Q&A: contract formation in Australia

Bizar Male

Contract formation

Good faith in negotiating

Is there an obligation to use good faith when negotiating a contract?

There is no general principle in Australian contract law to use good faith when negotiating a contract.

Australian courts have held that an express contractual obligation to negotiate a matter in good faith can be enforceable. However, an express obligation to negotiate in good faith needs to be drafted carefully to ensure the clause is capable of being given meaning.

A requirement to negotiate a contract in good faith has been imposed by law in select circumstances. The Franchising Code of Conduct requires the parties to a franchise agreement to act in good faith towards each other, including in negotiating the franchise agreement.

Although not a good faith obligation, it is important to note that legislation prohibiting misleading and deceptive conduct is also often relevant to contract negotiations. The Australian Consumer Law prohibits a person in trade or commerce engaging in conduct that is misleading or deceptive or likely to mislead or deceive. These laws apply regardless of the contract value or types of supplies. Silence can be misleading. Contract disputes between commercial parties often include claims that a party has been misled into entering a contract through inadequate disclosure of information during negotiations.

‘Battle of the forms’ disputes

How are ‘battle of the forms’ disputes resolved in your jurisdiction?

A battle of the forms scenario arises when each party is trying to impose its standard contract terms on the other party. For example, a supplier may issue a quote on the basis that its standard terms of sale will apply, and the purchaser issues a purchase order stating that its own standard terms of purchase will apply.

Under Australian law, a contract requires an offer and an acceptance. In the battle of the forms scenario described above, the purchaser’s order (on its own terms) will not constitute acceptance, as it is proposing different terms to those contained in the supplier’s offer. In many cases, parties will proceed with the supply and purchase of goods or services without it being clear whether there has been a contract formed and on what terms. Importantly, acceptance may be by conduct.

To determine when the contract was formed and on what terms, the court will consider the communications and conduct as a whole. In many cases, this will result in the court finding that the relevant terms are those in the last offer made, but this is not always the case. If a contract is found to have already been formed, terms contained in subsequent documents are unlikely to be sufficient to vary the agreement.

Language requirements

Is there a legal requirement to draft the contract in the local language?

No, there is no legal requirement to draft a contract in the local language, which is English.

Signatures and other execution formalities

In what circumstances are signatures or any other formalities required to execute commercial contracts in your jurisdiction? Is it possible to agree a B2B contract online (eg, using a click-to-accept process)? Does the law recognise the validity of electronic and digital contract signatures? If so, how are they treated in comparison to wet-ink signatures?

Yes, it is possible to agree a contract online. Electronic Transactions Acts are in force in each Australian jurisdiction, which support the ability to form online contracts.

A click-to-accept process can be effective in showing the contract has been formed. The parties are free to agree other ways of entering the contract. However, the party setting the terms and contracting process should ensure they can clearly show how the other party has agreed the terms.

Content is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee similar outcomes. For more information, please visit: www.bakermckenzie.com/en/disclaimers.

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