17 May Learn With Us: Boilerplate clauses. Jenny Mee, Partner, K&L Gates INTRODUCTION

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1 17 May 2016 Learn With Us: Boilerplate clauses Jenny Mee, Partner, K&L Gates Copyright 2016 by K&L Gates. All rights reserved. INTRODUCTION 1

2 WHAT IS A BOILERPLATE CLAUSE? Boilerplate is any text that is or can be reused in new contexts or applications without being greatly changed from the original (Wikipedia) In contract law, the term "boilerplate language" describes the parts of a contract that are considered standard (Wikipedia) klgates.com 3 ETYMOLOGY Wikipedia: "Boiler plate" originally referred to the sheet steel used to make boilers The analogy between the curved steel used to make water boilers and curved metal used to print prepared text was based on: the curved shape of the plate; and the fact that it had been prepared elsewhere before being incorporated into a downstream producer s finished product In the field of printing, the term dates back to the early 1900s klgates.com 4 2

3 EXAMPLES OF BOILERPLATE CLAUSES General clause at the back, covering (eg): Governing law and jurisdiction Notices Entire agreement Further assurances No waiver Severability Contra proferentum (no adverse interpretation) Standard definitions and interpretation provisions Other standard clauses eg force majeure, termination, insurance, etc klgates.com 5 AGENDA FOR THIS SESSION Entire agreement clauses Set-off clauses No waiver clauses klgates.com 6 3

4 DISCUSSION Why aren t they in every contract? Why aren t they common law rules? klgates.com 7 GOALS FOR THIS SESSION Understand: the purpose of each clause common wordings (and differences) the law behind each topic the extent of, and limits on, their enforceability examples and results from case law klgates.com 8 4

5 ENTIRE AGREEMENT CLAUSES CLAUSES This Agreement contains the entire understanding between the parties concerning the subject matter of the Agreement and supersedes, terminates and replaces all prior agreements and communications between the parties. This agreement states all the express terms of the agreement between the parties in respect of its subject matter. It supersedes all prior discussions, negotiations, understandings and agreements in respect of its subject matter. klgates.com 10 5

6 PURPOSE OF CLAUSE Inntrepreneur Pub Co. v East Crown Ltd (2000 English case) to preclude a party to a written agreement threshing the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim klgates.com 11 klgates.com 12 6

7 IS THE CLAUSE ATTEMPTING TO COVER Express terms? Implied terms? Prior agreements? Pre-contractual representations? klgates.com 13 ENTIRE AGREEMENT CLAUSES: EXPRESS TERMS 7

8 IS THE CLAUSE ATTEMPTING TO COVER Express terms? Implied terms? Prior agreements? Collateral contracts? Pre-contractual representations? klgates.com 15 EXPRESS TERMS Exclude other express terms main purpose of clause What if the contract does not contain an entire agreement clause? To what extent will the clause change the legal position? klgates.com 16 8

9 EXPRESS TERMS NO ENTIRE AGREEMENT CLAUSE Parol evidence rule not just verbal klgates.com 17 PAROL EVIDENCE RULE Gordon v McGregor (1909, High Court) adopted and approved 19 th century English formulation: where parties agree to embody, and do actually embody, their contract on a formal written deed, then in determining what the contract really was and really meant, a court must look to the formal deed and to that deed alone. klgates.com 18 9

10 PAROL EVIDENCE RULE Codelfa Construction Pty Ltd v State Rail Authority (1982, High Court) The broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument. klgates.com 19 PAROL EVIDENCE RULE What the contract really was vs what the contract really meant Parol evidence rule: Excludes extrinsic evidence in determining the meaning of words used in the written contract Sometimes (but not always) interpreted to exclude evidence of the existence of other terms klgates.com 20 10

11 PAROL EVIDENCE RULE State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986, NSW Supreme Court) [Under the parol evidence rule,] parol evidence is not admissible to contradict or vary the terms of a written agreement. But it is a rule whose scope and rationale is often misunderstood. It has no operation until it is first determined that the terms of the agreement are wholly contained in writing klgates.com 21 PAROL EVIDENCE RULE Codelfa Construction Pty Ltd v State Rail Authority (1982, High Court) It is not without significance that the parol evidence rule has never been applied so as to exclude evidence of a condition, non-fulfilment of which goes to the existence or validity of the contract. klgates.com 22 11

12 klgates.com 23 PAROL EVIDENCE RULE Hope v RCA Photophone of Australia Pty Ltd (1937, High Court) When parties express their agreement in writing they do so for the purpose of securing certainty and preventing disputes. They may choose to leave their arrangements to the risks and chances of verbal evidence. But if they have recourse to writing for the purpose of recording their agreement, they cannot afterwards change their attitude and, by seeking to give parol evidence, introduce the very element of uncertainty which the adoption of writing was intended by both parties to exclude It is true that there are exceptional cases where the parties to a contract have not expressed all the terms of their contract in writing and, accordingly, parol evidence is admitted to complete the written contract. klgates.com 24 12

