CONTRACT LAW Contracts: Types and Sources in Australia CONTRACT: An agreement concerning promises made between two or more parties with the intention of creating certain legal rights and obligations upon the parties to that agreement, which shall be enforceable in a court of law Sources of Contract Law Contract law in Australia is derived from: JUDGE-MADE LAW: Developed in the English Common law courts - From precedent decisions of judges LEGISLATION/ ACTS OF PARLIAMENT: Amended/ supplemented the case law - e.g. Competition and Consumer Act 2010 prohibiting misleading or deceptive conduct Types of Contracts FORMAL CONTRACTS: Deeds - Special form of contract, under deed or seal - Used in particular circumstances, where the parties would otherwise have no contractual obligations due to absence of consideration - Gratuitous (free) promise promise made without consideration SIMPLE CONTRACTS: Oral/written contracts - Primary form of contracts with no required formality - UNILATERAL CONTRACTS: A promise, which is accepted by doing something. Only one party under any obligation - BILATERAL CONTRACTS: A promise for a promise, where the exchange of promises creates the contract Contracts do not always have to be in writing A contract in writing is evidence of a legally enforceable agreement. Under the Imperial Acts Application Act 1969 (NSW), 5 classes of contract must be evidenced in writing to be enforceable 1. Promise by an executor/ administrator to pay the liability of a deceased person out of their own money 2. Contract of guarantee where one person promises to pay the debts of another, if the other defaults 3. Marriage 4. Contract for sale/disposition of land or any interest in land 5. Contracts not to be performed within 1 year of being made Elements of a Contract A valid contract must meet these 7 prerequisites: 1. Intention to create legal relations 2. Agreement 3. Consideration 4. Legal capacity 5. Genuine consent 6. Legality of objects 7. Any formal/ procedural requirements must be satisfied
Intention to Create Legal Relations INTENTION TO CREATE LEGAL RELATIONS: There must be evidence that the parties intended to make a legally enforceable contract o which they are bound The Offer Rules in relation to offers There must be: 1. An offer is not the same as an invitation to treat and an option 2. Communication of the offer a. Can be communicated to a specific person, or more broadly, to a class or persons/ the whole world b. Communication of the offer can be in writing, orally or by conduct 3. Revocation An offer must be cancelled before the other party accepts 1. Invitation to Treat is not an offer INVITATION TO TREAT: An offer to consider offers. Cannot lead to an legally binding agreement, unless an offer is made by the person considering the offers Price lists, advertisements, auctions, announcements, goods on display in shop windows and shelves REQUESTS FOR INFORMATION: A request for information is not a firm promise and so is not an offer It does not destroy the offer, as it is only an attempt to obtain information 2. Communication of the Offer The offer must be directed to: one person, a group of people or the world at large 3. Revocation An offer may be revoked at any time before acceptance Presumptions for Intentions Rules/ presumptions for intentions: 1. Presumed that parties to a business agreement intend to make a contract 2. Presumed that parties to a family, domestic, social or voluntary agreement do not intend to make a contract 1. Business/ Commercial Agreements These are presumed to intend to make a contract This can be rebutted if the parties enter an agreement that is binding in honour only (i.e. agreement only) 2. Family/ Domestic Agreements These agreements may be morally binding, but not legally binding 3. Social/ Voluntary Agreements Law presumes that voluntary agreements are not intended to create legal relations Presumptions now abolished and the traditional approach no longer apply. Now, the situation depends on the facts of a case
Agreement The Acceptance Rules in relation to acceptance are: 1. Acceptance must be made strictly in response to an offer 2. Acceptance must be communicated 3. Acceptance must be unqualified 4. Conditional assent is not acceptance 5. Acceptance must be clear and certain 1. Acceptance must be made strictly in response to an offer A person claiming to accept an offer must know that the offer exists 2. Acceptance must be Communicated Acceptance must be communicated to the offeror either through words (expressed) or conduct (implied) Acceptance by silence is not acceptance unless explicitly agreed to be so Acceptance by conduct may be good acceptance 3. Acceptance must be Unqualified To make sure there is a meeting of minds to create a contract, the acceptance of an offer must be unqualified with nothing further to be negotiated between the parties COUNTER OFFERS: The law states that when a party makes a counter offer, this is a rejection of the original offer 4. Conditional Assent is not Acceptance Conditional assent is not binding unless and until the offeror agrees to the condition The condition has to be fulfilled as a prerequisite to the contract The words subject to contract does not mean that the parties intend to be bound until a written contract has