Contract law is very complex. Although the information given here may be helpful in deciding if a right or remedy exists, expert advice will still be needed.
A person should not sign a contract unless they have read it, understood it, agree with it, and want to be legally bound by it. If they are not sure, they should get legal advice before signing the contact. Once a contract is signed it is usually a legally binding agreement.
What is a contract?
- A contract is a legally binding agreement between two or more people or companies (called the parties).
- It is an agreement that the parties intend to be legally binding - or that they would have intended to be legally binding.
- A contract is made when promises are exchanged to do something in exchange for something else, for example, to supply goods or services for payment of a specified sum of money.
- Each party to a contract is legally obliged to carry out her or his part of the bargain and a party who fails to do so is in breach of contract - see Breach of Contract. A court can require that person to put things right either by fulfilling the contract (called performance) or paying compensation for any loss (called damages) - see Remedies for Breach of Contract.
For an arrangement to be a contract it must have three identifiable features:
- an agreement between the parties to do or to refrain from doing certain things; and
- an intention to make the agreement legally binding; and
- an exchange of value, known as consideration.
An agreement between the parties
An agreement between the parties is reflected through offer and acceptance. Offers can be made verbally or in writing, and agreement can similarly be expressed in writing, verbally or through a person’s actions.
In some instances, counter-offers may be made before the exchange is finalised. A counter-offer is not acceptance. When a counter-offer is made, the other person has the choice as to whether to accept the counter-offer or not.
A contract becomes binding once acceptance of the offer (or counter-offer) is communicated. This can be communicated verbally, in writing, or through a person’s actions. There are special rules about offers which are accepted by post, facsimile and the like, and legal advice should be sought if there is uncertainty about the acceptance of an offer.
Up until an offer is accepted, the person making it can withdraw their offer by communicating to the other person that they are withdrawing it.
Sometimes, during complex negotiations, it may be unclear what offers have been made and what have been accepted. Legal advice should be sought if there is any uncertainty.
For there to be a legally enforceable contract, the parties must have intended to enter into a legally binding agreement. This is usually inferred from the circumstances surrounding the agreement or by the actions of the parties.
If family members or friends intend to make an agreement legally binding, they should take steps to make it clear that this is their intention, such as having something in writing indicating as such.
Consideration (the exchange of something of value)
Making a contract involves an exchange of something of value to each party. Whatever is given (or paid) is called consideration. The presence of consideration distinguishes a 'commercial' contract from an agreement to gift something. A one-sided arrangement in which one person gets a benefit at the other's expense (such as in the giving of a gift) will not usually be a contract.
What is paid in consideration need not necessarily be comparable in value to what the other party is giving. As long as there is an exchange of some kind the courts will usually enforce the contract.
Generally, contracts do not have to be written down to be legally binding, although sometimes it can be harder to prove exactly what was agreed to in an oral contract.
Some contracts, however, are legally required to be in writing, including:
- credit contracts and consumer leases, for example, contracts supplying credit or consumer mortgages;
- contracts for the performance of domestic building work to the value of $12 000 or more [Building Work Contractors Act 1995 (SA) s 28];
- contracts for the sale of second hand motor vehicles by dealers [Second-hand Vehicle Dealers Act 1995 (SA) s 17];
- contracts for the sale of land, or any interest in or concerning land [Law of Property Act 1936 (SA) s 26];
- unsolicited consumer agreements (e.g. door to door sales, telephone sales) [Competition and Consumer Act 2010 (Cth) Schedule 2 ss 78, 79].
While a contract is not required to be in writing for it be enforceable, it may be advisable to have it in writing regardless. This may prevent or limit a dispute at a later time.
For example, if a contract is of special importance, involves a substantial sum of money, or if there is a possibility of a dispute about it in the future, it is wise to have a written agreement.
Some agreements will not be legally enforceable, even if written down and signed. These include agreements where there was no consideration, or agreements to do things that are illegal – see Illegal Contracts.
With certain exceptions, anyone 18 years of age or over can enter into a contract.
People under 18
People under the age of 18 do not have the same full contracting power that adults do. They can still make contracts, but there are special rules.
In general, for a contract to be binding, the minor will have to affirm the contract, that is, agree to be bound by it after turning 18..
