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UNDERSTANDING CONTRACTS

WHAT IS A CONTRACT?

A contract might be defined, in simple terms, as a legally binding agreement between two or more parties. There are fundamental circumstances or elements of an agreement which must exist for a legally binding contract to be created. The information contained under the following sub headings identify the elements which must exist before contract can be created. 

An offer and an acceptance of that offer

A person cannot enter into a contract unless that person has either accepted an offer made to him or her or has made an offer to another person who has accepted that offer. 

Offer

A contractual offer must communicate the offeror's intention, upon acceptance, to be contractually bound and what the offeror requires from the offeree in exchange for that which is offered. An offer may contains conditions as to the way in which the offer might be accepted or for how long the offer is open for and capable of acceptance.

Sometimes what might appear to be an offer is in fact no more than an offer to negotiate business (sometimes called an 'offer to treat'). In such cases the so called offeror does not intend to be bound but merely expresses a willingness to transact business. An example of this is the practice of shopkeepers displaying items for sale on shelves: the display of the items by the shopkeeper is merely an offer to treat and not an offer to sell. 

Acceptance

Acceptance of a contractual offer must be in the mode and within the time, if any, specified by the offeror. Accordingly, depending upon the nature of the particular offer, acceptance may be express or implied form the acceptor's conduct.

Acceptance must be unconditional and therefore anything less, including a counter-offer, operates as a rejection of the offer, thereafter rendering the offer incapable of being accepted. Further, acceptance must occur before the offer lapses or is withdrawn by the offeror.

Examples of offer and acceptance:

  • Purchasing goods in a shop - a contract is formed when the shopkeeper accepts your offer to buy the goods.
  • Provision of services - you offer to cut your neighbour's lawn if your neighbour prunes your trees. In the absence of special conditions as to how the offer might be accepted, your neighbour can accept your offer by pruning your trees and you are contractual bound to cut your neighbour's lawn.

Consideration

Consideration is not, as the common usage of this word might suggest, contemplation of the contract. Consideration in contract law refers to the benefit obtained or detriment suffered under a contract: it is the price a contracting party pays for the contract. A gratuitous promise, not in the form of a deed, will not create a contractual right.

Normally, consideration will easily be evidenced in the exchange of goods, money or services: for example, you get the goods and the seller gets your money. The law recognises, however, that the exchange of promises to do or refrain from doing some act may be sufficient consideration for contractual purposes. Accordingly, the fact that no money has changed hands or no services have been provided is not necessarily a basis for denying the existence of a contract.

It should be borne in mind that courts will not generally inquire into the adequacy of consideration. That is, the courts will normally let parties be bound by their contractual dealings even if the thing contracted for is exchanged for something of less than comparable value. Accordingly, a party to a contract can not normally complain that he has not received 'value for money' so to speak. 

An intention to be legally bound.

Essential to the formation of a contract is an intention to be legally bound by the relevant agreement. Normally this intention is inferred from the nature of the transaction.

Generally, with respect to agreements which relate to family, social or domestic relationships, courts will presume that there is no intention to create a legally binding agreement. In commercial situations, however, courts will presume that contractual relations were intended. Courts determine the question of 'intention' objectively and the parties conduct rather than their actual intention, is considered for such purposes.

Accordingly, if you intend to contract with family or friends you should be careful to ensure all parties concerned appreciate that contractual relations are intended. In many cases it will be prudent to reduce the terms of the contract to writing. As well as assisting in any future legal disputes, this simple measure may also help to avoid souring otherwise good family and social relations. 

Legal capacity

Sometimes courts will not enforce contracts entered into by people who are mentally unable to understand what they are doing. Persons who are under 18 years of age are said to lack the capacity to enter into some types of contracts but they can be held to other types of contracts. Further, courts may not recognise contracts entered into by adults mentally unable to understand what they are doing by reason of mental illness or intoxication. 

Requirement of writing

The general law position is that contracts do not have to be in writing to be enforceable. Parliament has, however, created laws which require writing in some circumstances before a contract will have legal effect. For example, if you were going to sue someone over a contract involving the sale of land you would need to have some evidence of the agreement in writing signed by the other person. 

TERMS OF THE CONTRACT

Courts attempt to give effect to the contract agreed between the parties. What the parties agreed to in the contract are the terms of the contract. Courts may examine the conduct of the parties and the written form of the contract, if any, to ascertain, objectively, what the parties intended when they created the contract. Quite often the terms of a particular contract are those which the parties expressly agree to, however, sometimes terms may be implied in a contract.

As noted above, legislation may affect certain contracts. In many cases legislation exists which imports implied terms into a contract. An implied term is a term which applies to the contract even though the parties did not specifically include the term in the contract. For instance, in many contracts for the sale of goods, implied terms regarding the merchantable quality of the goods are implied in the contract.

Also, at common law there are a number terms which are implied in many contracts. Sometimes, the nature of the contract is such that trade or custom usage will operate to imply terms in a contract. There are, however, exceptions to many implied terms and the parties to the contract may in many cases expressly deny such implied terms or otherwise modify such terms. Examples of common terms which are implied in a contract are:

  • that the parties will not breach other terms of the contract;
  • with respect to contracts of service, work will be performed in a workman like manner;
  • with respect to business contracts, time is of the essence.

WHAT IF I DISPUTE A TERM OF THE CONTRACT?

