LexisNexis Practical Guidance®

Most contract disputes in the courts are concerned not with whether a contract has been formed, but with what the contract says regarding the rights and obligations it has created. This highlights the importance of clear and precise legal drafting. The interpretation of contracts primarily requires courts to determine the intention of the parties against the context and background of the contract’s formation.

The rules that courts use for this task are concerned both with deciding what terms have been incorporated into the contract (incorporation of terms) and what those terms can be understood to mean (construction of terms).

The express terms of a contract are those that have been expressly included by the parties. Where there is a dispute over the express terms of the contract, courts may need firstly to distinguish between terms and representations. The former (whether they are conditions or warranties) are legally binding constituent parts of the contract, whereas the latter are statements made prior to formation with a view to inducing a party to enter into the contract. Accordingly, they generally are not included in the contract. However, some representations may be treated as terms depending on their importance and the circumstance in which they were made. Breach of a term creates liability under the contract. A false representation may create liability under statute or in tort, despite not creating a liability under the contract.

Entire agreement clauses can be used to define and limit the extent to which this may occur.

See Express terms.

In deciding exactly what are the contents of a written contract, courts need firstly to deal with the parol evidence rule. In relation to the incorporation of terms, this rule states that nothing extraneous to the contractual document itself can be led as evidence to add to, subtract from or modify what the document actually says on its face. This fundamental rule gives certainty to written contracts. However, courts have acknowledged certain important exceptions to the rule.

Another fundamental rule relates to the importance of a signature on a written contract. The signature rule states that a signed contract is strong prima facie evidence that the signatory read, understood and approved of its contents. All the terms in the document are thereby incorporated into the contract. However, practitioners need to be aware of exceptions to this rule.

Terms may also be incorporated by the giving of notice. This takes on a special importance with terms that appear on signs and documents that may not appear contractual in nature and that purport to exclude or limit the liability of one or other party. Whether a term has been incorporated will depend on the timing and reasonableness of the notice.

Terms may also be incorporated by the nature and extent of any prior dealings between the parties.

A binding contractual obligation may be asserted and recognised by way of a collateral contract. This is a separate contract that is connected to the principal contract between the parties through consideration. Where one party relies on a promise in order to enter into the main contract, the promise may in some cases be enforceable as a binding separate contract even though it may not strictly speaking be a term of the principal contract.

See Incorporation of terms.

The rules of construction and contractual interpretation are subject to the parol evidence rule in the sense that a court will exclude extrinsic evidence that would have assisted the court in interpreting the contract. This relates primarily to evidence of pre-contractual negotiations and post-contractual conduct. Again, courts will recognise some exceptional situations. The main rules of construction relate to the use of an objective approach to ascertain the intention of the parties, and the treatment of ambiguities and inconsistencies.

The interpretation of terms that exclude or limit liability is governed by rules to determine the ordinary and natural meaning of the words used and the nature of the limitation or exclusion in light of the intention of the parties and the scope of the contract as a whole. It must also be kept in mind that terms dealing with the liability of the parties must be interpreted in light of any statutory prohibitions to exclude or limit liability of a party such as the Australian Consumer Law.

See Construction of terms.

The meaning of a contract should not be separated from the incorporation into it of terms by operation of law, custom or usage or the necessary facts of the case, regardless of any intention on the part of the parties. Courts will be prepared to imply a term into a contract where it is necessary to give effect to the parties' true intentions. Certain requirements will need to be established for that to occur. Similarly, a term may be implied because it is customary to do so in the context of the contract.

Some terms will be implied simply because of a long-standing common law rule or statutory prescription, especially where the contract belongs to a class of contracts in which the public interest must be protected. Finally, some contracts that require the parties to cooperate toward the performance of a contractual obligation may be subject to the implication of a term requiring good faith and honesty in the performance of that obligation.

See Implied terms.

Boilerplate clauses are contractual terms that deal with the interpretation and operation of a contract, rather than with its substantive content. The term itself has a varied history. In this regard, the following may be noted:

The term probably derives from the name given in the steel manufacturing industry to rolled plates of steel that were used for the mass production of steam boilers, a standard component of the ubiquitous steam engine.

However, newspaper editors in the early days of mass print also used pre-cast metal plates known as “boilerplates” to send media material that could be used repeatedly in different editions.

