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By Alan Mitchell, Henry Materne-Smith and Sam Hannah

Contract disputes are increasingly common in our unpredictable world. What should you do when it looks like you are heading into a dispute? Being proactive can help you to potentially resolve the issue before it evolves into something bigger and protect your position if the situation escalates. We set out below key considerations for the early stages of a contract dispute.

1. Start with the contract – do you have the full picture?

As soon as a dispute looks possible, the first step is to ensure you have a clear and complete understanding of what has been agreed. Do you have the final copy of the agreement signed by both parties? Who or which entities are the parties? Have there been any amended contracts, variations, assignments, novations or related agreements that affect the original contract? Answering these questions may take some investigating, particularly for older contracts or where your business has been restructured.

You can then identify which issues may be contested and which clauses are relevant. Check for a governing law and jurisdiction clause and consider whether there are any exceptions to the types of claims that could be brought. What you find may reframe your desire to pursue or defend a claim in the first place.

2. Check for a dispute resolution or notification clause

Many commercial contracts set out a particular process for resolving disputes. If your contract has such a clause, the first step is to check whether it applies. Is “dispute” a defined term? Is it only applicable to certain disputes? And is the process compulsory?

If a dispute resolution clause does apply, you will need to consider what mechanisms apply to your dispute. Often there is a notification and negotiation process, which may be subject to strict time limits. Double check all the applicable deadlines. Drafting an effective dispute notification at the right time can be complex and it is worth seeking specialist advice. Some dispute resolution clauses may then require the parties to undertake alternative dispute resolution, such as mediation or arbitration.

The importance of compliance is heightened in a dispute situation and the process may influence who has leverage. Bear in mind that Australian Courts may stay a proceeding if it has been commenced in breach of a compulsory dispute resolution clause, which will depend on close analysis of the clause and issue in question.[1]

3. Review clauses on damages, limitations of liability, indemnities and exclusions

There could be other clauses throughout your contract which may be critical to resolving your dispute. Look out particularly for special terms about what damages a party can claim and other terms that allocate risk (such as a limitation of liability, indemnity or exclusions clause). If there are terms which mean a breaching party’s liability is excluded or significantly limited, you may also need to look at claims outside the terms of the contract (see tip 10 below).

4. Check the limitation period and beat the clock

The ability for a party to bring a claim under a contract is generally subject to a specific limitation period. Such limitation periods are found in legislation. They apply even if the contract is silent about it. For example, in Victoria, the general rule is that claims for breach of contract cannot be brought after the expiration of six years from the date on which the cause of action accrued.[2] If your dispute relates to something that happened years ago, seek legal advice to ensure you do not miss a limitation date.

A different time limit for bringing an action will apply if the agreement is in the form of a deed, as distinct from a contract. In Victoria, there is a 15-year time limit for bringing an action for breach of a deed (different time limits apply in other states).[3] A further difference in respect of a deed is that, while deeds do not require ‘consideration’ to be binding, in the absence of consideration equitable remedies will generally not be available for a breach.[4]

5. Ask yourself if you can keep the dispute narrow

Most contract disputes arise initially because one party believes that the other has not followed, or will not follow, a particular term of their agreement. However, what was initially a specific breach may become a continuing one or may lead to multiple consequential breaches. This is particularly so for commercial contracts that are to be performed over a period of time. It is worth asking at an early stage: can you get back on track? If the non-compliance has not yet happened, can you negotiate a solution in advance, such as a contract amendment? Remember that parties to commercial contracts generally have an implied duty to co-operate,[5] and in some cases there may be an implied duty to act in good faith (such as when exercising a right to terminate).[6] Alternatively, if the non-compliance has already happened, consider whether additional oversight and systems could be put in place to prevent further breaches. The narrower the dispute, the easier it will likely be to resolve.

6. Continue to comply with your own contractual obligations but seek legal advice

Do not assume that a contract is terminated as soon as one party breaches it or says that they are not going to perform it anymore. The agreement is still in effect. Depending on the circumstances, the compliant party may have a choice as to whether they elect to terminate the agreement or not.[7]

While the contract remains on foot, it is important to continue to comply with your own obligations under the contract, while seeking legal advice on how to respond. You should aim to avoid giving the other party scope to allege that you are also in breach. If you stop complying, you may be exposed to a counterclaim. In serious cases, the other party may argue that you repudiated the agreement (ie, showed an intention to no longer be bound) and the party originally in breach may then be able to terminate the agreement.[8]

There are, however, situations where continuing to perform your own obligations would create complex issues. A common one is where one party has been failing to comply with the agreement and the other party therefore does not want to make a required payment. If continuing to perform your own obligations could cause you loss, or if you anticipate a standoff, seeking legal advice at an early stage can guide your actions and put you in a significantly better position later.

7. Be careful with what you do (and do not) say

As the risk of a dispute rises, so too does the importance of communication.

Even if you continue to perform your side of the contract, do not stay silent about issues with the other party’s compliance. Apart from you potentially having dispute notification requirements (see tip 2 above), you do not want to inadvertently elect to affirm a contract, waive your right to terminate, or become ‘estopped’ from terminating, by not taking appropriate action following a breach. Notifying the other party of your concerns is therefore an important consideration.

If you are the party accused of breaching a contract, admitting fault or making concessions may create unnecessary obstacles for you to overcome later. Be careful what you put in writing, both to the other side and within your own business. If you are going to make any concession in an effort to resolve an issue, state that it is “without prejudice”, so that the admission cannot be used against you in Court later.

Communicating confidentially with your in-house lawyers or external legal firm will generally be protected by legal professional privilege. You generally cannot be forced to provide privileged emails or documents to the other party and it cannot be used as evidence in Court. By contrast, communications with the other party, and communications and documents shared within your business for operational or commercial purposes, generally are not afforded the same protection.