13 EFFECT OF ENTIRE AGREEMENT CLAUSE Hope v RCA Photophone of Australia Pty Ltd (cont) In the present case, however, the parties have made an agreement in express terms which prevents either of them supplementing the written terms. Clause 27 provides that the agreement as set forth in the document: contains the entire understanding of the respective parties with reference to the subject matter hereof and there is no other understanding agreement warranty or representation express or implied in any way binding extending defining or otherwise relating to the equipment or the provisions hereof on any of the matters to which these presents relate. klgates.com 25 EFFECT OF ENTIRE AGREEMENT CLAUSE Hope v RCA Photophone of Australia Pty Ltd (cont) The presence of this clause makes it unnecessary to discuss whether the defendant might, upon some amendment of his plea, be allowed to allege and prove the existence of a supplementary term that the equipment was to be new equipment. klgates.com 26 13

14 RECTIFICATION What if a term was clearly left out by mututal mistake? Rectification? klgates.com 27 RECTIFICATION Hope v RCA Photophone of Australia Pty Ltd (cont) The law is not incapable of dealing with a case where the parties have intended to make an agreement in particular terms, but, by a mutual mistake in the expression of their agreement, have executed a document including different terms or omitting a term which they had intended to include. In such a case a court of equity can, upon the facts being clearly proved, rectify the document to make it accord with the true intentions of the parties klgates.com 28 14

15 RECTIFICATION MacDonald v Shinko Australia Pty Ltd (1999, Queensland Court of Appeal) ENTIRE AGREEMENT This Agreement constitutes the entire agreement of the parties as to its subject matter and supersedes and cancels all prior arrangements, understandings and negotiations in connection with it. Held that the equitable remedy of rectification operated outside a contract and despite the parol evidence rule klgates.com 29 EXPRESS TERMS CONCLUSION Formal written document: Likely to be difficult to establish other express terms anyway (but not impossible) Entire agreement clause may make it more difficult Unlikely to exclude rectification remedy klgates.com 30 15

16 ENTIRE AGREEMENT CLAUSES: IMPLIED TERMS IS THE CLAUSE ATTEMPTING TO COVER Express terms? Implied terms? Prior agreements? Pre-contractual representations? klgates.com 32 16

17 IMPLIED TERMS Sources of implied terms: Term implied in fact because of the factual circumstances of the case Terms implied by law: from the nature of the contract from statute Terms implied by custom klgates.com 33 TERMS IMPLIED IN FACT BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977, Privy Council) Must satisfy each of the following conditions: it must be reasonable and equitable it must be necessary to give business efficacy to the contract (such that no term will be implied if the contract is effective without it) it must be so obvious that it goes without saying it must be capable of clear expression it must not contradict any express term of the contract klgates.com 34 17

18 TERMS IMPLIED IN LAW Terms implied by the common law Terms implied by statute klgates.com 35 TERMS IMPLIED IN LAW Terms implied by the common law eg implied duty of a landlord to give the tenant quiet enjoyment of the premises eg implied term that a contractual obligation should be performed within a reasonable time if the contract does not specify a deadline eg implied term that professional services will be rendered with reasonable care eg implied duty of co-operation (each party must do all things necessary to enable the other party to have the benefit of the contract) klgates.com 36 18

19 TERMS IMPLIED BY STATUTE Examples of terms implied by statute: Sale of goods Conveyances Leases klgates.com 37 TERMS IMPLIED BY STATUTE Excludable vs non-excludable terms Implied terms vs other sources of legal rights eg statutory consumer guarantees under Australian Consumer Law eg common law rights of termination klgates.com 38 19

20 ENTIRE AGREEMENT CLAUSES Do entire agreement clauses generally intend to exclude all of those sources of implied terms? If so, are they effective in doing so? klgates.com 39 ENTIRE AGREEMENT CLAUSES An entire agreement clause will not generally prevent the court from implying a term unless the agreement expressly excludes the implication of that term Requires clear words klgates.com 40 20

21 IMPLIED TERMS Hart v MacDonald (1910, High Court) Contract for sale of a dairy plant the price of the machine shall be s., payable to me as follows: You to consign all butter produced by your own cows, and manufactured within the factory, to an approved agent in Sydney, you giving authority in writing to hand proceeds of sales to me, less 10 per cent. for working expenses. Interest at the rate of 6 per cent. per annum to be paid on unpaid balance after factory has been started six months. Implied obligation to carry on a dairy business? klgates.com 41 IMPLIED TERMS Hart v MacDonald (1910, High Court) Effect of entire agreement clause? It is to be understood that there is no agreement or understanding between us not embodied in this tender and your acceptance thereof. klgates.com 42 21

22 IMPLIED TERMS Hart v MacDonald (cont): It was urged that [the entire agreement clause] excluded implications. But that is not so. It excludes what is extraneous to the written contract: but it does not in terms exclude implications arising on a fair construction of the agreement itself, and in the absence of definite exclusion, an implication is as much a part of a contract as any term couched in express words. klgates.com 43 IMPLIED TERMS BAE Systems Australia Ltd v Cubic Defence New Zealand Ltd (2011, Federal Court) Implied duty of co-operation/prevention principle? Effect of entire agreement clause? klgates.com 44 22

23 IMPLIED TERMS BAE Systems Australia Ltd v Cubic Defence New Zealand Ltd (cont) assuming for the purposes of argument that the prevention principle and the duty of cooperation may be excluded by express words of a contract, those words would need to be very clear before a court held that that result had been achieved. The words of cl 1.4 are not so clear as to achieve that result. It seems to me that cl 1.4 precludes reliance on representations, statements, advices or information extraneous to the contract, but not implied terms of the nature alleged by the applicant. klgates.com 45 IMPLIED TERMS 1.4 Entire Agreement This Contract, as varied from time to time, is an exhaustive statement of the parties contractual obligations and supersedes and replaces all statements, representations or possible undertakings that were the subject of discussion or correspondence between the parties, or that occurred during the tender process, prior to signing this Contract. To the extent permitted by law, any representation, statement, advice or information provided by the Prime Contractor, whether negligent or otherwise, is not actionable by the Subcontractor unless it is included as a term of this Contract. klgates.com 46 23

24 EXCLUSION OF IMPLIED TERMS Clear words to exclude specific statutory terms: The covenants, powers and provisions implied in leases by sections 84, 84A, 85 and 86 of the Conveyancing Act do not apply to this Lease. klgates.com 47 EXCLUSION OF IMPLIED TERMS Are these words clear enough? Each party excludes from this Agreement all conditions, warranties and terms implied or imposed by statute or general law, except any condition, warranty or term the exclusion of which would: contravene the statute or general law which imposed or implied it; or cause this clause to be void. klgates.com 48 24

25 EXCLUSION OF IMPLIED TERMS What about these? To the fullest extent permitted by law, all warranties implied by common law or statute are excluded from this Agreement unless expressly included. However, if any part of this Agreement is unlawful, unenforceable or invalid, that part is to be treated as removed from the Agreement, but the rest of the Agreement is not affected. To the extent permitted by law, we give no condition, warranty or undertaking, and we make no representation to you, about the condition or suitability of [product], its quality, fitness for purpose or safety, other than those set out in this contract. klgates.com 49 IMPLIED TERMS CONCLUSION Generally need very clear words to exclude implied terms Do the parties really want to do this? Do they understand what they might be excluding? Be aware of what terms may be implied, particularly by statute klgates.com 50 25

26 ENTIRE AGREEMENT CLAUSES: PRIOR AGREEMENTS IS THE CLAUSE ATTEMPTING TO COVER Express terms? Implied terms? Prior agreements? Pre-contractual representations? klgates.com 52 26

27 PRIOR AGREEMENTS supersedes prior agreements Generally aimed at where the negotiations may be considered to be final at an earlier point eg prior oral agreement klgates.com 53 PRIOR AGREEMENTS Prior formal written agreements? Always ask/check! Which agreements concern the same subject matter? Specifically reference/carve-out if unsure Termination of prior agreements Effect of termination savings and transitional provisions? klgates.com 54 27

28 ENTIRE AGREEMENT CLAUSES: PRE-CONTRACTUAL REPRESENTATIONS IS THE CLAUSE ATTEMPTING TO COVER Express terms? Implied terms? Prior agreements? Pre-contractual representations? klgates.com 56 28

29 PRE-CONTRACTUAL REPRESENTATIONS Not contractual terms (whether of main contract or collateral contract) But may still have some legal effect: Misrepresentation under common law Estoppel by representation Misleading or deceptive conduct klgates.com 57 PRE-CONTRACTUAL REPRESENTATIONS Misrepresentation under common law: False statement of material fact made in order to induce the other party to enter into the contract Remedy of rescission (not contractual damages) May also be remedies in tort (eg negligence) Estoppel by representation Misleading or deceptive conduct Section 18 Australian Consumer Law Statutory remedies klgates.com 58 29

30 COMMON LAW MISREPRESENTATION Alman and Benson v Associated Newspapers (1980 English case) Standard entire agreement clause could not preclude plaintiff from seeking rescission or claiming damages in tort But suggested that such liability could be excluded by a clause acknowledging that the parties had not relied on any representations in entering into the contract klgates.com 59 COMMON LAW MISREPRESENTATION Arnot v Hill-Douglas (2006, NSW Supreme Court) It is quite possible to exclude reliance on representations, but the present clause is not strong enough to do so Clause in that case: 35.3 ENTIRE AGREEMENT To the extent permitted by law, in relation to the subject matter of this contract, this contract: (a) embodies the entire understanding of the parties; and constitutes the entire terms agreed on between the parties; and (b) supersedes any prior written or other agreement between the parties. klgates.com 60 30

