Area Report - Katherine Polkinghorne

Area Report
Katherine Polkinghorne, Solicitor, Hunt & Hunt 
Contract Tips – Know your rights and avoid the fights

The Tourism Industry
The tourism industry is made up of a range of people and organisations, including tour managers, tour guides, travel agencies and tour operators. All of these groups work together to provide tourism services to travellers. The interrelation and division of responsibilities between all of these bodies is governed by contracts. Contracts determine who has to do what, when, and at what price. They are the basis for the provision of service to the customer. 

As contracts have such an important role to play in the tourism industry and business in general, it is important to understand exactly what a contract is and how it can be enforced, so that you can know your rights and avoid the fights! If all the relevant parties are aware of their responsibilities and rights, there is less likelihood for misunderstanding, which in turn leads to a more cohesive relationship. 

What is a contract?
A contract is an agreement between two or more parties that consists of rights and obligations that the law will enforce. A contract can be written or verbal. However, there must be a genuine agreement for a contract of any form to exist. 

It is true that generally, parties are free to form a contract about any subject they choose. This is called the presumption of freedom to contract. 

However there are limitations on this freedom to contract that will negate any agreement reached by the parties. I will discuss these limitations a little later in this presentation. 

So, how does the law determine whether there is an agreement or not? The law requires that certain factors are present in a contract for it to be valid and enforceable. These factors are: 

An intention to create legal relations

An offer must have been clearly made from one party to the other for a contract to exist. This could be a verbal or a written offer, however the terms of what is being offered must be clearly identified. Some forms of conduct are not considered to be offers, such as:

a mere provision of information
an invitation to treat (such as most requests to submit a tender)

An offer can be terminated at any time after it is made provided that it has not yet been accepted. However once an offer has been validly accepted it cannot be revoked or cancelled.

Once a party has made an offer, it must be accepted for the contract to be complete. Acceptance can either be by written or verbal agreement, or it may be inferred by the subsequent conduct of the parties. Usually, an offer can only be accepted by the person to whom the offer was made. However it is possible for an offer to be made to a number of parties. In that case, the acceptance of the offer can be made by any of those parties.

Silence (or inaction) by the accepting party is not considered to be acceptance. Therefore, a written communication stating that “Unless I hear from you by 12pm Wednesday, I will take it that my offer has been accepted” will not create a contract between the parties.

Once an acceptance has been communicated, it can generally not be revoked. However it is possible to revoke an acceptance provided that the initial acceptance has not yet been communicated to the party making the offer (called the “offeror”). For example, if you agreed to an offer in writing, and posted that agreement in the mail, it is still possible to revoke that offer by telephoning the offeror and informing them that you do not want to accept, and to ignore your letter. However if the written agreement has already reached the offeror, you cannot revoke your acceptance.

Consideration is the legal term for the idea that in order to have a valid contract, you need to have given something of value to each other. The consideration does not need to be equal to the value of the contract, but must have a value. For example, it is possible to agree to pay $1 for a new Porsche (if you can find someone silly enough to sell it to you for that price!), despite the fact that the car is worth much more than that. However generally you cannot make a valid contract to sell the Porsche for nothing. In that case the agreement would be a gift, which the seller of the car is able to revoke if they change their mind.

Intention to create legal relations
The parties must intend that their agreement will have legal consequences and obligations for the agreement to be a valid contract. Usually this is not hard to prove, as most people are aware that if they sign an agreement it has a legal effect and can be enforced. The problem usually arises where parties have made a verbal agreement, and one party tries to back out later. Verbal agreements can have some inherent problems that will be discussed later in this presentation. In the meantime, it is sufficient to say that both parties to a contract must be aware that their agreement will have legal consequences. This is almost always the case, and is not likely to be a significant issue within the travel industry.

Finally, for an agreement to be a valid contract, the terms of the agreement must be reasonably certain. You cannot usually "agree to agree". This means that the parties need to clearly set out what each of their responsibilities are so that they know what is expected of them under the contract.

