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1 Assistant Secretary Business Law Branch Attorney-General s Department Robert Garran Offices 3 5 National Circuit BARTON ACT July 2012 Dear Assistant Secretary, IMPROVING AUSTRALIA S LAW AND JUSTICE FRAMEWORK: Reforming Australian Contract Law The Australian Corporate Lawyers Association (ACLA) is pleased to submit its response to the Discussion Paper issued by the Attorney-General s Department on Improving Australia s Law and Justice Framework, which explores the scope for reforming Australian contract law. ACLA agrees with the Government s assessment that Australia s system of contract law does perform well by international standards. That said, like many, ACLA believes that there is room for improvement and therefore welcomes and supports the Review. ACLA is the peak body for in-house lawyers (lawyers working for businesses and governments) in Australia. ACLA has close to 4000 members working across 2,000 organisations ranging from the ASX top 100 and equivalent through to start ups. As the actual conduits of legal practice in the business/government environment, ACLA members are at the coal face of contract law application in this country. This puts ACLA in a unique position to comment on the law and its application. Accordingly, in addition to this submission, ACLA believes input from the in-house legal profession throughout the reform process is vital to ensure practical and effective reform that enhances Australia s business and government operations. ACLA has sought the views of our members in relation to the broad scope of the Review. As stated at the beginning of this introduction, ACLA supports the Review process and has specific comments to make at this time. However, on behalf of our members, we urge that care be taken to ensure that any new contract law regime brings greater efficiency and certainty to business and government entities and can be implemented simply and with low cost. This submission contains three parts: 1. A summary of key ACLA comments, 2. Priority reform agenda, and 3. Response to the questions raised in the discussion paper. While this submission is a whole of membership perspective, I would like to acknowledge the following people who significantly contributed to its development. 1. The Hon. Andrew Roger QC, former Chief Judge of the Commercial Division of the NSW Supreme Court and current Patron of the NSW Division of ACLA 2. Rowena McNally, National President of The Institute of Arbitrators and Mediators Australia and Chair of ACLA s Professional Issues Committee 3. Damian Lovell, Vice President, Litigation, BHP Billiton 4. Adrian Goss, Corporate Counsel, ACP Magazines Limited and National Vice President, ACLA Should you have any questions about our submission, please contact Tony de Govrik on Kind regards Trish Hyde Chief Executive Officer Australian Corporate Lawyers Association ABN / 620 Bourke Street Melbourne VIC P a g e

2 1. Summary of key ACLA comments ACLA s key comments are: a) ACLA recognises that the scope of the Review is broad in nature to encourage a wide range of views to be gathered. We have not tried to anticipate what these views may be in our submission, but rather wish to note that, given our expertise in practical application of the law in business and government environments, we would welcome the opportunity to assist in the assessment of reform ideas in relation to their real-world impacts on certainty and efficiency. For example, creating a separate class of trader for small businesses may seem an appropriate mechanism to address perceived balance of power issues. However, defining small business creates many complexities, such as in relation to the aggregation of corporate groups what happens if the business grows does the contract have to be renegotiated? b) ACLA supports initiatives that will bring greater certainty to Australian contract law, whether by means of harmonisation or otherwise. ACLA recognises that efficient and just systems of contract law play a central role in successful economies. ACLA also recognises that contract law upholds basic standards of fairness in people s commercial dealings with each other. c) ACLA believes the basis for any reform should include: 1. Harmonisation across Australian jurisdictions, with consultation on which jurisdiction s laws would apply to ensure the most appropriate law for ensuring efficiency and certainty is adopted. 2. Removal of ambiguities, such as what material can be used when interpreting written contracts, to provide certainty for all parties business, government entities and consumers. 3. Simplification of the contracting process to make it easier to do business (entering into, managing and terminating contracts). The result should not create a larger, more complex legal environment, as we have seen occur within the taxation environment. 4. Centralisation so that contract law is accessible in one location. There would need to be significant consideration of the means of attaining this end. 5. Flexibility so that we do not lose the important ability to adapt to new circumstances. 6. Consideration of how to provide Australian businesses with a competitive advantage across multiple jurisdictions, not just with today s leading trading partners, but with tomorrow s as well. 7. Continuity of recent reforms, so that the investment organisations have made in compliance is not wasted. 8. A focus on accessibility and comprehension so that the regulation of commercial relationships enables businesses and government entities to operate efficiently and with certainty, and engage with their trading partners (including consumers) in an open and transparent manner. d) While in the course of the reform process ACLA may be persuaded otherwise, we are not yet convinced that a strong enough case exists for statutory codification of Australian contract law or for the adoption of a commercial code akin to the US Uniform Commercial Code. e) The purpose of any contract is to give effect to the intention of the parties and judicial interpretation of contracts accounts for a large part of the time taken up in the Court process when contracts become the subject of litigation. It has been suggested to ACLA that a way to mitigate this problem could be to include an optional short statement of intention of the parties (no more than a few bullet points) as a preamble to a written contract. Should the common intention of the parties not be found in the words of the contract then the Court might rely on such a statement to order rectification of the contract. 2 P a g e

