatement of the present law in Australia has also been raised as a reform option. Such an instrument does not involve the exercise of legislative power, and could be prepared and published after widespread consultation without any constitutional issues arising.
How should any reform of contract law be implemented?
The Australian Government firmly considers that broad consultation with stakeholders is essential to the success of any reform proposal. This is particularly the case with law and justice sector reforms which have the potential to affect all Australians. Recent public debate about the need for reform to Australian contract law has brought to light some thought-provoking ideas which deserve greater attention. Your responses to the questions asked in this paper may also reveal new issues that have been given limited exposure to date.
8.2 We are interested in hearing viewpoints from all sectors of the economy and the general public as this project progresses. To give stakeholders an ongoing role in shaping the future of any contract law reform, we intend to:
➢ obtain ongoing input from stakeholders as the reform project develops
➢ maintain a webpage to provide more information about the project including future opportunities for consultation
➢ conduct a survey to obtain data about user experience with contract law and views about reform options, and
➢ convene a roundtable discussion to bring together key stakeholders to discuss the issues involved and possible reform options.
What next steps should be conducted? Who should be involved?
OUTLINE OF THE FEATURES OF AUSTRALIAN CONTRACT LAW ––ATTACHMENT
The principles of Australian contract law can usefully be considered under the broad themes of formation, content and scope, performance and termination, avoidance of obligations and ‘fair dealing’, remedies and alternative dispute resolution. Each of these themes is considered briefly below.
To form a valid (and enforceable) contract, the parties must have the legal capacity to enter into a binding agreement (constituted by an offer and acceptance). The parties must each provide consideration (an act, forbearance or promise forming the price of the contract); agreements which are not supported by consideration will not be enforceable under common law rules. However, there is an important exception to the consideration requirement: under the equitable doctrine of estoppel, a promise which is not supported by consideration may be enforceable if the other party has reasonably relied on it to their detriment.36
The agreement must be sufficiently certain and complete to be enforced in the courts, and the parties must have manifested the intention that their agreement be binding. Contracts must also sometimes meet particular formalities (usually imposed by statute) to be binding.37 The absence of any of these elements will signify either that there is no legally binding agreement between the parties, or that the agreement is not enforceable as a contract.
The specific requirements for each of these elements are largely governed by common law principles, but may be modified by statute in specific circumstances. For example, the legal capacity of minors to enter a contract is governed by statute in New South Wales.38
Content and scope
Contractual terms may be express or implied. Certain terms are compulsorily implied by law, independently of the parties’ intentions. Provisions in the Australian Consumer Law (incorporated as Schedule 2 of the Competition and Consumer Act 2010 (Cth)), as well as the Sale of Goods Acts in each of the States and Territories, for example, imply particular terms into contracts dealing with specific subject matter. One example of a term implied by law is that goods sold be of acceptable quality and fit for any disclosed purpose.
Interpretation of the terms of a written contract often plays a central role in contractual disputes in determining, for instance, whether particular acts or omissions will be held to constitute breach of contract. Because of the inherent ambiguities of language, interpretation is often a difficult task.
Australian law currently divides contractual terms into conditions, warranties and intermediate terms with only breaches of condition and sufficiently serious breaches of intermediate terms allowing for termination of the contract.39
As a general rule, the common law doctrine of privity means that only the parties to a contract will be bound by it (subject to exceptions and a number of statutory modifications in certain jurisdictions).40
Performance and termination
Contracts are most commonly discharged through performance by the parties of their contractual obligations. Several courts have found that parties must conform to standards of good faith or ‘fair dealing’ when performing their contractual obligations or exercising contractual powers,41 although the extent and nature of this obligation remains controversial under Australian law.
