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Contractual arrangements are incredibly commonplace. Such arrangements can vary from purchasing milk at the corner store to the purchasing of large shopping centres, or industrial equipment.

When Can We Consider a Contract Valid?

The general principles in contract law assume all contracts to be valid, unless proven otherwise. In Australia, the following elements must be present to have a valid and binding agreement:

  • Offer and acceptance. The offer must be definite and accepted. Acceptance must be clear and communicated timely to the offeror;
  • The intention of the parties to create binding legal relations. The parties to the agreement must have the intention to enter into a legally binding a agreement. Most of the time, the presence of consideration is a binding proof of an existing contract;
  • Consideration to be paid for the promise made. Consideration is the price paid for the promise of the other party. It must be something of value, but is not necessarily money. A consideration may be some right, interest or benefit for the other party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party. The consideration paid does not have to be equal to market value. A common expression is that consideration must be sufficient, but need not be adequate.

Legal capacity of the parties to act. The law defines persons who cannot legally enter into a binding contract which include:

  • People who have a mental impairment significant enough to affect their ability to understand the agreement,
  • People under the influence of drugs or alcohol,
  • Minors (people below the age of majority, unless in certain circumstances),
  • Bankrupts, and
  • Corporations (may only act in a way defined by its constitution)

Legality of the agreement. This refers to the requirement for a contract to comply with any formalities. Although a contract can be made oral, certain statutes require that a contract should be in writing to be enforceable, e.g. those relating to sale or disposition of land or guarantees.

A contract must also be legal in the sense that it cannot be made for an illegal purpose. For example, a contract to commit a crime is unenforceable, as the purpose of the contract is illegality.

Forms of Contract

In Australia, a contract can be oral, written or a combination of both. An oral agreement is respected in Australia. However, there are certain dealings where contracts must be written, these include contracts to buy and sell land; to buy a car and in door-to-door sales contracts.

An oral contract normally is just as enforceable as a written contract, however it can be difficult to properly determine the terms of the contract due to its very nature. Oral contract disagreements tend to become a case of one persons word against that of another.

Warranties and Conditions in a Contract

Warranties are terms which are of minor importance. A breach of a warranty cannot become grounds to terminate or repudiate the contract. However, it gives the innocent party the right to recover damages. Whether a term is considered a condition or warranty is dependent on how essential it is the the essence of the contract.

On the other hand, conditions consist of the major or fundamental terms in the contract which compelled one or both parties to enter into a contract. The test of essentiality was discussed in the case of Tramways Advertising Pty Ltd v Luna Park (N.S.W) Ltd where the court held:

“the test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise, as the case may be, and this ought to have been apparent to the promisor.”

Remedies for Breach of Contract

The law provides for remedies in case of a breach of a contract. The innocent party can be entitled to the following actions against the breaching party:

  • Damages. A common law remedy, for breach of contract which is viewed as a ‘substitute’ for performance. Sometimes, damages are available for mental distress and anguish suffered under certain circumstances.
  • Liquidated claims. Another common law remedy that can be found in the contract itself. It is provided when a clause in the contract where parties agree that a particular sum of money will be payable upon commission of a breach.
  • Specific performance. This is an order directing the breaching party to perform the contract in the way specified by the court. It will only be ordered if damages will not provide adequate compensation. Also, this cannot be awarded in relation to contracts that require personal service.
  • Injunction for contractual breach. This refers to the order directing a party to not to do or refrain from doing something, e.g. not to persist with a contractual breach.

The right to terminate a contract. The innocent party may terminate a contract for breach, if:

  • a provision of the contract permits discharge for breach under the given circumstances; or
  • the other party repudiates the contract and renounces their obligations under the contract; or
  • the breach is sufficiently serious as to render the terms of the contract impossible to complete. Generally, minor or technical breaches will not allow the innocent party to terminate the contract.

Rescission. This is only available if the conditions relied upon by the innocent party are being misrepresented or false. The breach can be a fraudulent misrepresentation, innocent misrepresentation, or negligent misrepresentation.

Recent Amendments to Australian Contract Law

The need to overhaul the Australian contract law was first initiated by Australian Securities and Investment Commission (ASIC). It has administered new laws which were implemented on 1 July 2010. The reform deals with unfair terms in consumer contracts for financial products and financial services.  This became part of the broader new national Australian consumer law which was fully implemented on 1 January 2011.

The Trade Practices Amendment (Australian Consumer Law) Act (No.1) 2010  amends the Australian Securities and Investments Commission Act 2001. This Act marks the second phase of reform in Australian Consumer Law. The amendment is carried out to protect consumers and investors against unfair contractual dealings. Moreover, the law provides additional protection to consumers and investors, by giving the courts the power to declare the contract as void for having unfair terms and conditions.

The law covering unfair contracts terms will only apply to contracts entered into after 1 July 2010. Contracts entered into before that date will not be affected unless:

  • the contract is renewed on or after 1 July 2010. The law will apply to any conduct that occurs commencing on the day the contract was renewed; or
  • if a term of the contract is varied on or after 1 July 2010. The new provisions will apply only to the varied term and not to the whole contract.

If you have a contractual dispute, or wish for further information, you should contact our Australia lawyers to provide you with legal advice.