Law for Non-Lawyers: Introduction to Law Contract law - essential legal knowledge A contract is a legally binding agreement with words or in writing between two or more parties (people or companies), or a set of legally binding promises made by one party to another. The law says that these kinds of promises are enforceable. If one party breaches their legal promises then other will be entitled to a legal remedy to compensate them for any loss suffered. Why even have contracts? We can think about contract law in a number of ways. As a voluntary assumption of legal obligations between two individuals, or as a means of simplifying commercial transactions and ensuring certainty and clarity, or even as a way of setting out a mutual relationship agreement based on promises and action. One famous legal author even said that [t]he power conferred on individuals to mould their legal relations with others by contract is one of the great contributions to social life. Contract law is a private body of law. It operates between individuals or companies who owe the obligations created by valid contracts to other individuals or companies. The role of the Courts is to interpret and enforce the terms of the contract that the parties agreed to. In most jurisdictions the law of contract is found in both a mixture of statutory laws passed by the parliament, and common law principles established by the courts and judges when deciding about disputes. It is also known as the law of obligations, from the common law. Continued over Monash University FutureLearn 1
How does a contract begin? There are a number of essential ingredients that need to exist for a valid legal contract to be formed. Agreement is made up of two parts including an offer made by one party, and acceptance by the other. An offer is an expression of willingness by one party to enter into a contract on the verbal or written terms as stated. It s a promise to do, or not to do something in return. Acceptance is an unmistakable statement with words, conduct or in writing, by the other party to respond and accept the offer made. Through this form of legal consensus, agreement has occurred. An important common law case establishing this legal principle is Carlill v Carbolic Smoke Ball Co. Consideration is the price one party pays for the promise of the other party. Consideration does not need to be money (although it normally is) and could be the exchange of something of value. For example, this could include assigning a number of shares in a company held, or even as simple as agreeing to pay for monthly services with a loaf of freshly baked bread. Intention to create legal relations is another core element. Usually this is not an issue where one party pays the other valuable consideration as evidence of their intention to be bound by the agreement. However, the law does recognise that in some circumstances the parties are not presumed to intend to enter into a binding contract, such as domestic, social or family agreements. If a party does want to rely on one of these kinds of agreements, they will have to provide evidence to a court that the family member intended to be bound by the agreement. Capacity to contract is generally presumed, but there are some exceptions. Young people under the age of 18 do not have capacity to enter into binding legal contracts in many jurisdictions unless they are for necessities to maintain the condition of life of the person under 18. People who are mentally incompetent do not have the capacity to enter into binding contracts either, where they are not capable of understanding the transaction they are entering into and the other party knew that they were mentally incompetent at the relevant time. Formalities are required by statute law for some forms of contract, such as the sale of land. This means that the contract must be evidenced in writing and signed for. The purpose of these requirements for some contracts is to reduce fraudulent (untrue) contract claims, and to ensure that it is easier to prove that the parties completed the contract. In addition to these essential features, a contract will not be upheld as valid by a court if it is for an illegal purpose, such a contract between two parties agreeing to commit a crime. FutureLearn 2
What about when things go wrong with contracts? In reality, most contracts are performed and completed without any problems, a house is built, a car is sold or an item of clothing is purchased and worn. But, as we all know, contractual relationships can go wrong, and the disappointed party will want either the contract enforced and performed, or a legal remedy or compensation for any loss they have suffered. When this happens, the disappointed party can take their matter to the court to adjudicate on what the outcome of the dispute should be. The court will look at the contract problem objectively, meaning that they will take the view of what a reasonable person would understand all the facts, circumstances and the contract at the time it was entered into, and what were the terms agreed between the parties at the time the contract was made (both verbally and in writing). After assessing all the relevant evidence, and after applying the law of contract, the court decides what the outcome between the parties should be. The court then makes an enforceable decision against one party. For example, it can order that the contract be performed or that the losing party pay monetary compensation, also known as damages to the party who has suffered the loss as a result of the breach of contract. What about fairness? One problem with contract law is that it assumes that both