Contracts may be brought to an end in a variety of ways. The parties may discharge the contract by agreement. A party may terminate unilaterally in response to repudiation of the contract or a sufficiently serious breach of the contract by the other party. A contract is automatically discharged where the performance of the contract is frustrated by a supervening event beyond the parties’ control. In some jurisdictions legislation has been passed which affects the consequences of discharge of a contract by frustration.42
Avoidance of obligations and ‘fair dealing’
There are circumstances in which an Australian court will not hold a party to an agreement. Applying common law and equitable principles, Australian courts will not enforce contracts which lack a genuine ‘meeting of the minds’ of the parties. This means that a contract may not be upheld in certain circumstances involving a mistake, a misrepresentation or duress. While the common law traditionally enforced bargains regardless of power differentials between the parties, equitable doctrines may operate to set aside agreements in which one party has exerted undue influence over, or taken an unconscionable advantage of a special disability of, the other. Case law requires a basic level of fairness from contracting parties.
Over time, Australian statutes have become significantly more important than case law in this area. Statutory provisions establish broad requirements of fair dealing that are easier to prove and which allow a broad range of remedies. Examples include: • a general prohibition on misleading or deceptive conduct43 and false or misleading representations44 • prohibitions on unconscionable conduct45
• a provision providing that unfair terms in standard form consumer contracts are void,46 and • in NSW, statute also gives the courts power to review unjust contracts although the legislation does not apply to most commercial contracts.47
Contracts may also be void or unenforceable if they are made for an illegal purpose, for example, contracts to commit an illegal act or in restraint of trade.
Under the common law, damages will be available where a party proves breach of contract. The right to damages in the event of a breach of contract is independent of whether or not the contract is terminated.48 Damages at common law aim to put the party into the same position they would have been in had the contract been performed properly.49 Statutory damages may also be available where a contract has been affected by pre contractual conduct such as misleading and deceptive conduct or coercion.50
The contract may also provide for ‘liquidated damages’ via a contractual term providing for a set amount of damages to apply in the event of breach. Such terms are generally valid provided that the sum specified is not considered to constitute a penalty.51
At equity a party can also seek specific performance of the contract, or an injunction, against a defaulting party where common law remedies are inadequate to compensate the plaintiff.52 Equitable damages—also known as ‘Lord Cairns’ Act damages’—may also be available in some cases.53
Alternative dispute resolution
The vast majority of contract disputes are resolved without litigation—through negotiation or other alternative dispute resolution (ADR) processes. There are several types of ADR.
Commercial parties often choose arbitration as an appropriate way to resolve a dispute. In relation to international commerce, parties to the arbitration choose the venue, arbitrator, procedural rules and substantive law which will apply. This allows businesses to avoid the uncertainty of litigation in a foreign court system.
Other kinds of ADR which can be used in a contractual setting include mediation and conciliation (which can assist parties to maintain the continued commercial relationship) and expert appraisal (which may be useful where the dispute requires expertise in a specific area of fact or law).
1 D Kaufmann, A Kraay, and P Zoido-Lobatón, Governance Matters, World Bank Policy Research Working Paper 2196, October 1999, pp 15-16, available at info.worldbank.org/governance/wgi/pdf/govmatters1/pdf.
2 World Bank/International Finance Corporation, Doing Business — Economy Rankings, 2011, available at www.doingbusiness.org/rankings.
3 See, for example, Justice Paul Finn, ‘Symposium paper: The UNIDROIT Principles: An Australian perspective’, (2010) 17 Australian International Law Journal 193, p 193.
4 Attorney-General’s Department, A Strategic Framework for Access to Justice in the Federal Justice Civil Justice System: Report by the Access to Justice Taskforce, 2009.
5 M A Eisenberg, ‘The bargain principle and its limits’ (1982) 95(4) Harvard Law Review 741, pp 769-70.
6 Department of Broadband, Communications and the Digital Economy, National Digital Economy Strategy, 2011, available at www.nbn.gov.au/wp-content/uploads/2011/05/National_Digital_Economy_Strategy.pdf; Access Economics, Household E-commerce Trends and Activity in Australia, November 2010, available at www.dbcde.gov.au/__data/assets/pdf_file/0020/131951/Household ecommerce_activity_and_trends_in_Australia-25Nov2010-final.pdf; PricewaterhouseCoopers, The Economic Case for Digital Inclusion, October 2009, available a raceonline2012.org/sites/default/files/resources/pwc_report.pdf.