been prepared 5. Acceptance must be Clear and Certain The parties must be definite about the exact terms of their contract, and if the terms are not clear and not certain there is no contract Postal Acceptance Rule When parties use the post as a medium of exchange, the rules as to the timing of acceptance change as follows: An offer by letter is not effective until received by the offeree Acceptance is effective as soon as it is posted If the offer is to be revoked, notice of the cancellation must be received by the offeree, before the letter of acceptance is posted Instantaneous Communications In cases of agreements communicated by means of telephone, fax or email, the contract is formed when and where the offeror hears or receives the offeree s acceptance The Electronic Transaction Act 1999 (Cth) provides guidance on times for receipt and dispatch
Consideration The Consideration CONSIDERATION: What the promisor gives in exchange for the return promise Consideration turns an agreement into a contract Failure of consideration can make an agreement unenforceable Rules in relation to consideration are: 1. Consideration is essential to the validity of every simple contract Consideration must move from promisee 2. Consideration must not be in the past 3. Consideration must have value but needs not be adequate 4. Consideration must be possible of performance 5. Consideration must be definite 6. Consideration must be legal 7. Consideration must be referable to other party s promise 1. Consideration must move from the Promisee 2. Consideration must not be in the Past Consideration must be: Present: consideration which is an act done now in return for a promise when the Act is completed Future: where parties agree to exchange promises to do something in the future A past act can be considered good consideration if: - It was done at the promisor s request - Parties understood that the act would be remunerated - Promise would have been enforceable if it had been promised in advance of the act 3. Consideration must have Value but needs not be adequate Consideration is something the parties in the contract can decide on Consideration must be sufficient, which means that it must have some legal value 4. Consideration must be Sufficient Insufficient consideration can be analysed under: a) Performance of a public duty imposed by law - Promise to carry out a public duty imposed by the promise is no consideration - Going beyond what is owed by law is good consideration b) Performance of a duty already imposed by contract - A promise to perform a duty already imposed by contract is no consideration - Going over and above what the contract stipulates is good consideration c) Moral obligation/ natural love/ affection - Moral obligation/ love will not convert a promise into good consideration d) Uncertain or indefinite promises - A contract made for consideration which is uncertain or indefinite is unenforceable e) Practical benefit - Practical benefit can be consideration as long a there is no duress of fraud f) Part performance/ payment - Part performance is insufficient consideration, unless otherwise agreed upon to accept a smaller amount (or something different) Promissory Estoppel PROMISSORY ESTOPPEL: Will allow a promise to be enforced even though the promisee has not provided good consideration for that promise Operates if the promisee has relied on the promise and would suffer some detriment if the promisor went back on their word Rules of Promissory Estoppel (derived from Waltons v Maher) 1. Promisee assumes existence of particular legal relationship 2. Promisor responsible for this assumption 3. Promisee acted/ did not act in reliance on that assumption 4. Promisor knew what promisee would do or intended for promisee to act in this way 5. Promisee will suffer loss or some detriment or harm if the assumption/ expectation is not fulfilled
Legal Capacity Capacity CAPACITY: The presumption that everyone has full legal capacity A lack of capacity can void a contract There are classes of persons subject to degrees of incapacity to enter enforceable contracts 1. Minors 2. Mentally ill 3. Intoxicated 4. Corporations 1. Minors The only two classes of contracts binding on minors at common law are: Contracts for necessaries Employment, education, apprenticeship and training contracts (if they are for the minor s benefit) Voidable minors contracts are: Contracts which involve acquiring an interest in property of a permanent nature Contracts with continuing obligation 2. Mentally Ill A person with a mental disorder cannot give the consent to make a contract. The mentally ill are bound by their contracts unless: They can show that they did not understand what they were doing at the time of contracting The other person was aware of their impaired mental condition The burden of proving these two matters lies on the mentally ill person 3. Intoxicated Incapacity to contract because of intoxication by alcohol or other drugs is judged by the same test of incapacity as for the mentally ill If the intoxicated person did not understand what they were doing when they entered a contract, the contract is void because there was no consent If the intoxication affects the person s business sense, and the other person was aware of this, the contract is voidable by the intoxicated person 4. Corporations The contractual capacity of a corporation is limited in two ways: 1. Natural impossibility: All signing, emails and speaking is done by an agent or representative on behalf of the company 2. Legal impossibility: Corporations Act 2001 (Cth) provides that a company may be bound by contracts entered into by agents acting on behalf of the company with the company s express or implied authority