parties are just as smart and savvy as each other and can freely bargain the terms of the contract between each other. Sadly, the world is not like this, and many people either don t understand what their contractual rights are, or better yet, how to advocate for their protection and preservation. Thankfully, the law of contract is aware of this and has a number of tools in the form of common law principles available to even up the playing field when parties enter into contracts. Some of these principles have even been codified by parliaments into statute laws that prohibit this kind of conduct. Let s explore just a few of these now. Relationships of undue influence and advantage If it can be shown to a court that one party exerts undue influence over another to enter into a contractual agreement, the court can set the contract aside. The influence can be actual such as a violent relationship between a husband and wife, or even presumed where the very nature of the relationship means that there is a power imbalance, such as between a doctor and a patient, a parent and a child, or even a lawyer and their client. Where a position of undue influence can be established, the onus is on the stronger party to prove that the weaker party entered into the contract freely and with their full consent. Monash University FutureLearn 3
Engaging in unconscionable conduct against a disadvantaged party Where a stronger party knows and exploits a special disability of the weaker party, then the contract may be avoided by them on the grounds that it would be unconscionable for the transaction to proceed. Special disability can include age, literacy, language barriers, mental incapacity, even drunkenness are all relevant factors to assessing the degree or amount of disadvantage the weaker party had at the time of entering into the contract. A key case explaining this legal principle is Commercial Bank of Australia v Amadio. Misrepresenting information or misleading or deceptive conduct When two parties are considering entering into a contract they make statements, discuss terms and negotiate what is important to each of them. But, when one party makes a false statement about an important fact about the deal which causes the other party to enter into the agreement and suffer loss, they have wrongly misrepresented a key factor and should not be entitled to profit from that behaviour. So, if a commercial real estate agent makes a representation to a potential buyer that the property is fully let and tenanted for the next two years that will guarantee a great source of income for you when it can be shown that the real estate agent had knowledge that, all the tenants were about to leave the building next month, then the buyers will have a legal remedy, and can ask the court to set the contract aside, and put them back in the same position they were in before they entered into the contract. It s still important to be careful though Even though the law has shown us its ability here to adapt and protect against these sorts of tricky and undesirable contracting behaviours, it important to recognise that it is not the role of the courts to act as protectors against people entering into bad deals with unfavourable consequences. Freedom to contract does have its pitfalls, so buyer beware! That s why it s always a good idea to seek independent legal advice before entering into any form of significant contract when you feel unsure or are inexperienced in commercial deals. FutureLearn 4
How can contract law protect consumers like you and me? Another way the parliament has tried to fix the problem of unequal bargaining strength between buyers and sellers is to introduce statutory guarantees that operate in addition to, or on top of the law of contract in some areas, such as consumer goods. Passing consumer protection laws and having accessible government regulators, complaint handling bodies and information services to better inform and assist parties who have entered into contracts that the law says are either illegal or breach the minimum statutory standard that our society requires are great ways to look after consumers. Consumer guarantees and protections laws The Competition and Consumer Act 2010 (Cth) is an example of a national statutory consumer protection law operating in Australia. It applies to businesses or sellers who are supplying in trade or commerce goods or services for ordinary household use or consumption that normally cost (AUD) $40,000 or less. This law says that in any of these commercial contracts, consumers can rely on the following implied terms as always being part of their contracts to protect them, including that: The seller has title to and owns the goods they are actually selling The seller will not attempt to take back or disturb the buyer s possession The goods sold match the description in the contract The goods are of an acceptable or merchantable quality The goods are fit for their intended or specified purpose The goods sold match with a sample or demonstration model Any extra statements or promises made, known as express warranties, that the seller makes about the quality, durability or performance of the goods can be relied on The goods are not subject to any extra debts or moneys owed on them by the seller, also known as undisclosed securities The manufacturer or importer will take reasonable steps to provide spare parts and repair facilities for a reasonable time after purchase. If the seller, the maker, or provider breaches one of these consumer guarantees, then the buyer will have a right to a remedy against them to fix the problem or fault. Monash University FutureLearn 5