A court will not enforce an agreement that is incomplete. Using our car example again, where the parties have agreed to sell the Porsche but have not agreed when and for how much, this will not be a valid contract. However if only minor terms have been overlooked (for example the mode of delivery of the car to the new owner) the courts may decide to enforce the agreement.

In order to avoid confusion, it is best to clearly set out the exact responsibilities of each party in the contract in the first place. 

Written or verbal?
A written contract is more commonly used for business agreements. It can be very useful to set out in writing the exact parameters of the agreement in order to avoid confusion and disagreement later on. However verbal agreements are also used successfully every day, for example in consumer purchases. 

Often, putting the agreement into writing can help to clarify for the parties exactly what is being agreed to, and bring out any grey areas that have not been properly discussed. Although a verbal agreement is often just as valid at law as a written contract, there can be significant problems later on when each party recalls a different agreement. Verbal agreements may also fail to determine all of the necessary terms that become obvious in a written agreement when parties have time to take the agreement away and consider it.

Usually, it is far better to take the time to put an agreement into writing, especially if it is a long-term agreement, so that each party has a point of reference later on if there is a disagreement.

Implied Terms
In addition to the terms that have been agreed between the parties, the law will sometimes imply other terms into the contract. Terms can be implied by previous business dealings, custom, or by government legislation. Legislation is frequently introduced by governments to override unfair terms in contracts. In Australia the Trade Practices Act has been enacted to protect consumers in their transactions with businesses. Terms that may be implied through this type of legislation includes requirements that services sold will comply with their descriptions, and that the services will be supplied with due care and skill. In the travel industry, this means that tour operators and travel agencies must ensure that the services they sell to customers are of a reasonable standard and are delivered as agreed.

This type of consumer legislation also provides that any terms in a contract that attempt to override the provisions of the legislation are invalid. This means that that particular portion of the contract will not have any effect, and the legislation will apply in all cases. It is therefore important for all tour operators and agencies to be aware of their obligations under legislation in the country where the contract is made. There is also legislation that applies to international contracts that you should be aware of and be careful to abide by.

Limitations on a contract
Despite the presumption of freedom of contract, there are certain things that you cannot agree to do, or that will make a contract invalid at law. These things include:

contracts for an illegal purpose
contracts that contain a significant mistake so that it does not truly represent the intention of the parties where one party has been unduly influenced into signing the contract where one party has signed the contract under duress a contract formed with a minor or incapable person (including language problems)

In many circumstances a valid contract cannot be made by a minor (someone under 18 years of age in Australia). It is often necessary to have a parent of a guardian sign on behalf of a minor in order for the contract to be valid. You should carefully consider whether a parent or guardian should be present to sign a contract for travel arrangements if the person travelling is under the legal age of adulthood.

As members of the tourism industry, your rights will primarily depend on whether you are an employee or an independent contractor.

Where there is a contract of employment, there are certain terms that will be implied into the contract. These include, but are not limited to:
the employer is responsible for any loss by customers or other people caused by the action or failure to act of the employee (for example, for the employee''s negligence or breach of contract);
the employer must pay you compensation if you are injured during work;
the employer must deduct income tax and must pay you for things such as annual leave, sick leave, long service leave and parental leave;
there are unfair dismissal laws that regulate when your contract of employment can be terminated;
the employer must pay your superannuation, payroll tax and other such government payments.

Independent contractors are not covered by employment legislation, and therefore they are usually responsible for their own costs, losses and taxes. This means that if an independent contractor is sued in the performance of their work, they are solely responsible for paying any claim made against them.

Am I an employee?
There are tests to determine whether you are an employee or an independent contractor. As a general rule, an independent contractor has full responsibility for his or her own actions, and can be said to be self-employed. An employee on the other hand is controlled to a greater extent by his or her employer.