31 NO RELIANCE CLAUSES Each party acknowledges that, except as expressly stated in this Agreement, that party has not relied on any representation, warranty or undertaking of any kind made by or on behalf of another party in relation to the subject matter of this Agreement. No party has relied on any statement by any other party not expressly included in this agreement. No reliance is to be placed by the Contractor on any representation, promise or other inducement made or given or alleged to be made or given by the Principal prior to the Execution Date. klgates.com 61 NO RELIANCE CLAUSES DISCUSSION What if the other party knows that the first party is relying on a pre-contractual representation? Can they exclude equitable remedies? Can they exclude liability for misleading or deceptive conduct? klgates.com 62 31

32 KNOWLEDGE OF RELIANCE? Quest 4 Finance Ltd v Maxfield (2007 English High Court): The maker of a misrepresentation would only be protected by a non-reliance clause if it could show that it believed the other party had not relied on representations outside the agreement. klgates.com 63 ESTOPPEL The essence of the principle of equitable estoppel is equity s concern with circumstances in which a plaintiff has acted to its detriment on the basis of a fundamental assumption where the defendant s role in the adoption of that assumption by the plaintiff is such that it would be unconscientious to deny the plaintiff equitable relief. klgates.com 64 32

33 ESTOPPEL Franklins v Metcash (2009, NSW Court of Appeal) an entire agreement clause [that] specifically denies efficacy to all previous negotiations and representations, could not overcome an equitable estoppel, once established. An entire agreement clause might create a factual difficulty in the way of proof of the elements of equitable estoppel, most obviously, proof of inducement or reliance However, it does not create an insuperable obstacle of principle... klgates.com 65 MISLEADING OR DECEPTIVE CONDUCT Section 18 of the Australian Consumer Law A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. Not just consumers! Can this be excluded by contract? klgates.com 66 33

34 MISLEADING OR DECEPTIVE CONDUCT Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987, Federal Court) whatever effect [entire agreement and non-reliance clauses] may have in respect of an action for breach of contract, there is now abundant authority in this court that they do not operate to defeat a claim under s 52 [forerunner of s18 ACL] klgates.com 67 MISLEADING OR DECEPTIVE CONDUCT Campbell v Backoffice Investments Pty Ltd (2009, High Court) of itself, neither the inclusion of an entire agreement clause in an agreement nor the inclusion of a provision expressly denying reliance upon pre-contractual representations will necessarily prevent the provision of misleading information before a contract was made constituting a contravention of the prohibition against misleading or deceptive conduct by which loss or damage was sustained. klgates.com 68 34

35 MISLEADING OR DECEPTIVE CONDUCT But is the clause evidence that the other party was not misled in fact? whether conduct is misleading or deceptive is a question of fact to be decided by reference to all of the relevant circumstances, of which the terms of the contract are but one. (Campbell v Backoffice Investments) klgates.com 69 MISLEADING OR DECEPTIVE CONDUCT Re HIH Insurance Ltd (in liq) (2016, NSW Supreme Court) Misleading and deceptive financial statements Plaintiffs acquired shares on a market distorted by this conduct rather than proving direct reliance on those financial statements Indirect causation available and direct reliance not required klgates.com 70 35

36 ENTIRE AGREEMENT CLAUSES UNFAIR CONTRACT TERMS? UNFAIR CONTRACT TERM? A term of a consumer contract is void if the term is unfair and the contract is a standard form contract section 23 Australian Consumer Law will soon also apply to small business 2013 ACCC Report: Unfair Contract Terms: Broadly drafted clauses that seek to absolve a business of responsibility for statements they, or their agents, make to consumers may be unfair. klgates.com 72 36

37 ENTIRE AGREEMENT CLAUSES: CONCLUSIONS Express terms In a formal written agreement, likely to be difficult to establish other express terms anyway (but not impossible). Entire agreement clause may make it more difficult Unlikely to exclude rectification remedy Implied terms Generally need very clear words to exclude implied terms Do the parties really want to do this? Do they understand what they might be excluding? Be aware of what terms may be implied, particularly by statute klgates.com 74 37

38 Prior agreements Prior formal written agreements? (Always ask/check!) Which agreements concern the same subject matter? (Specifically reference/carve-out if unsure) Termination of prior agreements (Effect of termination savings and transitional provisions?) Pre-contractual representations May exclude common law misrepresentation, but need a non-reliance clause (not just an entire agreement clause) Unlikely to be able to exclude equitable estoppel Cannot exclude misleading or deceptive conduct, although clause may assist in showing that the person was not in fact misled klgates.com 75 ENTIRE AGREEMENT CLAUSES ADVISING CLIENTS When preparing, reviewing or negotiating a contract: Ask questions about surrounding circumstances whether or not such a clause is included When advising in a dispute: Don t assume that clause is entirely effective Clause itself may be an unfair contract term klgates.com 76 38

39 SET-OFF WHAT IS SET-OFF? The reduction of a claim by deducting the amount of a valid countervailing claim The right of a debtor to balance mutual debts with a creditor klgates.com 78 39