Genuine Consent Genuine Consent CONSENT: A genuine agreement between parties to a contract as to nature and scope Ask What have the parties agreed to? There must be genuine agreement between the parties to a contract as to its nature and scope Vitiating Elements VITIATE: To corrupt, to damage, to reduce value. A vitiating factor operates to render a contract voidable or void retrospectively. Vitiating elements include: 1. Mistake 2. Misrepresentation 3. Illegality 4. Inequality between the parties If a contract is bad because of a vitiating element, it can be: VOIDABLE: The contract will continue on foot unless the injured party elects to rescind (i.e. cancel) or avoid the contract VOID: Void back to the moment of formation, as if it never existed (void ab initio) 1. Mistakes If a mistake operates, it often renders a contract void ab initio (from the very beginning) Places the parties in the same position as if no contract had ever been made a. Common mistake: Both parties make the same mistake as to the existence or identity of the subject matter - Void b. Mutual mistake: Parties are at cross-purposes: both parties have made a mistake but each party has made a different mistake - Void c. Unilateral mistake: Only one of the parties is mistaken, and the other is, or should be, aware of this and does nothing to correct the mistake - Void or voidable 2. Misrepresentation MISREPRESENTATION: When representations made are untrue a. Minor Misrepresentation: non contractual or mere misrepresentation. A minor misrepresentation made by words or conduct - Not part of the contract, and cannot be sued on for breach of contract - No remedy for breach of contract but may be remedies under other heads of law (such as tort/ Australian Consumer Law) b. Major misrepresentation: Actionable misrepresentation that leads/ induces someone to contract, but is not a term of the contract - Voidable c. Fraudulent misrepresentation: A false representation of a material fact. Actionable if: - Knowingly made by D - Without believing in its truth - Recklessly, careless whether it is true/ false - Voidable d. Innocent/ non-fraudulent misrepresentation: A misstatement of a material fact without the intention to mislead and is made in good faith - No remedy in tort (unless negligent) e. Negligent misrepresentation: Statement made innocently but carelessly - Injured may sue for damages 3. Illegal Contracts Contracts can be illegal or void by the state or common law. Contracts will be illegal if they involve illegal conduct Contracts to commit a crime, tort or fraud on a third party Contracts that are immoral Contracts to the prejudice of public safety of good relations Contracts prejudicial to the administration of justice Contracts to defraud the revenue Contracts that involve a breach of duty
4. Inequality Between Parties a. Duress: Involves the use of violence or illegal threats against a person, their goods or economic interests to force them to enter into a contract against their will Lack of a voluntary agreement To the person: Actual or threatened violence to one contracting party, or their immediate family/ near relatives To the goods: Threats to seize, damage or destroy the goods of one contracting party Economic Duress: Economic pressure beyond normal acceptable commercial practice b. Undue influence: Involves the improper use of a position of influence or power possessed by one person over another in order to induce that other person to act for their benefit There exists a lack of genuine consent to the agreement c. Unconscionable conduct: Contract will be set aside as unconscionable (unfair) where the defendant has abused their superior bargaining position in their dealings with the plaintiff To prove unconscionable/ unfair conduct, the plaintiff must establish: There were in a position of special disability or special disadvantage - Age, financial needs, illness, ignorance, inexperience, inability to understand the language, inability to read Such disability/disadvantage affected the defendants ability to protect themselves The defendant knew, or ought to have known, of the plaintiffs disability/ disadvantage and taken advantage of it Actions of the defendant were unconscionable Legality of Objects Contracts can be illegal or void by the state or common law. Contracts will be illegal if they involve illegal conduct Contracts to commit a crime, tort or fraud on a third party Contracts that are immoral Contracts to the prejudice of public safety of good relations Contracts prejudicial to the administration of justice Contracts to defraud the revenue Contracts that involve a breach of duty Proper Form PROPER FORM Consider are there any statutory procedural requirements that need to be satisfied? A lack of compliance with the required formalities may make the contract void or unenforceable