Consumers and Contracts

The Terms of a Contract

What are the Terms of a Contract?

Before entering into a contract, various statements will often be made by the parties. A dispute may later arise as to which of the statements made should be considered a part, or a term, of the contract, and which should be taken as merely pre-contract talk, and therefore not a part or term of the contract. Parties to a contract are bound only by its terms, not by any peripheral statements that may have been made. However, a pre-contractual misrepresentation (that is, it is not a term of the contract) has legal consequences, as outlined above at Misleading conduct and misrepresentation.

The courts are prepared to look at any evidence of intention by one or other of the parties that the statement should be part of the contract. For example, the longer the interval is between the making of the statement and the reaching of the final agreement and contract, the less likely it is that the statement will be considered to be a term of the contract.

The fact that the maker of the statement had a special knowledge or skill compared with the other party will make the statement more likely to be a term. Where the agreement was subsequently reduced to writing and the statement was not included, it is less likely to be a term.

If a contract is in writing (either because it is required to be in writing by legislation or because the parties have chosen to put it in writing) then generally it is assumed that the written document is the complete statement of the terms of the agreement. What this means is that if one party then tries to argue that something said during negotiations is part of the contract and it was not included in the written document, then the argument to include that statement will not be successful. However, it is always important to keep in mind the remedies for misleading conduct under the Australian Consumer Law s 18. This legislation operates outside the contract.

Implied terms

Despite what has just been said, it is important to understand that in certain contracts terms may be implied, that is, read into the contract. This may happen because the parties overlooked something important. Or it may happen because consumer protection legislation prescribes that certain terms will be automatically read into a contract.

By far the most important for present purposes are statutory implied terms. These are discussed in detail at Implied Conditions and Warranties in Consumer Sales.

The Effect of Signing a Document

We have seen that contracts do not have to be in writing unless legislation provides otherwise. Or the parties may choose to use a written document. If a written contract is used, it is very common that it is required to be signed.

When a contract is in writing, the general rule is that a party is bound by all the terms set out in a contractual document if he or she has signed it (see Acceptance). This applies whether or not he or she has read the terms or understood them. The exceptions to the general rule are mistakes as to the nature of the document and misleading statements (see Defective Negotiations).

Unsigned Contracts - "Ticket" Cases

We have seen that not all written contracts are supposed to be signed. An example is an airline ticket or a public car park docket. The terms may be on a ticket or may be displayed on a sign or wall. The customer is taken to have agreed so long as the customer had an opportunity to read the terms and did not object to them. This rule means that the terms must be available for scrutiny before the contract is made. The rule takes little account of the fact that no-one actually reads the terms or would have almost no time to read them if he or she tried to. Some allowance is taken of this if an exclusion clause is in a ticket (see Exclusion of Responsibility Terms).

Collateral Contracts

A collateral contract is a separate contract which exists alongside the main contract. Generally, where a contract is in writing, the written terms of that agreement form the basis of the contract. But sometimes, where a statement has been made and intended as a promise, and intended to induce the main contract, a collateral contract will be held to exist.

Courts have been prepared to find a collateral contract where one party refused to enter the main contract unless certain assurances were given over and above what is in the written contract. For the court to hold that a collateral contract has been made, its terms must be consistent with the main written contract.

Uncertainty

It is common for the terms of a contract to be uncertain in some respect. There may be terms that contradict each other, a term may be ambiguous or it may be very difficult to decide what a particular term means. A possible consequence of an uncertain term or terms is that the terms are severed from the contract or else the whole contract is void. Hence uncertainty may be a way of getting out of a contract.

The law's approach to interpretation

To avoid this result so far as possible, the law's approach to this common problem is, firstly, to try to give the uncertain clause or clauses a sensible meaning. This is done by applying an objective test: what would a reasonable person consider the problem clause or clauses to mean? This should be a guide to resolving a dispute over the contract's meaning. The objective test is a common sense test. The courts will go a long way to finding a sensible meaning because the alternative is that the contract may be void.

The consequences of uncertainty

If a term is so uncertain that it cannot be given a sensible or any meaning, the term is either severed from the contract or else, if that is not possible, the whole contract is declared to be void which means that it never existed (despite the parties' assumptions and actions).

Severance means that the problem clause or clauses are "blue pencilled" from the contract and the rest of the contract operates without the severed clauses. Whether a term or terms can be severed from the contract depends on whether the contract can operate without the clauses. If the essential purpose and expected outcome of the contract can still be achieved without the problem clauses, then they will be severed.

If severance is not possible, then, as already stated, the contract is declared to have never existed. This does not quite leave the parties in a legal vacuum because the law of restitution provides that goods or services already provided must be paid for at a reasonable market price.

Unfair Contract Terms

Under the Australian Consumer Law it is possible for an individual consumer (as defined) to challenge a term or terms of a standard form contract on the basis that the term or terms are unfair. If the challenge is successful the term is void. This is fully discussed at Unfair Contract Terms.

Exclusion of Responsibility Terms

It is possible to have a term in the contract which excludes one of the parties from responsibility for something that may go wrong in the performance of the contract or limits that responsibility. It is called an exclusion clause, an exemption clause or limitation of liability clause. For example, an exclusion from liability for damage done to a lawn by a builder's backhoe might be included in a contract between the builder and a home owner who is having an extension built to their home.

The courts have generally taken the view that exclusion clauses are unfair and have tried to limit their application. Courts will generally interpret an exclusion clause against the party trying to rely on it and, at the least, interpret it narrowly so long as it is capable of being read down.

Where a contract is a document signed by the parties, they will generally be bound by the exclusion clause in it.

Where a contract is an unsigned document (see Unsigned Contracts - "Ticket" Cases), the court will look at what a reasonable person would assume the document to contain. Only where a reasonable person would assume the terms to include an exclusion clause will the exclusion clause in the document be able to be relied on. It must also be shown that the exclusion clause was brought to the notice of the other party. For example, if an automatic ticket machine in a car park had printed on it "issued subject to the conditions displayed in car park" and these conditions, or exclusion clauses, were on a pillar opposite the ticket machine, then this could potentially be held to be unreasonable notice of the exclusion clause. The driver may then be entitled to sue despite the exclusion clause in the conditions.

For consumer contracts, the Australian Consumer Law and other consumer protection legislation may imply conditions that cannot be excluded (see Consumer Guarantees).