Some contracts are binding on the minor without the minor affirming them. For example:
A minor can make a legally binding contract forgoods or services that are usual or appropriate to their way of life (called necessaries). These will be such things as food, clothing, accommodation, medical care, school requirements or sporting goods appropriate to their age and their standard of living. A minor can also make a valid contract for services of instructional or educational benefit, which could include such things as music lessons, sports coaching, educational tutoring, etc.
Contracts which give the minor continuing legal obligations
These contracts are binding unless the minor chooses to opt out of the contract before, or reasonably soon after, they turn 18. Examples of these types of contracts are contracts of business partnership, or contracts to lease land. If the minor avoids the contract, they are only responsible for the obligations which have already arisen, not for any future ones. They cannot avoid past obligations or get back money they have paid out in respect of these. However, the minor may be able to get a court order for the return of their property, previously transferred under the contract, on fair terms.
Contracts made with the consent of a court
A minor may make a binding contract with theconsent of a court. The minor's parents can apply on the minor’s behalf, if the minor wishes to be bound; or the other party can apply, if they wants to make the contract enforceable against the minor. If the court decides to approve the contract, it will then be legally binding [Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) s 6].
A minor's performance of a contract may beguaranteed. If the adult party to a contract wants greater security in contracting with a minor, they can ask the parents (or another adult) to guarantee the minor's performance of the contract. If the minor does not do as the contract requires, the other party has a separate right to sue the guarantors for any loss.
A person with a mental incapacity
A person with a mental incapacity will not necessarily be precluded from making or agreeing to a contract.
However, a contract involving a person with a mental incapacity will not be binding if it is set aside by a court. A court may set aside a contract in circumstances where the person with a mental incapacity was unable to understand the nature of the contract, or where the other party knew or should have realised this.
A contract where at least one party has a mental incapacity can still be binding in circumstances where:
- The other person did not or could not have known about the person’s incapacity; or
- Where a person has an incapacity,- if they were not affected by it at the time of making the contract; or
- Where a contract was made at a time when the person was affected by the incapacity – the goods or services they have subsequently received a benefit from are necessaries i.e. things reasonably necessary or appropriate to their way of life at the time.
A contract will require each party to do something. Some of the requirements will be spelled out in the contract (called express terms), while others are never mentioned, but are still part of the agreement (called implied terms).
Some contract may also contain exclusion clauses which limit the liability or responsibility of one party for certain happenings.
Where the contract is written down and signed, both parties are bound to do what it says (subject to some exceptions). Where some terms are in writing but are not signed by the parties, they are only binding if the party concerned knew about them, or the other one at least took reasonable steps to bring them to their attention before the contract was made.
It is also possible for oral statements to form part of the contract.
Sometimes terms which are never mentioned at all are still part of the contract. They may be implied by the circumstances. For instance, when a person visits their doctor, they probably do not discuss whether the doctor will agree to keep their medical details confidential, or whether they will have to pay the doctor's bill. The doctor is still legally bound to keep the patient’s confidence, and the patient is still legally bound to pay the bill.
Terms can also be automatically implied into a contract by law (i.e. by legislation or regulation), even if the parties do not know this. Most terms that are implied by the common law are now also stated in legislation such as the Sale of Goods Act 1895 (SA) and the Australian Consumer Law which provide for certain basic terms to be part of the contract. These terms are known as statute implied terms.
When a term is implied by legislation, the Act will also say whether the parties have a choice to exclude that term. If it says that they cannot do that, then the term will still be part of the contract, even if both parties agree that it will not apply. For example, the parties cannot agree that the Australian Consumer Law will not apply to them. Such an agreement would have no effect.
Exclusion clauses are clauses, usually written down, that say that one party to the contract will not be responsible for certain happenings.
These clauses can be valid as long as:
- they have been properly included in the contract; and
- are not contrary to law.
To be properly included in the contract, the clause cannot be tacked on after the contract has been made. If there is a signed contract containing the clause, this will usually have the effect of including it. If there is no signed contract, but there are printed documents or signs posted stating the terms, these can be included in the contract if they are brought to a person’s attention before the contract is made.
The exclusion also has to be legal. For example, there are some important obligations to a consumer that are placed on a trader and these are implied by statute into consumer contracts and cannot be excluded, see: Unsatisfactory Goods and Services.
Courts often give exclusion clauses the narrowest reading possible.
An exclusion clause will generally not cover a breach which occurs outside the 'four corners' of a contract, such as where a trader does something that was not authorised by the contract.
Where a trader has attempted to limit or exclude liability of an implied term a consumer should seek legal advice as the law on this point is both complex and uncertain.
Generally, yes. This is true even if they did not read the contract, or were unsure what it meant.
To be safe, a person should never sign a contract unless they have read it, fully understand it, and want to be legally bound to do what it says.
If they are not sure, they should get legal advice before signing. Once a contract is signed, the other party can initiate court proceedings to seek performance of the contract, or damages if the contract is breached.
However, there can be exceptional cases where a person is not bound, even though they have signed.
In some contracts, such as those to buy land, door-to-door sales contracts, and contracts to enter a retirement village, the law provides for a cooling-off period which allows a person to reconsider after signing a contract. During the cooling-off period they can legally opt out of the contract. This only applies to specific types of contracts, not to all.
If a cooling-off period applies, a person should receive a notice of their cooling-off rights at the time of signing. Often only a short time is allowed, sometimes only a few days. If a person wishes to exercise their rights to cool-off, they must give the other party written notice advising them as such, or must follow any other legal requirements that apply in relation to cooling-off for that particular type of contract.
Misleading conduct misrepresentation
If the other person, or someone on their behalf, gave a false impression about the nature of the document they were signing, or the terms in it, the parties may not be bound by the document. However, this can be hard to establish if the document itself clearly tells the person what the true situation was - see Misrepresentation.
Implied or explicit conduct
If it should have been obvious to the other party from a person’s conduct when they signed that they had no idea of the real nature of the document, for example, because they are unable to read, or it was written in a foreign language, they may not be bound. However, this defence is not available just because the person was not careful and did not read the contract. It must be shown that, for example, through the person's illiteracy or poor vision the document signed was radically different in practical effect from the document the person believed she or he was signing.
Even where grounds exist to rescind a contract, courts can be reluctant to set aside the transaction if it would affect people other than the parties themselves.
Agreement not to be bound
It is also possible for the parties to a contract to agree not to go ahead with it. Even after signing, if both sides agree that they do not want to go ahead as promised, they can agree to let each other out of the contract. If an agreement not to be bound is reached, it is prudent to have this recorded in writing.
Misrepresentation is the giving of false information by one party (or their agent) to the other before the contract is made, which induces them to make the contract. If a person makes a contract in reliance on a misrepresentation and suffer loss as a result, they can cancel the contract or claim damages.
The false statement must be one of fact, as opposed to a statement of opinion or a promise. For example, a seller saying that their property is worth $150 000 is expressing an opinion, but a seller saying that they paid $150 000 for it is making a statement of fact. A promise cannot be a misrepresentation because the statement made is about the future, and cannot be true or false at the moment it is made. Some factual statements in advertisements, such as 'this vehicle is equipped with passenger airbags and ABS braking' are statements of fact and can be misrepresentations if false.
Some latitude is allowed to people selling privately to make statements commending an article in order to arouse interest in potential buyers. Rather than relying on the seller's statements, a person should carefully inspect the item themselves, and if necessary, have an expert examine, test or value it prior to purchase.
A misrepresentation is innocent where a trader believes that the statement they are making is true and consequently has no intention to deceive the buyer. It is fraudulent where the trader makes the statement knowing it to be false or without believing in its truth, or without caring whether it is true or false. In that case, the trader may be guilty of the offence of fraud as well as misrepresentation.
Disputes often arise over whether a misrepresentation has occurred and the nature and extent of that misrepresentation. Legal advice should be sought in these circumstances.
It is a defence to misrepresentation if the person making the statement can show that they believed on reasonable grounds that it was true, or that someone else made the statement and they had no reason to know that it was made, or was not true.
If a misrepresentation is relied upon in entering a contract, a person can:
- seek to rescind (cancel) the contract; or
- sue for damages to compensate for any loss.