7 Australian Bureau of Statistics, Business Use of Information Technology 2007–08, 2010, Cat No.8129.0; Organisation for Economic Cooperation and Development, The Future of the Internet Economy — A Statistical Profile, June 2008, p 8.
8 D Robertson, ‘Symposium paper: Long-term relational contracts and the UNIDROIT Principles of International Commercial Contracts’ (2010) 17 Australian International Law Journal 185, p 186.
9 Lange v Australian Broadcasting Corporation (1997) 189 CLR 520 at 563; John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503; Farah Constructions Pty Ltd v Say-Dee Pty Ltd  HCA 22 at .
10 Justice Paul Finn, ‘Internationalisation or isolation: the Australian cul de sac? The case of contract’, in M Hiscock and W Van Caenegem (eds), The internationalisation of law: Legislating, decision-making, practice and education, 2010, p 160.
11 Conveyancing Act 1919 (NSW); Property Law Act 1958 (Vic); Property Law Act 1974 (Qld); Property Law Act 1969 (WA); Law of Property Act 1936 (SA); Conveyancing and Law of Property Act 1884 (Tas); Civil Law (Property) Act 2006 (ACT); Law of Property Act 2000 (NT).
12 See Sale of Goods (Vienna Convention) Act 1986 (Qld); Sale of Goods (Vienna Convention) Act 1986 (NSW); Sale of Goods (Vienna Convention) Act 1987 (Vic); Sale of Goods (Vienna Convention) Act 1987 (NT); Sale of Goods (Vienna Convention) Act 1986 (WA); Sale of Goods (Vienna Convention) Act 1987 (Tas); Sale of Goods (Vienna Convention) Act 1987 (ACT); Sale of Goods (Vienna Convention) Act 1986 (SA). See also section 68 of the Australian Consumer Law.
13 See, for example: Bills of Exchange Act 1909 (Cth), section 77; Carriage of Goods by Sea Act 1991 (Cth), section 11.
14 See, for example: Insurance Contracts Act 1984 (Cth), section 8; Contracts Review Act 1980 (NSW), section 17(3).
15 Bonython v Commonwealth (1950) 81 CLR 486, 498 per Lord Simonds.
16 Re United Railways of Havana and Regla Warehouses Limited  Ch 52, 91; Mendelson-Zeller Co Inc v T & C Providores Pty Limited (1981) 1 NSWLR 366, 368-9.
17 Electronic Transactions Act 1999 (Cth); Electronic Transactions Act 2000 (NSW); Electronic Transactions (Victoria) Act 2000 (Vic); Electronic Transactions Act 2001 (Qld); Electronic Transactions Act 2003 (WA); Electronic Transactions Act 2000 (SA); Electronic Transactions Act 2000 (Tas); Electronic Transactions Act 2011 (ACT); Electronic Transactions Act 2000 (NT).
18 Department of Foreign Affairs and Trade, Trade at a Glance 2011, 2011, p 2, available at www.dfat.gov.au/publications/trade/trade-at-a-glance-2011.html.
19 WTO online database and EIU Viewswire cited in Department of Foreign Affairs and Trade, Trade at a Glance 2011, 2011, pp 16-17.
20 Centre for International Economics, Benefits of Trade and Trade Liberalisation, 2009, cited in Department of Foreign Affairs and Trade, Trade at a Glance 2011, p 40.
21 Department of Foreign Affairs and Trade, Trade at a Glance 2011, 2011, p 4.
22 See, for example, J Gillard (Prime Minister), Australia in the Asian Century, media release, 28 September 2011, available at www.pm.gov.au/press-office/australia-asian-century; W Swan (Deputy Prime Minister and Treasurer), Budget Speech 2011-2012, 10 May 2011, available at www.budget.gov.au/2011-12/content/speech/html/speech.htm.