8. Be proactive about minimising your loss

If a party breaches a contract and the compliant party wishes to claim damages, the compliant party should take reasonable steps to mitigate losses stemming from that breach. You cannot walk away and allow objectively avoidable losses to pile up.[9] Damages will be reduced to the extent that loss was reasonably avoidable.

A recent example is Morabito v Kingston Industries Pty Ltd.[10] In this case, Ms Morabito (owner) leased an industrial warehouse and carpark to Kingston Industries (lessee), who used it for a machinery hire business. The owner alleged that the lessee’s heavy machinery damaged the concrete floor. The Court rejected that claim, but still considered the issue of damages. The owner wanted compensation for 18 months of lost rent after the lessee vacated the warehouse. However, the Court found that it was unreasonable that the owner delayed fixing the concrete and did not enter a new lease (despite offers being made) for 18 months. The owner should have promptly fixed the concrete and found a new tenant. Due to the owner’s failure to mitigate her loss, the Court would not have awarded damages for 18 months of lost rent.

9. Take accurate and detailed records

In the early stages of a dispute, it is even more important than usual to make contemporaneous, accurate and detailed records. What was initially discussed, all communications between the parties (particularly any variation requests) and actions taken in the lead up to or during the dispute could be crucial. What may be easy to gather now – things like original paperwork, receipts, work logs, diaries and text messages – may be lost or damaged in years to come. Collect it now and keep it safe. Such records can be essential for negotiations and a Court may be convinced that a contemporaneous note or document speaks for itself as to what actions were undertaken and whether they were reasonable.[11]

10. Consider claims outside the terms of the contract

Our first tip was to start with the contract, but it would be a mistake to stop there. Contracts are subject to legislation and other legal principles that could significantly affect your position. Here are a few examples to consider:

  • Misleading or deceptive conduct: Section 18(1) of the Australian Consumer Law provides that “a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”.[12] A contract cannot exclude liability for misleading or deceptive conduct under the Australian Consumer Law.[13]  The Victorian Court of Appeal recently considered a clause in a confidentiality deed that purported to release the disclosing party from any liability arising from the provision or non-disclosure of certain information. The Court held that the clause was unenforceable to the extent that it would preclude a party seeking damages for misleading or deceptive conduct.[14]
  • Unfair contract terms: Section 23(1) of the Australian Consumer Law provides that “a term of a consumer contract or small business contract is void if: (a) the term is unfair; and (b) the contract is a standard form contract”. If your dispute concerns a consumer contract or small business contract (as defined in the legislation), you will need to consider whether some of the rights in that contract are technically unenforceable.
  • Penalties: If a contract contains a clause that would impose a detriment on a party if that party breaches the contract or upon some other event, and the detriment imposed is out of all proportion to the interest being protected, the clause could be an unenforceable ‘penalty’.[15] This could be a key consideration if your contract contains a harsh agreed damages clause or repayment clause. For example, in a recent Queensland case, a lease and incentive deed appeared to give the landlord the right to recover a significant portion of the ‘fitout contribution’ that it had paid to its new tenant if the lease ended early due to the tenant’s default.[16]  However, when the landlord tried to exercise that right and demand repayment of almost $1 million, the Court refused to enforce the repayment clauses at all. They were unenforceable penalties.
  • Industry specific laws: Some sectors, such as energy, financial services and construction, also involve specific legislative rights or protections, or are subject to regulatory regimes. These may affect your contract or create rights outside of it.

Conclusion

It is important to be proactive when you first encounter trouble with a contract. The tips above will help to ensure that you are considering some of the important things from the start. Of course, these tips are general and every contract dispute has unique factual, legal and commercial aspects. It is never too early to seek legal advice on your contract, which could help to resolve or manage an issue before it evolves into a full dispute and guide you on how best to protect your position.

[show_profile name='Alan' surname='Mitchell' jobtitle='Partner, Melbourne' phone='+61 3 9288 1401' linkedin="https://www.linkedin.com/in/alan-mitchell-2789622/"]

 

 

 

 

 

 

 


[1] See, for example, Inghams Enterprises Pty Ltd v Hannigan (2020) 379 ALR 196; WCX M4-M5 Link AT Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd (No 2) [2022] NSWSC 505.

[2] Limitation of Actions Act 1958 (Vic) s 5.

[3] Limitation of Actions Act 1958 (Vic) s 5.

[4] 400 George Street (Qld) Pty Ltd v BG International Ltd (2012) 2 Qd R 302, [28].

[5] Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd (2015) 237 FCR 534, [130]-[141].

[6] Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558, [429]; Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd (2015) 237 FCR 534, [142]-[150].

[7] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115, [47].

[8] Mann v Paterson Constructions Pty Ltd (2019) 267 CLR 560, [165]-[166].

[9] Burns v M.A.N. Automotive (Aust.) Pty Ltd (1986) 161 CLR 653, 673-674; Motor Yacht Sales Australia Pty Ltd v Cheng [2021] NSWSC 1141, [172]-[175].

[10] Morabito v Kingston Industries Pty Ltd [2023] NSWSC 1020.

[11] See generally Queensland Bulk Water Supply Authority v Rodriguez & Sons Pty Ltd (2021) 393 ALR 162, [677]-[683].

[12] See Competition and Consumer Act 2010 (Cth) schedule 2.

[13] Viterra Malt Pty Ltd v Cargill Australia Ltd [2023] VSCA 157, [379], [499].

[14] Viterra Malt Pty Ltd v Cargill Australia Ltd [2023] VSCA 157, [451].

[15] Paciocco v Australia & New Zealand Banking Group Ltd (2016) 258 CLR 525.

[16] BMG SP Pty Ltd v YFG Strathton Pty Ltd [2023] QSC 52.


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