More recently, the term has been used in the information technology industry for generic units of writing with a variety of software applications.

The term “boilerplate” therefore implies something that can be rolled out for any or every occasion and that has a multiplicity of practical and standard uses. In contract law, the term is used widely to denote routine, standard or generic terms inserted into contracts, particularly between commercial parties, in order to clarify key terms and outline how the contract is to work and be understood. It typifies the ‘fine print’ in contracts that parties customarily ignore and leave to the lawyers.

However, the image of boilerplate clauses as generic or routine contractual provisions belies the fact that such terms are critical to the effectiveness of a contract. It also conceals the importance of drafting boilerplate clauses deliberately, rather than routinely, with customisation for each contract. This will of course depend on the interests of the commercial party requiring representation and protection. It may also depend on the jurisdiction in which the contract is formed or may be litigated. In many cases, routine insertion of standard boilerplate terms will be appropriate. However, it should be kept in mind that most contractual disputes in the courts are concerned with the proper construction of the contract and its terms. The presence or absence of clear and concise boilerplate provisions, customised for the contract at hand, is therefore sometimes crucial to the outcome of the dispute.

Often, boilerplate clauses simply restate established contract law principles and are not strictly necessary, other than to indicate the parties' intentions. Nevertheless, they are seen as dealing primarily with matters of construction, interpretation, operation, administration and definition. This covers a wide range of possibilities, with no clear agreement about, or authority for, exactly which terms qualify as “boilerplate”. It is perhaps useful to distinguish between:

• • those provisions that deal with interpretation of the contract (often inserted at the beginning); and
• • those provisions that deal with aspects of its operation (often placed at the end).

Below is a non-exhaustive list of common boilerplate provisions that deal with the interpretation and operation of contracts.

It is at times useful to specify the parties to a contract by way of a separate clause in order to eradicate doubt or confusion. This could be necessary where there are multiple parties or signatories, where joinder of parties is envisaged or where corporate or firm names need to be specified to comply with regulatory or court requirements.

See Parties.

Many commercial agreements employ the generic concept of “person” as a means of referring to any natural person or legal entity where the contract as a whole makes such a term convenient.

See Persons.

Many contracts make it clear that references to parties are gender neutral and that a reference to one gender includes the other. This avoids possible arguments that certain provisions apply to one party but not another based on gender.

A term is often inserted in commercial contracts to the effect that words denoting the singular include the plural (and vice versa). This is in order to render contracts easier to read without compromising their meaning. Sometimes, these matters are provided for jointly in one clause, although two separate clauses may be used.

See Gender, singular and plural.

The purpose of recitals is to set out necessary factual background to the agreement. It may be appropriate to include these in a contract. Care should be taken to avoid imbuing the recitals with contractual or promissory intent.

See Recitals.

The interpretation clauses usually state that any reference to time is a time in a certain time zone. Likewise there is usually a reference to what is “Business Hours” and what rule will apply if an obligation to perform occurs on a non-business day.

Reference to a “person” includes corporations, partnerships and unincorporated associations.

Long or complex contractual documents often provide for defined terms in order to avoid ambiguity and promote consistency of usage.

See Defined terms.

Lengthy contracts often use headings to distinguish the content of different terms and clauses. This aids the reader and makes the contract more comprehensible. However, a disclaimer is often inserted to clarify that the heading will not determine interpretation of the content.

A standard boilerplate clause provides that references in the body of the contract to clauses, schedules etc are references to clauses, schedules and other component parts of the contract at hand. Although considered by some as unnecessary, this provides clarity and obviates the need to identify the contract on each occasion.

See References to headings, clauses, schedules etc.

Many contracts specifically refer to what has been known as the ejusdem generis rule of interpretation. The rule states that where particular words are followed by general words, the general words are limited to the same kind or class as the particular words.

See General and particular terms.

The currency and its associated permitted symbols are usually stated for consistency in the interpretation clause.

Where agreements refer to statutes or subordinate legislation, it is not uncommon for a clause to be inserted expressing how the parties intend the agreement to be affected. Where no express term is used, a reference to legislation will be presumed to be a reference to it as repealed or amended.

See Amendment and replacement of legislation.

If a contract is to be signed in counterparts, a clause is often inserted to clarify that each counterpart is deemed an original and that together they constitute one instrument.