3 2. Priority reform agenda ACLA believes that harmonisation should be the first priority of any reform agenda and that it will have both local and international trading benefits. As noted in the Discussion Paper, harmonisation of the laws across States and Territories could better facilitate trade between parties in different Australian jurisdictions. It will also make trading with Australia easier. Differences in contract law between jurisdictions increase the risks and costs associated with cross-border transactions. Australian contract law differs between Australian jurisdictions in several areas due to the existence of non-uniform Commonwealth, State and Territory statutes, with the consequential imposition of additional costs and the lessening of predictability. The Discussion Paper highlights some of the legislative areas where differences arise, including the various property and sale of goods legislation, the operation of the Australian Consumer Law, laws governing the legal capacity of minors to contract and the ability of third party beneficiaries to enforce contracts. In addition to this, there are also differences resulting from case law in different jurisdictions. ACLA strongly recommends that harmonisation across all Australian jurisdictions be the initial focus of any reform. Because of the differences that have come about by Commonwealth, State and Territory statutory intrusion into Australian contract law, the following areas should be examined as part of any reform proposals in order to bring a degree of uniformity to Australian contract law: Third party rights under a contract Proportionate liability Requirement for contracts to be in writing Implied contractual duty of good faith Use of extraneous evidence in interpreting contracts Capacity of minors to contract Operation of the doctrine of frustration Sale of goods legislation Operation of the Australian Consumer Law Assignment of contractual rights The treatment of unfair contract terms ACLA would be pleased to provide further elaboration in relation to any of the above areas if required. 3 P a g e

4 3. Response to the questions raised in the discussion paper The Discussion Paper raised eight questions in relation to the review. ACLA addresses each of these as follows: 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? ACLA regards the lack of uniformity across the various Australian jurisdictions, as a result of statutory intrusion, to be the main problem experienced by users of Australian contract law. We therefore consider harmonisation of contract law, ahead of other issues such as codification and internationalisation, as the primary driver for contract law reform in Australia. We do not consider that there are any other immediate drivers for reform. That said, we are open to considering others views that arise from this consultation process, including looking at some form of restatement or codification if a convincing case can be made that does not created added burden to conducting commercial relationships. 2. What costs, difficulties, inefficiencies or lost opportunities do businesses experience as a result of the domestic operation of Australian contract law? Inefficiencies flow from the intrusion of inconsistent Commonwealth, State and Territory statutes into general Australian contract law. As noted in the Discussion Paper, legislative provisions affecting general contract law can be found in unexpected places - particularly in the area of property law. Consequently, there may be a general lack of awareness of, and misunderstandings about, some significant statutes even within the legal profession, let alone the broader business community. This can obviously affect costs associated with the preparation, interpretation and enforcement of a contract as advice may need to be sought from legal practitioners in other jurisdictions more familiar with a particular jurisdiction s legislation. 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? There have already been some significant advances in relation to electronic contracting most notably through the various Commonwealth, State and Territory Electronic Transactions Acts. There is often commentary about the risks consumers face in online transactions. However, ACLA recommends caution in looking at isolated extreme behaviour as the basis for reform. To the extent that existing principles of contract law can be shown to not adequately address electronic contracting, there may be some merit in considering further, uniform statutory intervention that appropriately balances consumer and business interests. 4. To what extent do businesses experience costs, difficulties, inefficiencies or lost opportunities as a result of differences between Australian and foreign contract law? ACLA is not aware of any particular difficulties, disadvantages or lost trading opportunities arising out of differences between Australian and foreign contract law. That is not to say that none exist but by and large contracts are dealt with according to the governing law and arbitration clauses agreed to by the parties and by relevant international conventions. 5. What are the costs and benefits of internationalising Australian contract law? While the internationalisation of Australian contract law might reduce the costs involved in foreign trade and might also make Australia a more attractive venue for international commercial arbitration and litigation, there are also significant potential risks that could have a damaging effect on trade. Depending on the approach taken, the potential for internationalising Australian contract law to create significant costs for business and government entities is high. For example, if the UN Convention on the Sale of Goods was adopted into Australian Contracting Law our entire domestic trading system would be changed. For example, the ability to return goods not fit for purpose would be removed. The cost of adjustment to business operations, let alone contracting, would be significant. Without knowing the approach being considered, the costs and benefits of internationalising Australian contract law are difficult to assess. 4 P a g e

5 It is ACLA s view that Australian contract law has relatively little impact on international trade and that any reform of Australian contract law should focus on delivering better outcomes for those involved in domestic transactions. Accordingly, at this stage of the reform process, ACLA recommends against the pursuit of the internationalisation of 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? ACLA would support any proposal that has the effect of simplifying or providing greater certainty to contract law. Harmonisation of laws would go a long way towards achieving this objective without the need for codification. We are not yet convinced that a strong enough case exists for statutory codification of Australian contract law or for the adoption of a commercial code akin to the US Uniform Commercial Code. 7. How should any reform of contract law be implemented? The Discussion Paper notes that the Commonwealth Parliament has power to enact legislation which is supported by one or more heads of power in the Constitution and is not prohibited by any constitutional limitation. It further notes that there is no head of Commonwealth legislative power dealing specifically with contract law. For reasons of maintaining uniformity and in order to address the potential for any constitutional challenge, ACLA would prefer to see a clear referral of power by the States and Territories to the Commonwealth Parliament under Section 51(xxxvii) of the Constitution rather than by other forms of co-operative federalism such as through the enactment of model laws in all jurisdictions a method which has not proved entirely satisfactory in other areas of law reform. Should, of course, a non-binding restatement of the present law in Australia be adopted as the preferred reform option, then the question of a referral of powers to the Commonwealth does not arise. 8. What next steps should be conducted? Who should be involved? ACLA expects that any level of reform of Australian contract law will take time to achieve and that further public consultation will be required. ACLA, as a major stakeholder representing the in-house legal profession who in turn advise business and government entities, wishes to have an ongoing role in shaping the future of any contract law reform. Accordingly, ACLA would be pleased to remain involved and to contribute at every stage of the reform process. In particular, ACLA would welcome any invitation to participate in future working parties or consultative groups that may be set up by the Attorney-General s Department to further the Review process. 5 P a g e

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