A contract does not have to be in writing to be legally binding. A contract can exist where there is a simple handshake or someone says, ‘we have a deal’. Whatever its form, if you agree to provide goods or services for payment, then you have an agreement which can be enforced.
The Supreme Court of Western Australia recently considered the terms of an ‘informal’ contract in Northmead Holdings Pty Ltd v Westralian Fruits Pty Ltd1
This case serves as a helpful reminder that it is always best to have your contract in writing.
Northmead Holdings Pty Ltd (Northmead) operates a family-run agricultural supply business in Gingin in Western Australia. Westralian Fruits Pty Ltd (Westralian) is a former operator of a horticultural farm in the Gingin area and was a customer of Northmead between 1999 and 2017.
The parties had no discernible method to invoicing and payment during this period, and Westralian did not pay for the goods at the time they were supplied by Northmead. Instead, from time to time an invoice or statement of account was issued by Northmead, at which point Westralian would make a payment for the goods purchased. The invoice or statement of account was sometimes paid in full, sometimes paid in part and sometimes an amount was paid without any reference to a particular statement or invoice.
By June 2004, Northmead had issued invoices or statements of account covering the supply of goods made prior to 1 July 2002.
Northmead continued to supply Westralian with goods after this time but did not send any further invoices or statements of account until 6 July 2018. Westralian refused to pay those further invoices and statements of account.
The dispute centred around the terms of the contract between the parties as to when Westralian was obliged to pay Northmead for the goods supplied and the proof of the actual goods supplied. Northmead and Westralian relied on different implied or inferred terms as to payment.
In essence, Northmead argued that Westralian was required to pay Northmead after it sent its bill (which could be issued at any time), while Westralian argued that Northmead was required to render its invoice within a reasonable period following which payment was required. Northmead relied on various conversations and the parties’ course of dealing to support its claim.
Given the period of time that had passed since certain of the goods had been supplied, and the relevant time limitation placed on claims concerning the sale of goods, if Northmead did not succeed part of its claim would be ‘statute barred’ (ie no longer legally enforceable).
The Court determined that the appropriate terms to be implied were those pleaded by Westralian.
In doing so, the Court explained that a term will only be implied where it is necessary to do so for the reasonable or effective operation of the contract2. In this case, to allow a party to wait years to issue invoices and then expect payment was said to make no commercial sense.
Relevantly, the Court remarked that Northmead's failure to issue invoices or statements arose as a result of its 'complete mess' of an accounting system; it was not a result of any intention on the part of the parties to contract on a particular basis. Moreover, the conversations and conduct of the parties on which Northmead relied did not support the position for which it contended.
In reaching its decision, the Court also observed that for a cause of action to arise, whenever a party decided to issue an invoice or statement, would be contrary to the public policy considerations underpinning limitation periods.
As a consequence, the majority of Northmead’s claims were statute barred. The Court ordered that Westralian pay the outstanding balance of the claim that was not statute barred (which was only a fraction of its original claim). It also ordered that Northmead pay Westralian’s legal costs.
It is critical that parties formalise the terms and conditions of their agreements.
Often parties enter into arrangements with the best intentions and without appreciating that the relationship can sour or management can change. Where the terms of an agreement are not clearly articulated in writing, it can be difficult for parties to determine what is an implied, inferred, or express term of the agreement.