See Counterparts.

An applicable law or “governing law” clause in a contract is designed to determine by which law the contract will be interpreted and governed. In this way the parties may decide that substantive rights and obligations under the contract will be adjudicated according to a chosen body of law, rather than under default private international law principles.

See Applicable law.

The parties to a contract may agree to submit to the jurisdiction of the courts of a particular state or country. The submission is usually non-exclusive in order to provide for some flexibility in case the chosen court determines it does not have the requisite jurisdiction.

See Jurisdiction clauses.

Time of the essence clauses are sometimes regarded as boilerplate provisions although it is probably more correct to regard them as substantive terms that should be inserted only after careful consideration and appropriate instructions. Drafters of contracts may consider inserting a term that specifically limits, defines or negates the possibility of time being deemed essential.

See Time of the essence.

A dispute resolution clause sets out the preferred method, commonly mandatory as a first step, by which any dispute over the contract is to be resolved. It often involves alternative dispute resolution methods such as mediation or arbitration, and commonly requires the cooperation of a third-party expert.

See Dispute resolution.

A contract may require the parties, or one of them, to make certain efforts in order to fulfil the aim of the contract. Where the contract specifies such efforts, distinction may need to be made between endeavours that are “reasonable” and those that are “best”. Much will depend on the exact wording of the clause and on the jurisdiction in which the contract is to be enforced.

See Reasonable endeavours.

Many contracts provide that a party shall not assign or otherwise transfer any of its rights, interests or obligations to a third party without the prior written consent of the other party.

See Assignment and novation.

It is not uncommon for commercial contracts to contain a non-waiver or exercise of rights clause, the purpose of which is to ensure that a party has not, or is not deemed to have, given up or waived any of its rights, powers or remedies under the contract where it has not exercised such rights or done so only partially. A variant clause will provide no waiver can apply unless it is in writing.

See Waiver.

Where a provision or term in a contract is held to be unenforceable or invalid in a particular jurisdiction, a severance or severability clause allows the parties to agree that the term will be severed and that it will not invalidate the rest of the contract or affect the enforceability and validity of the term in another jurisdiction.

See Severance.

A no merger clause is common as a boilerplate provision at the end of an agreement. There will be no merger if the parties intended the contractual term to survive the merging event, hence a no merger clause is usual as a standard. A merger operates to extinguish the lesser of two estates or rights where there is a lesser right which coincides with some greater right and is subservient to that greater right, and title to the two rights or estates is merged.

A notice clause may be included in certain types of contracts to establish an agreed upon and valid mechanism for the giving and serving of notices and also for determination of whether and when the notices have been validly delivered.

See Notice.

Parties to a contract may agree to restrict or exclude completely the rights of third parties that are not a party to the contract itself from enforcing any interests they may expect to receive under the contract.

The extent to which such a boilerplate provision may assist in avoiding the effects of the privity rule will depend on a variety of factors.

See Rights of third parties.

This clause outlines how the parties apportion costs of drafting and negotiating the contract and which party, if any stamp duty applies, is obliged to pay for stamp duty.

Where a natural or man-made event occurs which is outside the control of parties to a contract and this affects the ability of at least one of those parties to perform obligations under that contract, a force majeure clause can offer clarity about how risk will be allocated.

See Force majeure.

A confidentiality clause in a contract would normally make it a breach of the contract for either or one party to disclose the terms of the contract or any of its terms, or to enable the unauthorised use or disclosure to third parties of information that the contract has identified as confidential.

See Confidentiality clauses.

Many commercial contracts are drafted to include “entire agreement clauses”, which are considered to be “boilerplate” provisions because they are often routinely used to deal with important aspects of contractual construction. It is true that entire agreement clauses frequently play a significant role when a court is deciding upon the effect of the contract as a whole, but practitioners should be aware of their pitfalls as well as their reputed strengths.

See Entire agreement.

Contracting parties frequently disagree over whether the contract has been finalised. Contract law addresses the finalisation or completion of a contract through the concept of discharge. A contract will effectively be completed for a contracting party if that party is discharged from any further obligations under the contract. Of course, that party may have certain rights under the contract if the other party has not fully discharged their contractual obligations.

Contractual obligations may be discharged by:

• • performance;
• • agreement;
• • breach; and
• • frustration.

