Incorporating Contract Terms – one way to make Max Mad
When entering into any type of contract, the last thing that either party wants is a ‘contractual surprise’. These types of surprises often appear when standard terms have been incorporated into contracts, and where, subsequently, parties might not have seen or even read those standard terms. A timely reminder of this type of contractual surprise has come about through the case of Warner Bros Feature Productions Pty Ltd v Kennedy Miller Mitchell Films Pty Ltd  NSWCA 81.
A few of the key learnings from this case are that:
- contract terms can be incorporated by reference;
- whether or not a contract term has actually been incorporated is viewed within the context of the contract as a whole; and that
- contract terms that are standard for a group of companies may be incorporated as a standard term for an individual company within the group.
Kennedy Miller Mitchell Films commenced initial proceedings against Warner Bros Entertainment Inc (the parent company) and Warner Bros Productions (the Australian incorporated company) in the Supreme Court of NSW, asserting that a breach of contract had occurred based on the non-payment of a bonus which had been promised for delivering the film Mad Max: Fury Road under budget. Along with this, there were two further claims concerning the breach of co-financing arrangements, and misleading and deceptive conduct.
Warner Bros Entertainment had sought a stay of proceedings based on a clause that required disputes to be heard by arbitration in California. The relevant clause 21 provided that the “balance of terms” would be “WB standard for ‘A’ list directors and producers”, subject to “good faith negotiations”.
At first, the court agreed that the wording of the clause had effectively incorporated the terms that were “WB standard for ‘A’ list directors and producers”, although the court did not agree that the arbitration clause was its ‘standard’ clause that would effectively stay the proceedings in Australia.
What happened on appeal?
Warner Bros sought leave to appeal, which was then granted.
The Court of Appeal agreed with the primary Judge that Warner Bros standard terms had been incorporated into the contract before any ‘good faith’ negotiations were able to ensue – a decision which was based on an interpretation of the clause.
The next question to be answered related to whether the arbitration clause had been incorporated as a term that was “WB Standard”.
The primary Judge held that Warner Bros Productions was itself distinct from other members of the Warner Bros group, and that as such it did not have any “standard” terms which were incorporated. He took the view that “WB Standard” meant “sufficient preponderance”, so that the terms were the usual terms.
The Court of Appeal disagreed, taking a broader interpretation which found that “WB standard” meant “habitually proferred”. Based on the evidence, and within the context of the contract as a whole, the Court of Appeal found that the arbitration clause had been part of many standard form agreements of Warner Bros Entertainment.
The proceedings between Kennedy Miller Mitchell Films and WB Productions stayed under Section 7(2) of the International Arbitration Act 1972 (Cth). The proceedings against Warner Bros Entertainment were similarly stayed, as they were clearly related to the proceedings involving WB Productions however, a right to apply to lift the stay.
The main takeaway from this case is the fact that terms can be incorporated into a contract simply by reference - even if they are not attached to the contract. Further to this, it must be noted that a standard clause used by one corporate entity can be incorporated into the contract of another entity in the same group.
With the above in mind, Coleman Greig urges readers to ensure that they look into all documents referred to within a contract that they are a party to, and examine whether any incorporated clauses are likely to be either inconvenient or potentially detrimental to your business.
Finally, this case should be seen as a reminder that a court will stay proceedings where the parties have agreed to refer disputes to arbitration by virtue of a binding contractual agreement.
If you have a query relating to any of the information, or tips made in this piece, or you would like to speak with someone in relation to your own contractual dispute, please don’t hesitate to get in touch with Coleman Greig’s Commercial Advice team: