ContractLawDiscussionPaperAttorneyGeneralsDepartment

IMPROVING AUSTRALIAS LAW AND JUSTICE FRAMEWORKA discussion paper to explore the scope for reforming Australian contract law 2012 Commonwealth of Australia 2012All material presented in this publication is provided under a Creative CommonsAttribution 3.0 Australia (http:/creativecommons.org/licenses/by/3.0/au/deed.en) licence.For the avoidance of doubt, this means this licence only applies to material as set out inthis document.The details of the relevant licence conditions are available on the Creative Commonswebsite (accessible using the links provided) as is the full legal code for the CC BY 3.0 AUlicence (http:/creativecommons.org/licenses/by/3.0/legalcode).Use of the Coat of ArmsThe terms under which the Coat of Arms can be used are detailed on the Its an Honour(http:/www.itsanhonour.gov.au/coat-arms/index.cfm) website.Contact usInquiries regarding the licence and any use of this document are welcome at:Business Law BranchAttorney-Generals Department3-5 National CctBARTON ACT 2600Telephone: (02) 6141 6666copyrightag.gov.auISBN 978-1-921725-97-5FOREWORD BY THE AUSTRALIAN ATTORNEY-GENERALThe Australian Government is committed to improving Australias 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 systemsincluding those of our major trading partnersare 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 MPThe Australian Attorney-Generals Department invites you tocontribute to Australian law and justice reforms by makinga submission on this discussion paperThis 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:Assistant SecretaryBusiness Law BranchAttorney-Generals DepartmentRobert Garran Offices3-5 National CircuitBARTON ACT 2600E-mail: contractlawag.gov.auFax: 02 6141 3488All submissions will be treated as public and may be published on the Attorney-Generals 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-Generals Departments website (www.ag.gov.au) to access further related information and project updates.QUESTIONS FOR CONSULTATIONThe 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?CONTENTS1 Introduction12 Drivers for reform3Accessibility3Certainty3Simplification and removal of technicality3Setting acceptable standards of conduct4Supporting innovation4Maximising participation in the digital economy4Suitability for small and medium-sized businesses5Elasticity5Harmonisation5Internationalisation63 Challenges of Australian contracting7Origins of Australian contract law7Challenges arising from different sources of law7Applicable law and enforcement9Challenges relating to Internet contracting94 Challenges for international contracting11Australias current trading patterns11Possible obstacles to greater trading opportunities12Differences in legal systems of some key trading partners125 International approaches15United Nations Convention on Contracts for the International Sale of Goods15UNIDROIT Principles16Developments in the European Union16Application of international principles of contract law by Australian businesses176 Options for reform18Restatement19Simplification19Reform197 Issues for implementation20Domestic or international contracts?20Opt-in, opt-out or mandatory?20Constitutional issues218 Next steps221. INTRODUCTIONWe 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.11.3 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 Australias 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.2. DRIVERS FOR REFORMProposals 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 driversthat 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.Accessibility2.2 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.Certainty2.3 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.5Simplification and removal of technicality2.4 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 conduct2.5 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. Australias 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.Supporting innovation2.6 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 economy2.7 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 businesses2.8 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.Elasticity2.9 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.Harmonisation2.10 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.Internationalisation2.11 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.Question 1What 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?3. CHALLENGES FOR AUSTRALIAN CONTRACTINGThe 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 law3.2 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