Factors that are taken into account when determining whether you are an employee or an independent contractor include:
The level of control over how you perform your job held (but not necessarily exercised) by the company or person who hired you. As a rule, employees are required to follow the instructions of their employers, where independent contractors can decide for themselves how best to perform a job.
Whether you can set the price for your tours or services offered to customers, or whether your employer sets the price for you. Employees will not usually have any control over the price of the services they are offering to customers.
Whether you or your employer sets the policies, rules and procedures for your work. An employee will have less input into these policies than an independent contractor is likely to have.
Whether you are able to work for other people or companies, or whether you are exclusively employed by one agency. Exclusive service usually indicates a relationship of employee.
Whether any training is provided or required in your work. An employee is more likely to be required to complete specific training than an independent contractor.
Whether you operate your own business, have your own company and manage your own financial affairs in relation to the tours that you operate. This can be an indicator of an independent contractor.
Whether you provide specific expertise in an area relevant to your work, for example in a geographic region or language. Independent contractors are likely to be hired for their expertise, whereas an employee may have a more generalised and widespread work focus.

Whether you perform your services on a sporadic, per job basis or a permanent, ongoing basis. Independent contractors may provide services only when required, whereas an employee is continuously employed in most cases.

Are you required to present reports to your employer? If so, this may indicate a relationship of employer/employee.

Do you provide your own place of work and support services? An employee would normally have these things supplied by their employer. 

What did the parties intend when the agreement was signed?
Whether you are an employee or an independent contractor is ultimately a question of fact, and can have important consequences for your contractual rights.

Restraint of Trade
When signing a contract as an employee or an independent contractor, there may be a provision in the contract that restrains you from working within a certain distance in the same industry either during your employment or for a certain period of time after your contract ends. This is called a restraint of trade.

The general principle is that people are considered to be free to work wherever they are able. Therefore a restraint of trade clause is considered to be unenforceable at law unless it can be demonstrated that there is a legitimate business interest that is protected by the restraint of trade clause. Courts are generally more inclined to enforce a restraint of trade clause during the course of your employment rather than after your employment or service as an independent contractor ends.

The court will assess the reasonableness of the restraint of trade before it will uphold any such agreement. If you are employed on a full time basis by an organisation and that organisation requires that you do not work for any other competitive tour company in the same city during your employment, this is likely to be upheld as a reasonable restraint. However, if you are employed as an independent contractor on a part time basis, it is less likely that a restraint of trade will be reasonable, particularly if it prevents you from earning a sufficient living. 

Similarly, if a contract prohibits you from working for any other tour company for, say, 3 years after your contract ends, this is not a reasonable restraint of trade, as it prevents you from working in your career area once your contract ends.

One of the primary concerns for people entering into a contract in a services industry is the concept of negligence. If you are negligent in the way that you perform your obligations under a contract you can be sued for the damage that your negligence caused. 

The basis for a claim for negligence is whether or not you have discharged your duty of care. As explained in the English case of Donoghue –v- Stevenson, you have a duty of care to anyone who is considered your "neighbour". A neighbour is anyone who you might reasonably expect to be affected by your actions (this is a very broad definition).

As a general rule, you are required to exercise your obligations in a way that is reasonable, taking care not to cause any damage or loss to another person in your discharge of your duty. Legislation may also require that certain steps be taken in order to protect third parties from your negligent discharge of your duty. If circumstances beyond your control cause damage to your customer, you will not be negligent provided that you have done all that was reasonable for you to do in order to protect your customers. 

Potential areas for liability in negligence include:
claims for inadequate or inappropriate accommodation and transport;
loss of luggage during transport;
providing tours in unsafe areas;
unhygienic food and water supplied during a tour or accommodation;
holiday packages that do not match the description or are incomplete.

So, how do you minimise claims against you and your company? The best way to do this is to have a proper audit system of checks in place to ensure all of your obligations are met, and that no steps are missed in the preparation and delivery of tourism services. Taking the following steps can assist you in ensuring that you discharge your duty of care and avoid claims for negligence:

Check the services you are providing beforehand to make sure they are an appropriate standard, including hotels, transport and tour locations;
Be aware of any travel warning for areas that you offer tours and make an informed judgment about whether to adjust the tour if necessary to avoid danger spots;
Make sure your staff are properly trained and are able to deal with any problems that the customers may have;
Keep an eye on your accommodation and transport partners to ensure they are maintaining appropriate standards and licences.