Rescinding a contract
It is important to attempt to rescind the contract as promptly as possible once a misrepresentation is discovered. The right to rescind may be lost if a person waits too long to seek to rescind it. The right can also be lost if:
- the person trying to rescind the contract has in some way acted unfairly; or
- the person trying to rescind the contract knows of the misrepresentation and of the entitlement to rescind, but does something which shows that they still want to continue with the contract; or
- a party to the contract cannot be restored to substantially to the position they were in before the contract was made, for example, if the goods have been used or damaged; or
- a person who is not a party to the contract has obtained some right over the goods and would suffer if the contract were set aside.
A contract can be rescinded by one party advising the other party. If the contract deals with goods, the goods should be returned in good condition. If the other party accepts this, the contract ends. However, if the other party still wants to go on with the contract, there may be a dispute which could result in court proceedings.
As an alternative to rescission, a person can sue for damages as a result of relying upon a misrepresentation. The court will consider whether the statement was a misrepresentation, whether it was relied upon in entering the contract, and whether loss has been sustained. The person accused of misrepresentation may not be ordered to pay damages if they can prove either of the following:
- that they had reasonable grounds to believe and did believe the statement was true; or
- that someone else made the statement, for example an employee, and the person did not know and could not reasonably be expected to know that the representation had been made or that it was untrue.
As a contract will require each party to do something (called the performance required by the contract) a breach of contract occurs where at least one party fail to perform their obligations according to the terms of the contract. Performance may relate to both the actions required of each party, and the time frame required for such actions.
Where a party has failed to perform their obligations according to the contract, the other party may assert that a breach of contract has occurred. Where one party is asserting a breach, this should be communicated to the other party as soon as practicable after the breach has become known. The other party may respond in a number of different ways to the alleged breach:
- they may acknowledge the breach and try to remedy it;
- they may dispute that a breach has occurred;
- they may argue that there is an exclusion clause or other term in the contract limiting their liability for the breach; or
- they may argue that there is an excuse for their breach, or that the contract is invalid.
Where a breach of contract is established, the aggrieved party may have the right to terminate the contract and/or seek a remedy - see Remedies for Breach of Contract. The right to terminate the contract may not always apply for every breach that occurs.
Where a breach of contract is disputed, the aggrieved party may need to take further action to resolve the dispute, such as commencing court proceedings.
Where a breach of contract has occurred, the parties can seek to:
- resolve the matter between themselves;
- terminate the contract;
- agree for damages to be paid to the innocent party;
- agree for specific performance of the contract to occur.
In the event the parties cannot agree on any course of action, a court application may have to be made. Not all of the above options may be appropriate depending on the circumstances of what has occurred. Depending on the breach, the court can make orders relating to the termination or performance of the contract, or regarding the entitlement to, and quantum of, damages payable to the innocent party.
It may be appropriate for the parties to resolve the dispute between themselves. This can be an effective approach, and does not involve the time and expense of going to court. As soon as a problem arises, the aggrieved person should contact the other party. If the problem involves goods bought from a trader, then contacting the trader as soon as the problem is discovered is advisable. For consumer complaints, government agencies may also offer advice, assistance or mediation to help resolve disputes - see Assistance from Government Agencies.
If the complaint cannot be resolved by negotiation, then court action may be considered. Court proceedings could be lodged where a person refuses to carry out their side of the contract and the other party initiates a claim, or where there is some other disagreement and either party decides to initiate a claim.
Before refusing to carry out the terms of the contract, it is advisable to obtain legal advice.
Sometimes a contract will specifically say that one party may end the contract if there is a particular kind of breach (or perhaps any breach) by the other. Any clear provision to this effect will be decisive.
If there is no express provision, the general rule is that a very serious breach by one party will allow the other party to choose whether or not to end the contract.
To be serious, the breach would have to be either:
- a breach of any term that has very serious consequences - that is, the effect of the breach must substantially deprive the innocent party of what was intended to be obtained under the contract; or
- a breach of a vital term - that is, a term in relation to which, at the time the contract was signed, the party's words and conduct showed that the party considered that strict compliance with the term was essential.
If the other party's breach is very serious, the person affected can choose to go on with the contract (and still potentially keep their right to claim damages), or end the contract. If the contract is terminated, the other party should be advised immediately.