23 A Turrini and T Van Ypersele, ‘Traders, Courts and the Border Puzzle Effect’ (2010) 40 Regional Studies and Urban Economics 82.
24 J Smits, ‘Diversity of Contract Law and the European Common Market’, Maastricht Faculty of Law Working Paper 2005/9, available at arno.unimaas.nl/show.cgi?fid=3772.
25 Uniform Law Commissioners/American Law Institute, Uniform Commercial Code (US).
26 The Restatement (First) of Contracts was published by the American Law Institute in 1932.
27 Queen Mary University of London, 2010 International Arbitration Survey: Choices in International Arbitration, 2010, p 11, available at www.arbitrationonline.org/docs/2010_InternationalArbitrationSurveyReport.pdf.
28 The Convention was adopted in 1980 at a diplomatic Conference attended by 62 States and 8 international organisations. As at February 2012, there were 77 States Parties to the Convention.
29 See note 12.
30 United Nations Convention on Contracts for the International Sale of Goods, article 6.
31 See Perry Engineering Pty Ltd (Receiver and administrator appointed) v Bernold AG  SASC 15; Playcorp Pty Ltd v Taiyo Kogyo Ltd  VSC 108; Attorney-General of Botswana v Aussie Diamond Products Pty Ltd (No 3)  WASC 141.
32 A database of international cases and awards mentioning the UNIDROIT Principles has been established and can be accessed at www.unilex.info. It must be noted, however, that many arbitral awards remain confidential and as such details of them will not appear on such databases.
33 L Spagnolo, ‘The last outpost: Automatic CISG opt-outs, misapplications and the costs of ignoring the Vienna Sales Convention for Australian lawyers’ (2009) 10(1) Melbourne Journal of International Law 141, pp 159-60.
34 One notable exception is Justice Paul Finn of the Federal Court of Australia: see, for example, P Finn, ‘Internationalisation or isolation: the Australian cul de sac? The case of contract’, in M Hiscock and W Van Caenegem (eds), loc. cit.
35 L Spagnolo, loc. cit.
36 Walton Stores (Interstate) v Maher (1988) 164 CLR 387.
37 In New South Wales, for example, contracts for the sale of land must be evidenced in writing: Conveyancing Act 1919 (NSW), section 23C.
38 Minors (Property & Contracts) Act 1970 (NSW)
39 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 241 ALR 88.
40 The Insurance Contracts Act 1984 (Cth), for example, extends insurance contracts to third parties where the third party is specified or referred to as a person to whom the cover extends.
41 Renard Constructions (ME) Pty Ltd v Minsiter for Public Works (1992) 26 NSWLR 234 at 263
(Priestley JA); Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1; Burger King v Hungry Jack’s Pty Ltd  NSWCA 187; GEC Marconi Systems Pty Ltd v BHP Information Technology Ltd  FCA 40 (particularly paras -); cf Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289.
42 Frustrated Contracts Act 1978 (NSW); Frustrated Contracts Act 1959 (Vic); Frustrated Contracts Act 1988 (SA).
43 Australian Consumer Law, section 18.
44 Australian Consumer Law, Part 3-1, Division 1.
45 Australian Consumer Law, Part 2-2.
46 Australian Consumer Law, Part 2-3.
47 Contracts Review Act 1980 (NSW).
48 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 at 300.
49 Robinson v Harman (1848) 1 Ex Rep 850.
50 See, for example, Australian Consumer Law, section 236.
51 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd  AC 79.
52 See, for example, JC Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282; Wilson v Northampton and Banbury Junction Railway Co (1984) LR 9 Ch 279 (specific performance); Sky Petroleum Ltd v VIP Petroleum Ltd  1 WLR 576 (injunction).
53 See, further, Madden v Kevereski  1 NSWLR 305.