Of course, it is impossible to guarantee that nothing will ever go wrong, particularly in a global industry like travel and tourism. However by maintaining a vigilant system of checks you can ensure that you have fulfilled your obligations to the customer as far as can be expected, to avoid any claims for negligence being made against you.

Changing a contract
Sometimes parties need to change a contract after it has been signed. As we discovered earlier, once an offer has been made and another party has accepted it, the terms of the contract are binding on both parties. But what happens if circumstances change?

Where both parties agree to the variation, it is a relatively simple matter of executing another minor contract that states what has been agreed. Provided that both parties have signed it, the contract has been successfully varied. In the case of a verbal contract, both parties can verbally agree to the variation, but it is far better to record it.

However it becomes more difficult where only one party wants to vary the agreement. The relative bargaining position of the parties is often important when negotiating a change to the contract. If you hold the stronger bargaining position you may be able to negotiate the amendment to the agreement on terms that are favourable to you. However where there is too much discrepancy between the bargaining power of the parties, and the contract clearly favours the more dominant party, this may amount to unconscionable conduct. Alternatively it may be necessary to offer a concession to the other party such as a change in fees or responsibilities.

There are two types of termination for a contract. The obvious form of termination occurs when all the parties have fulfilled their obligations, and the contract comes to an end of its own accord. However sometimes the parties decide to terminate a contract earlier than originally anticipated. It is this second form of termination that I am going to discuss today.

Sometimes circumstances change that means the parties are no longer able or willing to complete their obligations under the contract. This may be a mutual decision or it may be made by one party only. The law will not usually force a person to provide personal services against their will. This is because it is extremely difficult to make sure that the services are performed properly and with a reasonable level of care. It is often more appropriate to simply terminate the contract and to enter into a new agreement with another service provider.

Depending on how the contract was negotiated, there may be a provision within the contract for one or both parties to terminate the contract with a certain amount of notice. This notice period will vary depending on what the parties negotiated, and how long it is expected to take to find replacement services in the event of termination. If your contract has a notice period for termination and you do not comply with the requirements of that part of the contract, you may have to pay money to the other party for any loss that they suffered due to your actions. It is therefore important to know whether you have to give notice and how much notice is required.

If there is no provision for early termination in the contract, there may be a provision for an event called a Force Majeure. Force majeure clauses allow the parties to terminate a contract when something unexpected happens that they are unable to control, which leads to an unexpected difficulty or inability to perform or complete their obligations. Examples of a force majeure include floods, cyclones and other natural disasters, unexpected changes to government policy or legislation, labour strikes, terrorism, riots, sabotage and civil unrest. In the case of a force majeure event, the parties'' obligations are suspended for the duration of the event. If the event is ongoing or beyond a set number of days in duration, the parties are excused from the contract without the need to pay any fee for early termination. These types of clauses can be extremely useful in the tourism industry to avoid claims by customers and business partners. 

The least favourable position for termination is where the contract does not provide for any early termination, or where early termination is only offered to the other party, at their option. In these cases, unless you can show that the other party has breached their obligations and is unable to rectify that breach within a reasonable amount of time, you may have to pay for the loss of business revenue to the other party by your early termination. In this case it is important to seek advice to make sure you have investigated every other avenue for termination to minimise the costs that you will have to pay as a result of your actions. Tips
We have now discussed how a contract is formed, some of the things that can go wrong, and how it can end. The best tips that you can follow in making and operating within contracts are: Read the contract and make sure you understand it before you sign!
Get advice if you are unsure of any part of the contract
Know your rights as an employee or an independent contractor
Make sure the contract accurately reflects what you have agreed to, and avoid vague terms or statements Get the agreement in writing wherever possible
Maintain good insurance cover in case things go wrong.

Armed with a proper understanding of what your rights and obligations are, you can be confident that your business dealings are smooth, efficient and effective. In short, know your rights, and you can avoid the fights!