Effects of Statues on Commercial Relationships

Statutes are laws made by parliament, which can affect commercial relationships in several ways. These include:

Making contracts and/or contract clauses void or illegal;
Imposing terms & obligations on parties; and
Forming grounds to sue & transferring the rights to those grounds to third parties.

Contracts and/or Contractual Provisions Void or Illegal

Depending on the type of statute, contracts can be void, illegal or certain provisions within a contract can be deemed void.

Void Contracts

General principles – void contracts:

1. Arise out of a failure to satisfy requirements contained in a statute;
2. are usually unenforceable;
3. do not have to be illegal to be void;[1] and
4. usually do not allow you to make a claim against the person who breached the contract.

Example: Statutes can set pre-requirements which have to be fulfilled before a contract comes into force. If the requirements have not been satisfied, the contract may be void and unenforceable.

The Property Law Act 1969 (WA) at s34 states that no interest in land can be transferred without a written agreement. If two parties enter into an agreement for the sale/purchase of land verbally, whilst the agreement is not illegal, it would be unenforceable because of the requirement under s34.

Illegal Contracts

General principles – a contract is illegal if:

• It is expressly or impliedly prohibited by statute (“illegal as formed”).[2]
  This can occur where the statute prohibits the performance or the formation of the contract.[3]

   

  Example: s45 of the Australian Consumer Law deals with anti-competitive contracts and clauses. In effect, it prohibits the formation of contracts or the inclusion of clauses within a contract that lessens trade competition within a market, and any such contract would therefore be deemed illegal; or

• It is contrary to public policy and interest (“illegal as to performance”);[4]
  Illegality as to performance occurs where the contract itself is not illegal, however the manner of performance of the contract is forbidden or the purpose is unlawful.[5]

  Example: s9 of the Building Act 2011 (WA) provides that no building is to be constructed without a building permit. If two parties enter into a contract for the building of a structure in which, whether expressly or impliedly, they agreed to proceed with the performance without obtaining the permit required by s9, the contract would be illegal as to performance.

Void Provisions

Provisions of a contract can be deemed void if a statute expressly prohibits those provisions.

Example: s12C(1) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) states that any clause contained within a lease which requires a tenant to open the retail shop the subject of the lease at specified hours or specified times is void.

Imposing Terms & Obligations
Statutes can affect commercial relationships by creating obligations or imposing implied terms into contracts.

Examples:

• Statutes can direct parties to do or refrain from doing certain acts
  s76 of the Australian Consumer Law which obliges the seller to notify consumers both prior to entering into an ‘unsolicited consumer agreement’ (i.e. telephone or door-to-door sales), and after in writing, of their right to terminate the agreement within 10 business days pursuant to s82(1) of ACL.

   

  If the seller fails to comply with s76 and notify the consumer of their termination rights, then s82(d) of ACL extends the termination period from 10 business days to 6 months from the date the agreement was entered into and the consumer is entitled to terminate the contract within that timeframe.

• Statutes can impose implied terms into contracts
  Certain sections of the Australian Consumer Law provide a list of guarantees which apply in the course of supplying goods or services. The most commonly used example is guarantees of fitness for a disclosed purpose. This same guarantee is implied through the Sale of Goods Act 1985 (WA) at s14.

  The Australian Consumer Law goes a step further in Subdivision C (s64) where it expressly states that these guarantees cannot be excluded out of contracts.

Giving Rise to Causes of Action & Inferring to Third Party

A statute can give rise to causes of action separate to those available in a commercial relationship and infer the rights to bring those causes of action on third parties.

s588F of the Corporations Act 2001 (Cth) allows a liquidator of a company to bring claims for recovery of unfair preferential payments made to creditors of that company (commonly referred to as ‘clawbacks’) for the six months preceding the date on which the company went into liquidation.

Example: a company enters into contract with a supplier for supply of goods and then goes into liquidation. Despite the contract being between the company and the supplier, and the obligations arising under that contract only binding them, the mere existence of the contract in the circumstances may be enough for the Liquidator to bring a claim against the Supplier for recovery of preferential payments made by the Company.

Statutes are not the only thing impacting the enforceability of and obligations formed under contracts. There are also other matters to consider when entering into a contract such as common-law (“judge made”) implied terms. This is why it is crucial to know your rights and obligations before making a long term, or even short term, contractual commitment. Make sure you get the correct legal advice from solicitors experienced in the area of contract law.

[1] J W Carter, Carter on Contract (LexisNexis Australia, 2010) at [27-001].
[2] Stephen Graw, An Introduction to the Law of Contract (Thomson Reuters, 7th Ed, 2012), 434.
[3] Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, 413.
[4] Above, n 2.
[5] Above, n 3.

Introducing the Parties

To have a guarantee and indemnity, you need three parties: Party One, Party Two, and a third party which can be a Guarantor and/or Indemnifier.

• Party One The person who enters the contract with Party Two. Party One has the power, assets, or money needed by Party Two. They can be, for example, a landlord, bank, or seller of a business.
• Party Two The person seeking something from Party One. This can be, for example, a lease, loan, or money to buy a business.
• Guarantor A Third Party who guarantees the fulfilment of any contractual obligations owed by Party Two to Party One. A Guarantor can be an individual, company, or an unrelated third party.
• Indemnifier A Third Party (who is usually the same party as the Guarantor) who agrees to compensate Party One for any losses, damage, and claims suffered because of the actions of Party Two. Like Guarantors, an Indemnifier can be an individual, unrelated third party, or company.

Void Contracts

General principles – void contracts:

1. arise out of a failure to satisfy requirements contained in a statute;
2. are usually unenforceable;
3. do not have to be illegal to be void; and
4. usually do not allow you to make a claim against the person who breached the contract.