Contracting parties may discharge their obligations primarily by performing the agreed terms of the contract. Disputes most commonly arise over whether the terms have been performed to the required level or standard, in the correct order, or at the right time.

Generally, contractual obligations are indivisible and must be performed in exact compliance with the terms. However, courts have recognized exceptions to the general rule. These include where deviation from exact performance is trivial, where the contractual terms are divisible, where there has been obstruction or partial performance, and where there has been substantial performance, in which event a court may allow payment for work done even if partly defective.

Whether a contracting party needs to perform first will depend on a proper construction of the contract, although default rules exist that govern the order of performance. This may depend on whether contractual obligations are independent, dependent or concurrent. Principles governing the situations where performance of any particular contractual obligation depends on cooperation between the parties should also be noted.

In relation to the time for performance, this will depend on a proper construction of the contractual terms. However, where no time has been expressly agreed, default rules apply in determining the reasonableness of the time.

See Performance.

Parties may discharge their obligations by way of agreement. This may be done by providing for such agreement in the contract itself, such as an express term providing for termination upon breach by either party, or by way of conditions precedent or subsequent.

If parties effectively abandon their contractual obligations by failing to attend to performance over an inordinate length of time or by indicating a mutual lack of intention to perform, courts may consider this to amount to agreement to discharge.

Parties are also free to agree to discharge their obligations at any time after contracting. This may involve termination of the original contract, its variation, or termination and substitution of a new contract. The new contract may be by way of a novation agreement or by merger. Particular principles apply in deciding whether any agreed variation, termination or new contract requires consideration and writing to be valid. This in turn may depend on whether the contract is executory or executed. In the latter case, the recognition by a court of any new agreement may be dependent on whether it amounts to an accord and satisfaction, conditional accord and satisfaction, or an accord executory.

The doctrine of waiver may apply in determining whether a party has lost their right to sue for breach of contract.

See Agreement.

Contractual obligations may be discharged when the contract is breached. This takes place when a party terminates due to breach by the other. However, whether termination is available or justified will depend on the circumstances and the nature of the breach.

Generally, termination will be an available option to a party where the other party has fundamentally failed to perform the contract as agreed, or where they have repudiated the contract in the sense of manifesting an absence of readiness or willingness to perform as agreed. Discharge for breach, either of a general or specific kind, may be provided for in the original contract.

Otherwise it will be activated by a failure to perform, but only where the innocent party elects to terminate because of the breach. Whether that party is entitled to terminate depends on the nature of the term that has been breached. This will in turn require satisfying the requirements of breach of a condition or a serious breach of an intermediate term. Breach of a warranty will generally not be a ground for termination.

Breach of a time provision in a contract will generally be regarded as a breach of intermediate term at common law and under statute. The right to terminate for breach of a time provision will generally be available only where there has been at least a serious breach of intermediate term and a valid notice to complete has been served upon the party at fault.

A contract may be breached by its repudiation, which may take place in a variety of ways. Repudiation means one of the parties displays an unwillingness or inability to perform. Where notice in advance is given of repudiation, this may amount to anticipatory breach, which gives the innocent party the right to terminate immediately (subject to the restrictions on termination).

The act of termination must be clear and unequivocal and manifested by a conscious election. Both parties are thereafter discharged from further contractual obligations and the party not at fault may be able to sue for damages. However, regard should be had to situations where a party with a prima facie right to terminate for actual breach or repudiation may be precluded from terminating the contract.

A party that is aggrieved by termination who suffers the loss of property (such as a deposit on the purchase of land) may qualify for protection through the equitable doctrine of relief against forfeiture. This generally requires the terminating party to have acted in an unconscientious way.

See Breach.

Frustration means the contract is no longer capable of being performed as agreed because an intervening event outside of the parties’ control has rendered performance of the contract radically different from what was intended. It requires evidence of an intervening event that significantly changes the nature of the outstanding obligations and rights, was not caused by the contracting parties, was not anticipated by the contract or reasonably contemplated by the parties, and would render performance of the contract unjust in the circumstances.

Certain kinds of intervening event have been recognised by courts as amounting to frustration, although the objective circumstances will be decisive. Depending on jurisdiction the consequences of frustration may be governed by common law or statute.

See Frustration.