The party in breach of contract can be ordered to compensate the innocent party for losses caused by the breach. Damages are awarded to put the innocent party in the position they would have been in had the contract been properly performed.
In some instances a contract may specify how much the damages are for a breach of the contract - see Penalty Clauses below. In other cases, unless the parties are able to agree about the quantum of damages, it is up to the court to decide. The party claiming damages must prove to the court the amount of the loss and the fact that the loss was caused by the breach. They must also prove that the loss is reasonably closely linked to the breach (that is, it is not too remote).
The court considers whether the loss is too remote, by looking at the term breached and that the loss that has, in fact, been caused. The court then asks whether the party in breach should have realised at the time of contracting that that sort of loss (if not its extent) was reasonably likely to result if that particular term were breached.
In general, courts have decided that the kinds of losses that a party in breach should have expected to result are:
- losses that would normally result, in this sort of situation, from breach of this sort of term
- any special losses that the party in breach should have realised were likely to arise in this particular case.
The party claiming damages must keep their loss to a minimum (called mitigating their loss).
In some instances, the parties to a contract may agree in advance on the amount of damages that must be paid if either breaches the contract. If the agreed amount represents a genuine estimate of the likely loss, the courts will enforce the clause. The agreed amount must be paid even if the real loss is more or less than that.
However, if the amount specified in the contract is not a genuine estimate of the value of the loss, but is only a threat to make the other party perform the contract (that is, a penalty), it will not apply. Instead, the court will work out the actual value of the loss that must be paid.
Disputes often occur about whether the amount stated in the contract is a penalty or a genuine estimate. The court uses the following principles in working this out:
- it does not necessarily matter what the contract calls the sum. The court will make up its own mind about whether it is a penalty or not;
- if the sum is obviously a lot more than the real loss which could result from a breach, it is likely to be a penalty;
- if there are a number of possible breaches of contract, which could produce different amounts of loss, but only one sum is provided for breach of contract, that is probably a penalty.
The court will sometimes order a party to carry out the actual requirements of the contract (called specific performance), rather than pay damages, if damages would not compensate the other party fairly. A court may order a person to comply with a contract where damages are inappropriate or inadequate because of the subject matter of the contract, for example, where the contract was for the sale of a particular house, block of land or work of art.
A contract is illegal if it involves doing something that is a criminal act or a civil wrong, or against the public good. For example, it is an offence to sell a firearm to a person not licensed to hold one, so a contract to sell a firearm in these circumstances is illegal. A contract whose purpose is to get the party to it to break another legally binding contract that the party has made already is also illegal.
Courts will not enforce an illegal contract. Money paid or property transferred under an illegal contract cannot normally be recovered. There are exceptions however. For example, where a contract is made illegal by a statute passed for the protection of a class of people, a member of that class can get back money paid or property transferred by her or him under the contract.
The law about illegal contracts is very complex. If there is any doubt about the legality of a contract, seek legal advice.
Most contracts come to an end by being completed. Once everything required under the contract has been done, the parties are discharged from further obligations under it, and it ends. A contract can also be ended by rescission following a breach, by mutual agreement, or where it becomes impossible to carry it out (called frustration).
Discharge following breach
Certain serious breaches of a contract give the innocent party the right to cancel it. If they decide to rescind the contract, they must inform the party as soon as practicable. The contract comes to an end from the moment the party in breach is informed of cancellation. Neither party is bound by the contract from then on. Matters can be become complex where there is a disagreement as to whether a serious breach has in fact occurred.
Discharge by agreement
The parties to a contract can agree at any time to end it. Such an agreement is itself a contract, so there must be consideration. If both parties have obligations under the contract which have not yet been carried out, release from those obligations counts as consideration, so nothing more is required.
Where one party has already fully performed their side of the contract, they may require the other party to give value in exchange for release from the remaining obligation. The party promising to release the other party may change their mind before the value is paid. However, if the party in breach has relied on the agreement and has changed their situation in some way, a court may force the party promising release to keep to the agreement.
Discharge by frustration
Sometimes circumstances change so much after a contract is made that it is impossible to carry it out. If this happens without the fault of either party a court may find that the contract has automatically ceased (become frustrated). In that case neither party will be bound.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.