Contract Law

Contributed by Nick Seddon, originally amended by Cathy He and Jane Black (NT Law Handbook), as amended by Adam Thompson and Andrew Tan, Consumer Law Centre ACT and current to March 2022

The information contained in this part is a very brief overview of contract law as it can apply to the purchase of goods and services. There are many aspects of contract law not covered here.

What is a contract?

A contract is a legally binding and enforceable agreement between 2 or more parties. It may be written or verbal. A contract involves exchanging one thing for another. For example:

• a person agrees to pay a shop $30 in exchange for an electric toaster;
• a person wants to insure their car and signs a written insurance contract promising to pay the insurance premium and in return, the insurance company promises to pay the costs of repairs, should the car be damaged;
• Michael needs to borrow $1000. A friend lends him the money in return for Michael's verbal promise to repay the loan in two months.

Contract disputes are very common. It is for this reason that many contracts are written rather than verbal.

The details of the agreement are called the terms of the contract. These terms may come from:

• the words the parties have used in making their agreement, either verbal, written or, in limited circumstances, both verbal and written;
• terms implied from the circumstances surrounding the contract or the actions of the parties

The law of contract

The law of contract comes from two sources:

• the common law, which is the law made by judges in deciding disputes between contracting parties;
• statute law, which are laws made by State, Territory and Federal parliaments. Statute laws add to or override the general law of contract. An example of this is the Australian Consumer Law (ACL) which applies to consumer contracts and the National Credit Code which applies to credit contracts (see Buying on credit).

Contract law is extremely complex. Although the information here may be helpful, seek legal advice for your particular circumstances (see Help and remedies and Legal help).

Does a contract need to be in writing?

Except for a few statutory exceptions, unwritten contracts are as enforceable as written ones. However, it is always preferable to have a written agreement because proving the terms of a verbal agreement can be difficult as it relies on what ‘he said’ or ‘she said’.

The requirement that unsolicited door-to-door and telemarketing suppliers must provide consumers a written copy of the agreement is an example of a statutory exception.

Pre-contract behaviour

Consumers often complain about false impressions created about products or services, or the terms under which they will be supplied. These may be created by false statements or misleading conduct through advertising, packaging, pamphlets or brochures, or by statements made by sales staff.

Mere puffs

Advertisements may contain statements that are exaggerated and obviously untrue. Statements in advertisements, such as 'our soap powder washes whiter than white' or ‘this is a great little car’ are examples of mere puffs. A ‘puff’ is statement that is unlikely to be taken seriously. Under the law a ‘puff’ is not a misrepresentation. However, there can be a fine line between a statement that is obviously not meant to be taken as fact and a statement that is a misrepresentation or misleading.

Misrepresentation

A false statement made by a party (or an agent) during negotiations for a contract may be a misrepresentation in law if it is:

• a false statement of fact rather than an opinion or an expression of an opinion not actually held;
• made with the intention of persuading a person to act; and
• it effected that person’s decision to enter into the contract.

Remedies for misrepresentation

Remedies include the right to rescind a contract and/or claim damages depending on the circumstances. Sections 172-176 of the Civil Wrongs Act 2002 (ACT) ('CWA') alter the common law and remove the bars a person had to rescind a contract for a non-fraudulent or innocent misrepresentation. In addition, for consumer transactions, a person may claim damages under s 236 of the ACL for misleading representations or conduct under s 18 & 29 of the ACL.

Formation of contract

There are several major identifiable features of a contract:

• an offer and acceptance;
• an intention to create a legal relationship;
• consideration; and
• certainty of terms

Agreement – Offer and Acceptance

It is not always easy to determine when negotiations have concluded and an agreement is reached. A contract requires that one party makes an offer to be bound on certain terms and that offer is accepted by the other party. Any attempt to vary or qualify the offer needs to be made before the contract is entered into. In most cases, it will be clear there has been an offer and an acceptance. For example, a car is offered for sale at $5000 and the buyer agrees to buy it for that price.

Intention to create legal relations

For there to be a legally enforceable contract the parties must have intended to create a legal relationship. This will be inferred from the agreement itself or from the circumstances surrounding the agreement. In commercial transactions, such as the buying and selling of goods, the intention to create legal relations is obvious.

However, this intention is less likely in the case of agreements between friends or family members. For example, a person offers to pick up their sister’s child from school. As thanks, their sister invites them over for dinner, but cancels last minute. This kind of agreement would not be enforceable.

Consideration

An essential element of a contract is consideration. There must be an agreement to exchange one thing for another. The thing exchanged is called the consideration. Consideration can be a promise, payment of money, goods or services, or anything else of value. The law only requires that something is given by each party, not that it is of equal value.

Terms of a contract

The terms of the contract are the details of the agreement between the parties. Express terms are terms the parties have specifically agreed to either verbally or in writing, and implied terms, are terms implied by law to fill gaps in the contract. Not all terms of a contract have the same importance. The remedies available if a term is breached will depend on whether a term is considered a condition or warranty.

The important terms are called conditions. Conditions are terms that are fundamental or 'go to the root of the contract'. If a condition is breached, the other party may rescind (cancel) the contract. For example, a person who contracts to buy a Rolls Royce, but is delivered a Holden, would be entitled to rescind the contract.

Less important terms are generally referred to as warranties. If a warranty is breached, a consumer cannot rescind the contract, but may sue for damages. For example, if the person with the Rolls Royce contracts to have the car fitted with a four-speaker stereo, but finds it has only two speakers when it is delivered, the person can only claim damages.