40 NO SET-OFF CLAUSES No right of set-off Unless this Agreement expressly provides otherwise, a party has no right of set-off against a payment due to another party. klgates.com 79 NO SET-OFF CLAUSES Loan agreement: All payments to be made by the Borrower under this Agreement will be made without set-off or counter-claim and free and clear of any withholding or deduction for any Tax, unless prohibited by law. Guarantee: The Guarantor agrees to make any payment due hereunder upon first written demand without set-off or counterclaim Lease: The Tenant must pay all amounts due under this Lease to the Landlord free of deductions and with no right of set-off. klgates.com 80 40

41 SET-OFF CLAUSES Lease (tenant-friendly) The Lessee may set off against any Rent due under the Lease, any amount owed by the Lessor to the Lessee, including any amount owed as a result of any damage to the Lessee s property caused by the Lessor. klgates.com 81 SET-OFF CLAUSES Construction contract: Set-off The Principal may deduct or set off from any amount due and payable from the Principal to the Contractor under or in connection with this contract or the Works, any amount due and payable from the Contractor to the Principal under or in connection with this contract or the Works. klgates.com 82 41

42 SET-OFF CLAUSES Construction contract: The Superintendent shall, within 14 days after receiving such a progress claim, issue to the Principal and the Contractor: (a) a progress certificate ; and (b) a certificate evidencing the Superintendent s assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract. The Principal shall within 7 days after receiving both such certificates pay to the Contractor the balance of the progress certificate after setting off such of the certificate in paragraph (b) as the Principal elects to set off. klgates.com 83 SET-OFF OR NO-SET OFF CLAUSE? Do you need a no set-off clause (to exclude setoff that would otherwise exist)? Or do you need a set-off clause (to confer a right that would not otherwise exist)? klgates.com 84 42

43 SET-OFF OR NO SET-OFF CLAUSE? Are you the party likely to receive payments? no set-off clause Are you the party likely to have to make payments? set-off clause klgates.com 85 SET-OFF OR NO SET-OFF CLAUSE? A no set-off clause may effectively contract out of rights of set-off under civil procedure or other legislation mere absence of a set-off clause won t do this A set-off clause may expand the circumstances in which set-off is available and the nature of those rights klgates.com 86 43

44 SET-OFF OR NO SET-OFF CLAUSE? No set-off clauses are not intended to remove debtor s rights to bring a claim Debtor can still bring a cross-claim Usually aimed at cash-flow, prompt payment (pay now, complain later) klgates.com 87 WHAT IS THE LAW OF SET-OFF? 44

45 TYPES OF SET-OFF National Australia Bank Ltd v Idoport Pty Ltd (2007, NSW Supreme Court): Set-off is of at least 6 different categories Each has its own basis and peculiarities Can raise very complicated questions of law klgates.com 89 TYPES OF SET-OFF 1. Common law: set off of debts on the same or connected accounts [Note: most other authorities say that there is no common law of set-off, outside statute, equity or agreement] 2. Civil procedure legislation: set off of unconnected debts by way of defence Was position in Australia: generally until 1969, through adoption of English Statutes of Set-Off (18 th century statutes); repealed in 1969 (possibly in error) and following that, in Supreme Court (through the interpretation of Supreme Court Act and Rules to have this effect) until 1984 (when Rule repealed) Re-introduced in NSW in 2005 by section 21 Civil Procedure Act klgates.com 90 45

46 TYPES OF SET-OFF 3. Miscellaneous statutory: Eg section 54(1) Sale of Goods Act 4. Equity: Permitted in a wider range of circumstances 5. Insolvency: Section 553C Corporations Act; section 86 Bankruptcy Act klgates.com 91 TYPES OF SET-OFF 6. Contractual: Where parties have agreed in a contract to allow set-off Few reported cases of contractual set-off Cases dealing with other categories (procedural setoff) of no assistance when considering contractual set-off Contractual set-off is equivalent to payment klgates.com 92 46

47 TYPES OF SET-OFF In summary, main sources of set-off: Statutory Civil procedure Insolvency/bankruptcy Other miscellaneous Equity Contract klgates.com 93 SET-OFF UNDER VARIOUS STATUTES 47

48 CIVIL PROCEDURE ACT 2005 (NSW) 21 Defendant s right to set-off (1) If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set off against the plaintiff s claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set-off was filed, whether or not the mutual debts are different in nature. (3) This section does not apply to the extent to which the plaintiff and defendant have agreed that debts (whether generally or as to specific debts) may not be set off against each other. (4) This section does not affect any other rights or obligations of a debtor or creditor in respect of mutual debts, whether arising in equity or otherwise. (6) In this section, debt means any liquidated claim. klgates.com 95 SALE OF GOODS ACT 1923 (NSW) 54 Remedy for breach of warranty (1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods, but the buyer may: (a) set up against the seller the breach of warranty in diminution or extinction of the price, or (b) maintain an action against the seller for damages for the breach of warranty. klgates.com 96 48

49 CORPORATIONS ACT 2001 (CTH) 553C Insolvent companies mutual credit and set-off (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent. klgates.com 97 BANKRUPTCY ACT 1966 (CTH) 86 Mutual credit and set-off (1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy: (a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings; (b) the sum due from the one party shall be set off against any sum due from the other party; and (c) only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he or she had notice of an available act of bankruptcy committed by that person. klgates.com 98 49

50 SET-OFF UNDER CIVIL PROCEDURE LEGISLATION CIVIL PROCEDURE ACT 2005 (NSW) 21 Defendant s right to set-off (1) If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set off against the plaintiff s claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set-off was filed, whether or not the mutual debts are different in nature. (3) This section does not apply to the extent to which the plaintiff and defendant have agreed that debts (whether generally or as to specific debts) may not be set off against each other. (4) This section does not affect any other rights or obligations of a debtor or creditor in respect of mutual debts, whether arising in equity or otherwise. (6) In this section, debt means any liquidated claim. klgates.com

51 CIVIL PROCEDURE ACT 2005 (NSW) Cf section 22: Defendant s right to cross-claim 22 Defendant s right to cross-claim (1) Subject to subsection (2), the court may grant to the defendant in any proceedings (the first proceedings) such relief against any person (whether or not a plaintiff in the proceedings) as the court might grant against that person in separate proceedings commenced by the defendant for that purpose. (2) Relief may not be granted under this section against a person who is not a plaintiff in the first proceedings unless the relief relates to, or is connected with, the subject of the first proceedings. (3) A person against whom a defendant makes a claim for relief under this section: (a) has the same rights in respect of his or her defence against the claim as he or she would have in separate proceedings commenced against the person by the defendant, and (b) if not already a party to the first proceedings: (i) becomes a party to the first proceedings, and (ii) unless the court otherwise orders, is bound by any judgment (including a judgment by consent or by default) or decision (including a decision by consent) on any claim for relief in the proceedings (including a claim for relief in any cross-claim in the proceedings). klgates.com 101 CIVIL PROCEDURE ACT 2005 (NSW) Section 21: Broad right of set-off Applies to debts (defined as liquidated claims) Cf claim for damages Debts may be different in nature Debts may arise from different transactions Creditor may want to limit the breadth of this (eg to debts under the same contract), if not exclude it altogether Preserves equitable set-off Also applies to debts/agreements pre-dating Act, unless court orders otherwise see savings and transitional provisions klgates.com

52 LIQUIDATED CLAIMS Section 21 applies to debts (defined as liquidated claims) Cf unliquidated claim for damages Contractual set-off clauses also typically refer to amounts due can this extend to an unliquidated claim for damages? The expression money due is not apt to describe a claim which, as regards liability, has not yet been determined, and, as regards quantum, has not yet been ascertained Wulguru Heights Pty Ltd v Merritt Cairns Constructions Pty Ltd (1995,Queensland) klgates.com 103 LIQUIDATED CLAIMS Contract may provide for conversion of damages claims to liquidated amounts eg if works are not performed as specified, Principal can have rectification work carried out by others and the cost is a debt due from the Contractor Contractual set-off clause: may specifically provide for amounts claimed for unliquidated damages to be set off but may be contentious if effectively allows creditor to be both judge and jury! klgates.com

53 CONTRACTING OUT Section 21: Can contract out of it (eg no set-off clause) Might it still be desirable for a party to have a contractual set-off clause? Would a contractual set-off clause, that reflects the same conditions as this section (eg mutual liquidated claims etc), confer additional rights? klgates.com 105 PROCEDURAL SET-OFF Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd (1980, NSW Court of Appeal) Southern and Stehar owed equal amounts to each other (unrelated transactions) Scheme of arrangement between Southern and unsecured creditors (including Stehar) included clause prohibiting a creditor from commencing or continuing any action or proceeding against Southern Debt recovery proceedings by Southern against Stehar Question: Could Stehar plead set-off by way of defence? klgates.com

54 PROCEDURAL SET-OFF Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd (cont): held: Stehar could not plead set-off by way of defence Prohibited by terms of scheme of arrangement Right of set off under Supreme Court rules procedural only one means of bringing conflicting claims to a single adjudication Only if the rules governing set-off work an automatic discharge do they cease to be procedural Claiming to set off a sum of money is still commencing a proceeding against the company, and this was prohibited by the scheme of arrangement klgates.com 107 PROCEDURAL SET-OFF Effect: Set-off under civil procedure legislation takes effect as at the date of judgment and separate and distinct debts remain until that time Cf contractual set-off: automatic discharge klgates.com

55 EQUITABLE SET-OFF EQUITABLE SET-OFF Clear cross-claims for debts or damages, which were so closely related as to subject-matter that the claim sought to be set-off impeached the other in the sense that it made it positively unjust that there should be recovery without deduction. klgates.com

56 EQUITABLE SET-OFF Can be broader than set-off under civil procedure legislation eg may permit liquidated and unliquidated claims to be set off (although a relevant connection is required) klgates.com 111 CAN EQUITABLE SET-OFF BE EXCLUDED? 56

