Can you get out of a standard-form contract?

Since WHO announced a pandemic on 12 March of this year, the way many of us do business has completely changed.  We are paying close attention to our expenses, and drawing a line through goods and services we are no longer using and perhaps don’t see us needing in the future.  Perhaps like us, you’re discovering more efficient ways to run your business and won’t be going back to the ‘old ways’ even when we are ‘on the other side’ of this.

What is clear is that terminating an agreement for the supply of goods and services is never straightforward.  Take photocopiers, for example, you may no longer be working from your office where the copier is located, and have recently discovered that your clients are quite happy to have electronic rather than paper copies of their documents.  Here is an opportunity to cut costs and help the environment.  You’d therefore like to terminate your photocopier agreement.

Have you ever read your photocopier contract?  Talk about small print!  For those of you seeking an early termination of a supply contract, it’s unlikely you will find a simple clause in there that allows you to give 7 days-notice and hand over the redundant machine.  ‘But it’s a pandemic’, you may say, and ‘I have been closed down by the government!  Surely that means something?!  What about force majeure?’  Well, you may find a force majeure clause in the agreement allowing the supplier to terminate the contract because of forces beyond its’ control, but it is unlikely this clause is mutual!

Often your only recourse is either to:

  1. The Australian Consumer Law which prohibits unfair contract terms. If you are a small business and you entered into a standard form agreement with an upfront price payable of up to $300,000 (or up to $1 million if the contract term is greater than 12 months), you may be able to apply to a court to have certain terms of the contract you entered into declared unfair and accordingly, void.  By way of example, in 2018, the ACCC found that Servcorp’s unilateral termination clauses were void and Servcorp’s clients could seek redress for any loss; and/or
  2. The common law doctrine of frustration which allows the court to set aside contracts where an unforeseen event either renders contractual obligations impossible, or radically changes a party’s principal purpose for entering into the contract.

This is where we come in.  We can help you assess what avenues are open to you and how best to pursue them. If you’re in a bind, and you want to know if there is a way out, then call us on 1300 654 590 for a no-obligation chat. You can also read this article about ways to get out of a contract you wish you had never signed.

Going forward

What’s done may be done, but what can you do in the future to minimise contractual disputes with your suppliers?

Now you are aware of how difficult (and potentially expensive) it is to terminate supply contracts early, you need to put in place a policy that delegates someone in your business to manage those contracts.  Their responsibilities may include:

Developing a procurement guide: This may simply mean getting three quotes for the supply of a particular good or service or a more involved process including formal guidelines for tendering, budgets and approvals.

Actively considering the contract terms: In addition to the commercial terms of the contract, you must turn your mind to other terms including those dealing with rights of termination, warranties given by the supplier, liability for delays in the provision of services or faulty goods and the assumption of risk.

Actively managing the contract: If you have imposed obligations on your suppliers, such as requiring them to submit Certificates of Insurance on an annual basis or maintain certain licences, you must make sure these commitments are fulfilled and document the evidence of completion or advise the supplier of the breach.

Manage contract change: If the supply of goods and services change over the course of the relationship you should document and agree on the changes.

Address contract issues: All relationships have their issues.  Addressing these issues constructively and early on will prevent disputes from arising.

Stay on top of delivery performance: If the supply of goods and services are not what you expected, you must notify the supplier of delays in the provision of services and poor quality, faulty or damaged goods.  Failure to manage delivery performance may be interpreted against you as a waiver of your contractual rights.

Create a governance library: A governance library should contain a record of all communications associated with a contract over its lifecycle.  In the event of a dispute, it will help you support your claim.

Manage invoices: You must have a system of managing and verifying invoices so that they match your agreement.  This way discrepancies can be dealt with quickly before they escalate into conflict.

What should you do next?

If you have a supply contract that you wish to terminate, call us on 1300 654 590.  We can also prepare or review your supply contracts and negotiate changes, advise you about disputes and conduct litigation on your behalf.

A business that employees less than 20 people.

ACCC v Servcorp FCA 1044

The information contained in this post is current at the date of publishing – 28 April 2020

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There are a number of important issues that need to be considered when advising clients on buying or selling a business. Join Andrew Andreyev, Principal of Andreyev Lawyers on Thursday 29 October 2020 at 12:00pm – 1:00pm (AEDT) for this webinar on buying and selling a business.

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