If the contract or a term of a contract appears to be uncertain or incomplete, a court may refuse to enforce the relevant contract or term. In some circumstances courts will rectify an uncertainty or incompleteness in a contract if such can be done while giving effect to the parties' intended agreement. That is, the courts will substitute or add words to the contract to rectify it. A court can then, if necessary, adjudicate upon the rectified contract.

Also, a court may, if uncertainty exists in relation to a term of the contract, sever the deficient term of the contract if such severing is possible while still leaving the contract relatively unaltered. If severing the deficient term would deprive one or both of the parties substantially of what they bargained for, severing will be refused. 

WHAT RIGHTS DO I HAVE IF A TERM OF THE CONTRACT HAS BEEN BREACHED?

If a contract has been breached, the general law of contract provides a range of possible remedies, depending on how important the term was to the making of the contract. Also, what the subject matter of the contract was may affect the remedies available to an aggrieved person. The remedies available in a court might be summarised under the following sub headings. 

Termination

It may be possible for you to terminate the contract. An example of this would be where you refuse to accept goods delivered to you on the basis that they are defective. 

Damages

Perhaps the most common form of relief sought is damages. An innocent party who sues for damages is entitled to damages, which restore him to the same situation as if the contract had not been breached. Examples of recoverable damages include: additional expenses incurred in repairing goods purchased which are found to be defective, or lost profits because of the guilty parties breach of a contract. 

Quantum meruit

The Latin maxim which may be translated to mean 'so much money as the plaintiff reasonably deserves' allows a plaintiff to recover a sum of money as remuneration for the goods or services supplied under a contract. This remedy is different to damages in that the court is primarily concerned with what the other party has gained than what you have lost. 

Specific performance

A court may order the other party to carry out the things they promised to do under the contract. Normally a court will not order specific performance if an award of damages would be sufficient. Further, a court generally will not order specific performance in contractual disputes involving personal services. 

Injunction

An injunction is an order of the court which, most commonly, prohibits certain conduct such as a continued breach of a contract. An injunction, for practical reasons, is normally only considered in contracts of a substantial nature. 

DAMAGES - A TERM OF THE CONTRACT

Sometimes a written contract will provide for an agreed amount of damages (liquidated damages) which is recoverable upon breach without specific proof of actual damage suffered. However, courts will not recognise an obligation to pay such liquidated damages if such can be characterised as a penalty rather than a genuine pre-estimate of the loss which flows form the breach.

On the other hand, if a contract restricts the nature or extent of damages recoverable by a party upon breach by the other party, the courts will not normally interfere with such term. However, where the term of the contract is unconscionable, the courts have shown a willingness to intervene. 

FRAUD AND UNCONSCIONABLE CONDUCT

If you are induced to enter into a contract by fraud, you are generally entitled to rescind the contract and sue for damages. However, proving fraud is not easy and the courts require a very high standard of proof when fraud is alleged. Perhaps one of the main difficulties in asserting fraud is that quite often what is thought to be a fraud is in fact an innocent misrepresentation or a mistake.

Some times the relative bargaining power of the parties may be such that it would be unconscionable for the stronger party to obtain or retain the benefit of the contract. Again this is a difficult area of law and normally the courts will not set aside a contract unless it can be shown that one party to the contract was at a disadvantage because of illness, impecuniosity or ignorance of the effect of the contract.

If you believe that a party you have contracted with has acted fraudulently or unconscionably, you should consult a lawyer before you attempt to commence legal proceedings. This is an area of law which may be fraught with dangers for even the experienced legal practitioner. 

WHAT SHOULD I DO IF I WANT TO TAKE LEGAL ACTION

A claim regarding a contract must normally be commenced in a court within 6 years from when the relevant cause of action arose. However, there may be more restrictive limitation periods which apply to more specific types of contract. Accordingly if you intend to commence legal action with respect to a contract you should do so promptly. It may also be necessary to consult a lawyer to determine whether other limitation periods exist.

Commencing and maintaining legal proceedings yourself can be quite difficult, although, many people do manage do it themselves. However, as a cautionary note, an analogy might be drawn between a person who attempts to perform his or her own electrical alterations to a home. Just as in the self litigant's case, the home electrician, if not very competent or lucky, is foolish. You must, therefore, fully arm yourself with the relevant law and court procedures if you intend to represent yourself.

If you do intend to litigate on your own behalf, or if you wish to prepare matter as best you can before approaching a lawyer, you should:

  • consider what, if any, damage or loss you have suffered;
  • try to obtain evidence of any loss or damage you have suffered, such as receipts or other records;
  • consider what you would like the court to do: it may be that the court can not grant the relief you seek;
  • gather any evidence of the creation of the contract including any letters or other documents which may have passed between the parties; and
  • consider whether any specific legislation has altered the common law rules of contract.

FURTHER INFORMATION

This Information Outline is provided courtesy of Hall Payne Lawyers who are experienced in this area of law. They are located at Level 9, 344 Queen Street, Brisbane, QLD 4000 or call them on (07) 3221-2044 if you would like more information on this legal topic, or you wish to obtain formal advice regarding your situation.

Hall Payne Lawyers are an established Queensland firm practicing in the areas of employment law (unfair dismissal etc), accident compensation (WorkCover, motor vehicle accident, personal injuries), anti-discrimination & harassment, consumer law, family law, wills & estates, criminal law and conveyancing. Hall Payne Lawyers are a founding member of the Australia-wide PeopleLaw group.

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