57 EXCLUDING EQUITABLE SET-OFF Conflicting authority! Norman; Re Forest Enterprises Ltd v FEA Plantation Ltd (2011, Federal Court): The weight of appellate authority does not support the view that without deduction excludes equitable set off Nevertheless it is difficult to see how the words without any deduction whatsoever are consistent with an entitlement to maintain an equitable set off. klgates.com 113 EXCLUDING EQUITABLE SET-OFF O Brien v Bank of Western Australia Ltd (2013, NSW Court of Appeal): Guarantee contained following clause: As long as any of the guaranteed money remains unpaid, you may not, without our consent: (a) Reduce your liability under this guarantee and indemnity by claiming that you or the debtor or any other person has a right of set-off or counterclaim against us (except to the extent you have a right of set-off granted by law which we cannot exclude by agreement) klgates.com

58 EXCLUDING EQUITABLE SET-OFF O Brien v Bank of Western Australia Ltd (cont): Did this preclude guarantors from asserting in their defences that the debt was not payable due to estoppel, breach of contract, misleading/deceptive conduct, unconscionable conduct? Bank did not suggest that the guarantors did not have any arguable claim for relief issue is whether the clause effectively put in place a pay now, litigate later regime klgates.com 115 EXCLUDING EQUITABLE SET-OFF O Brien v Bank of Western Australia Ltd (cont): Held: Guarantors could still assert in their defences that the debt was not payable for those reasons cf seeking to set off other debts or liabilities The clause only operates once a liability has arisen under the guarantee klgates.com

59 EXCLUDING EQUITABLE SET-OFF Cf Oswal v Commonwealth Bank of Australia (2013, Western Australian Court of Appeal): majority: The expression without set-off excludes all form of set-off, no matter what jurisprudential basis might exist for the set-off. Thus it excludes statutory set-off and equitable set-off. minority: reasonably arguable that equitable set-off not excluded (where it impeaches the title of the creditor, such that it would be unconscionable for the creditor to enforce the guarantee) klgates.com 117 CONCLUSIONS ON EXCLUDING EQUITABLE SET-OFF Courts struggle with the contractual exclusion of equitable remedies Similarly to entire agreement clauses excluding estoppel by representation klgates.com

60 SET-OFF IN CONSTRUCTION CONTRACTS CONSTRUCTION CONTRACTS The Superintendent shall, within 14 days after receiving a progress claim, issue to the Principal and the Contractor: (a) a progress certificate evidencing the Superintendent s opinion of the moneys due from the Principal to the Contractor ( progress certificate ); and (b) a certificate evidencing the Superintendent s assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract. The Principal shall pay to the Contractor the balance of the progress certificate after deducting retention moneys and setting off such of the certificate in paragraph (b) as the Principal elects to set off. klgates.com

61 CONSTRUCTION CONTRACTS Main Roads Construction Pty Ltd v Samary Enterprises Pty Ltd (2005, Vic Supreme Court): Application for summary judgment due to nonpayment pursuant to 6 progress certificates Superintendent certified 12 progress certificates, only 6 paid Principal (Samary) alleged that it had set-offs or counterclaims in excess of the Contractor s (Main Road s) claims Contractor submitted that the contract excluded the ordinary right of set-off, other than in accordance with the contract, so progress claims payable in full klgates.com 121 CONSTRUCTION CONTRACTS Main Roads Construction Pty Ltd v Samary Enterprises Pty Ltd (cont): Contractor submitted: that the contract provided for a comprehensive scheme for the certification of payments and the adjustment of liabilities between them Judge agreed Progress payments are the life-blood of contractors in the building industry Set-offs only allowed in accordance with contract (not general court rules) Would not prevent the disputes from being raised at a later stage (payments of progress payments are on account only) Summary judgment granted klgates.com

62 CONSTRUCTION CONTRACTS Façade Treatment Engineering Limited v Brookfield Multiplex Construction Pty Ltd (2015, Victorian Supreme Court) Interaction between security of payment legislation and Commonwealth insolvency laws klgates.com 123 CONSTRUCTION CONTRACTS Façade Treatment Engineering Limited v Brookfield Multiplex Construction Pty Ltd (2015, Victorian Supreme Court) Court considered that there was a conflict between: section 16(4)(b) of the BCISP Act, which expressly prohibits a defendant in section 16(2)(a)(i) proceedings from bringing any cross-claim or raising any defence in relation to matters under the parties' subcontract in the proceedings; and section 553C of the Corporations Act, which provides for a statutory set-off of opposing claims where there are "mutual credits, mutual debts or other mutual dealings" between an insolvent company being wound up and a creditor. Court found that Commonwealth Act prevailed due to inconsistency rule under Cth constitution klgates.com

63 NO SET-OFF CLAUSES UNFAIR CONTRACT TERMS? UNFAIR CONTRACT TERM? Former guidelines by Consumer Affairs Victoria on equivalent provisions in former Fair Trading Act 1999 (Vic): Terms that require consumers to pay without deduction or setoff may be considered unfair particularly where the supplier holds an irrevocable authority to debit the consumer s credit card or bank account for payment klgates.com