If there are errors, omissions or ambiguity in relation to the essential terms of a contact, the contract may be void for uncertainty, that is, unenforceable. Courts will attempt to give effect to contracts, if they can, by removing or correcting terms, or by implying terms into the contract, but generally only in relation to non-essential terms.

Notice of contractual terms

A party will not be bound by the terms of a contract if they did not have notice of those terms or have an opportunity to read them before entering into the contract. However, if the terms of a contract are received after contracting, one may be bound by them depending on the circumstances and the person’s conduct.

Quotes and estimates

Gathering quotes and estimates for work or repairs can present legal problems. A consumer may believe the cost of a repair job is clear and fixed, but receives a bill for a far greater amount. Whether the consumer can enforce their right to be charged the original price depends on whether they were provided with a quote or an estimate.

A quote is a fixed price for services, including parts and labour. It should always be in writing, preferably detailing the work to be done, outlining the cost of each item, plus labour and materials used, and the period for which the quote is valid.

Most traders will be happy to give a quote unless they are unsure of the costs involved. Note: A trader can charge a fee for providing a quote if they inform you beforehand. This fee is often not charged if the trader is engaged. A quote is legally binding on both parties usually fix. A higher price cannot be charged. Consumers should shop around for several written quotes, consulting friends or family who have had similar work done, and look at online reviews.

Certain traders, like a motor mechanics, will give an estimate instead of a quote if they are unsure of the extent of the problem and of what parts are needed. An estimate is a reasonable guess of the approximate cost of repairs. An estimate is usually verbal, but can be in writing and may look like a quote. Always check the document carefully and if in doubt, contact the trader to discuss it.

A consumer who decides to agree to repair work after an estimate has been provided should ensure the trader provides them with a fixed quote in writing once the extent of the problem is known and before any work is done. Alternatively, the consumer can set a limit on the amount they are prepared to pay and once this is reached, should ensure they have the option of agreeing to a fixed price or foregoing further work.

When an estimate only is provided and no fixed or maximum price is agreed to, the consumer is obliged to pay the bill even if it is considerably more than the estimate, providing the work is satisfactory.

Extra work

A consumer cannot be charged for work that was not quoted for and which they did not ask for. For example, a roof repairer quotes to retile a roof and replaces the guttering without consulting the customer. This highlights the importance of getting detailed quotes in writing.

A bill higher than that quoted should be discussed with the trader immediately. If no agreement can be reached, the consumer may refuse to pay the excess.

Exclusion clauses

Traders sometimes incorporate exclusion clauses into contract to attempt to avoid or limit liability for defects in goods or poor service, or for injury caused by the goods or services. An exclusion clause may be included in the written contract or contained in a notice or a sign or printed on a ticket. For example, a notice at the entrance of a car park may state the owners are not responsible for any damage to your car while your car is parked.

Under the common law exclusion clauses can limit liability except where the exclusion relation to a misrepresentation (s 176 CWA). For example, the seller of a car by private sale may exclude their liability for anything that goes wrong with the car. However, for consumer transactions, an exclusion clause that attempts to exclude or limit a consumer’s right under the ACL is void (s 64 ACL)

Rights against third parties

Generally, only parties to a contract are bound it. A contract cannot be enforced against someone not a party to it. This is known as privity of contract. There are, however, some very limited circumstances where a contract conferring a benefit on a third may be enforced by that third party; for example, through a trust arrangement or contractual assignment.

Breach of contract

Sometimes parties to a contract do not perform their obligations under the contract and they will be in breach of contract. A contract may expressly state what happens when a breach occurs or it may not. If the contract is silent on the consequences of a breach then a party may only terminate the contract for a serious breach by the other party. For a non-serious breach, only damages are available where loss is proved.

NOTE: A party has a duty to mitigate losses cause by the other party’s breach. Losses that arise because of a failure to mitigate are not compensatable. For example, where a mechanic fails to fix a truck needed by a furniture removal company by the agreed date, where time is of the essence, the company has a duty to mitigate their losses by attempting to hire truck.

Penalty clauses

Sometimes contracting parties will include a term in their contract that an agreed sum of money will be paid if either breaches the contract. An agreed damages clause will be enforceable if it does not constitute a penalty. If the agreed amount represents a genuine pre-estimate of the likely loss, it will not be a penalty and a court will enforce that term.

For an agreed damages clause to be considered a penalty it must be punitive in nature. A clause that is unconscionable, extravagant, exorbitant or out of all proportion to the interest it protects will be a penalty and therefore, unenforceable.

Court order to comply with the contract

A court can order a party in breach of contract to carry out their obligations under the contract. This is called specific performance. Orders of this type are discretionary and not made lightly. An order may also be made in the form of an injunction, that is, to stop a party from engaging in conduct that is in breach of contract.

A court will not make an order for specific performance where it considers damages an adequate remedy. An order may be made where the order is likely to carried out and it can be without excessive hardship. It is not uncommon for specific performance to be ordered in contracts for the sale of land. In the case of goods, such an order may be made in favour of a buyer that purchased a rare vintage motor vehicle where the seller subsequently refused to deliver it up.

Discharge by frustration

A contract may be automatically discharged if an event beyond the control of either party renders its performance impossible. For example, if a person contracts with a company to install solar panels on the roof of their house and the house is destroyed by fire before instalation, the contract is frustrated as it would be impossible to perform. However, a mere change in the circumstances of a party, like illness or loss of employment, does not engage the doctrine of frustration.