64 SET-OFF CLAUSES: CONCLUSIONS CONCLUSIONS Creditor party may want no setoff clause Debtor party may want set-off clause eg to exclude rights under civil procedure legislation or to limit those rights (eg to only those arising out of same contract) eg to confer rights in addition to statutory and equitable set-off may also attempt to exclude equitable set-off (may not necessarily be enforceable) eg to effect automatic discharge (cf procedural right) mere absence of a set-off clause won t eg to expand circumstances of set-off do this (eg by turning a damages claim into a liquidated amount, or by allowing unliquidated amounts claimed (even if klgates.com disputed) to be set off)

65 CONCLUSIONS If both parties have payment obligations: may want to rely on existing law statutory and equitable set-off Cannot contract out of insolvency set-off Construction contracts: Progress payments regime may allow set-off within that regime, but may otherwise exclude set-off Set-off in insolvency will prevail A no set-off clause may be an unfair contract term klgates.com 129 NO WAIVER CLAUSES 65

66 CLAUSES No waiver (a) A failure, delay, relaxation or indulgence by a party in exercising any power or right conferred on the party by this Agreement does not operate as a waiver of the power or right. (b) A single or partial exercise of the power or right does not preclude a further exercise of it or the exercise of any other power or right under this Agreement. (c) A waiver of a breach does not operate as a waiver of any other breach. klgates.com 131 CLAUSES In no event shall any delay, neglect or forbearance on the part of any party in enforcing (in whole or in part) any provision of this Agreement be or be deemed to be a waiver thereof or a waiver of any other provision or shall in any way prejudice any right of that party under this Agreement. klgates.com

67 WHAT IS WAIVER? WHAT IS WAIVER? An intentional act done with knowledge whereby a person abandons a right by acting in a manner inconsistent with that right klgates.com

68 WHAT IS WAIVER? Commonwealth of Australia v Verwayen (High Court, 1990), per Mason CJ (dissenting): Waiver is an imprecise term capable of describing different legal concepts: Election Estoppel New agreement klgates.com 135 WHAT IS WAIVER? New agreement: need consideration Mason CJ: Generally speaking, an existing legal right is not destroyed by mere waiver in the sense of an express or implied intimation that the person in whom the right is vested does not intend to enforce it. In these cases, unless consideration is present, something in the nature of an election or an estoppel is required. klgates.com

69 WHAT IS WAIVER? Election: between inconsistent rights Mason CJ: the better view is that, apart from estoppel and new agreement, abandonment of a right occurs only where the person waiving the right is entitled to alternative rights inconsistent with one another, such as the right to insist on performance of a contract and the right to rescind for essential breach. This category of waiver is an example of the doctrine of election. klgates.com 137 WHAT IS WAIVER? Estoppel: Mason CJ: Purpose: protection against the detriment which would flow from a party s change of position if the assumption (or expectation) that led to it were deserted Verwayen case: Commonwealth had said that it would not rely on certain defences (including expiry limitation period), but then changed its mind It must be borne in mind that a voluntary promise is generally not enforceable and that pleadings are susceptible of amendment. The breaking of a promise, without more, is morally reprehensible, but it is not unconscionable. Something more than a broken promise is required. Considered that costs would be a sufficient recompense for the Commonwealth s change in position. klgates.com

70 CASES CASES Tele2 International Card Company and others v Post Office Ltd (2009 English Court of Appeal) Tele2 entered into an agreement to supply phone cards to Post Office Agreement required Tele2 to provide annual parent company guarantee Post Office did not complain about the breach and continued to perform its obligations Post Office purported to terminate (for Tele2 s failure to provide the guarantee) nearly one year later klgates.com

71 CASES Tele2 International Card Company and others v Post Office Ltd (2009 English Court of Appeal) (cont) Tele2 argued that Post Office s performance of the agreement during that time amounted to an election to affirm the agreement Post Office tried to rely on a non-waiver clause: In no event shall any delay, neglect or forbearance on the part of any party in enforcing (in whole or part) any provision of this Agreement be or be deemed a waiver thereof or a waiver of any other provision or shall in any way prejudice any right of that party under this Agreement." klgates.com 141 CASES Tele2 International Card Company and others v Post Office Ltd (2009 English Court of Appeal) (cont) Held: Whether an election existed was a question of fact In this case, POL's significant delay and continued performance of the contract without any protest was held to be an affirmation of the contract, ultimately meaning it had forgone its right to terminate A "non-waiver" clause does not remove the obligation of the aggrieved party to make an election Such a clause was "of no particular help, other than to emphasise that an election must be clear and unequivocal klgates.com

72 CASES Kostopoulos v G E Commercial Finance Australia Pty Ltd (2005 Queensland Court of Appeal): "It may be accepted that a non-waiver clause may itself be waived by conduct" klgates.com