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UNDERSTANDING CONTRACTS

GENERAL CONTRACT LAW

What is a contract?

In simple terms, a contract is a promise or set of promises which the law will enforce. "Enforcement" might mean requiring one party to pay the other compensation if they don't carry out their promises or forcing that party to carry out those promises.

How do I know I have entered into a contract?

Over the years the accumulated decisions of courts have given us a set of principles which tell us whether a contract is in existence or not.

These principles may be summarised as follows:

Offer and Acceptance

There is an offer and an acceptance of that offer which constitute the agreement between the parties. The critical characteristic of an offer is that the person making it intends to be legally bound if the offer is accepted. A few examples:

Circulars, advertisements and catalogues are generally not seen as offers but rather it is the order form sent in by a customer which constitutes the offer. If the catalogues were viewed as offers every order form sent in by a customer would be an acceptance and the trader would be bound in contract even though they might not have a sufficient supply of those goods.

Displays of goods do not generally constitute an offer but rather the offer occurs when a customer takes them to a checkout. When the shopkeeper displays goods they do not generally intend to be bound by you presenting them at the checkout.

At auctions bidders make offers when they bid rather than the offer being the holding of the auction itself. The auctioneer accepts the bid on the fall of the hammer.

It is possible to have an option agreement: this is a side contract whereby one party pays something (or agrees to do something) in return for an offer being kept open for them.

Acceptance means a final and unqualified expression of assent to the exact terms of an offer. Often there is no acceptance but rather a counter-offer specifying terms which are different to those in the first offer. Any attempt to vary or qualify an offer after there has been acceptance of an offer is of no effect because there is already a contract in existence.

Consideration

The promises in an agreement will only be enforceable if there is also "consideration". Consideration is something of value promised in return for something else. For example when you purchase goods, you give the seller your money in return for the goods you receive. It is not necessary that there be an actual exchange of money - a promise to pay would be sufficient consideration to bring a contract into existence and so it will not assist you to get out of a contract to argue that you have not paid for the goods.

Sometimes you will want to have an enforceable promise from someone where you are not giving anything in return. This can be achieved by having your lawyer draw up document called a deed.

Intention to create legal relations

The third requirement for a contract to be enforceable is that there is an intention to be legally bound. It is rare to find a statement in a contract that there is an intention to be legally bound. Courts will generally presume that the intention exists in commercial agreements and will presume that it does not exist in agreements about family, domestic and social arrangements.

Requirement of writing

The general law of contract does not require that a contract be in writing but legislation imposes a requirement of writing in some circumstances. For example, to sue on a contract for the sale of land you would need to have evidence of the agreement in writing signed by the person you propose to sue. Hire purchase agreements and door to door sales are also required by law to be in writing.

Capacity to Contract

In certain circumstances contracts will not be enforceable against people who are under 18 (minors) or who were mentally disordered at the time the contract was entered into.

Generally, a contract involving a minor will be enforceable if made for their benefit and they understood they were entering into a legally binding agreement. If it appears that the contract is not for the minor's benefit, it is possible for that person to end the contract by notice in writing. It should be noted that the contract will become binding once the person turns 18 if they indicate that they wish the contract to continue or if nothing is done to end the contract before the person turns 19.

If a person is mentally disordered at the time of entering into a contract it will be enforceable unless they can show that they were incapable of understanding the nature of the contract and that the other party knew or ought to have known of his mental disability.

Privity of contract

Only parties to a contract can sue and be sued on a contract under the general law. This is known as the doctrine of privity of contract. This is why you may not have contractual rights under the general law against the manufacturer of goods, because it is the seller with whom you have contracted. There may be other actions available such as suing the manufacturer for negligence or under product liability law.

WHEN DOES A CONTRACT COME TO AN END?

A contract comes to an end in the following ways:

Discharge by performance

When a party has done precisely what he is required to do under a contract he is discharged from further performance under it.

Discharge by frustration

A contract may come to an end if one of the parties is unable to perform their obligations because of some intervening event which makes performance impossible, that is the contract is frustrated and both parties are automatically discharged form their obligations. It is not easy to show that there has been frustration of a contract:

  • The intervening event has to cause a fundamental change in the nature of the contract such as the destruction of something essential to the contract
  • The event must not have been contemplated
  • Neither party can be the cause of the intervening event
  • It must be unjust for the parties to be bound.

Discharge by agreement

This concerns the situation where the parties agree to discharge their contract. In effect they are entering into another contract and so the same rules apply (offer, acceptance, consideration) If both parties still have something to perform under the original contract the consideration will be the exchange of promises not to enforce the old contract. However, if only one party still has something to do under the original contract the new contract to discharge will only be enforceable if supported by consideration (ie if he gives something of value in exchange for being released from his obligations).

Discharge by breach

A party will be entitled to terminate a contract if the other party refuses to carry out any of his obligations, that is if there is a total breach of contract. For example, a consumer may elect to refuse to accept delivery of goods or refuse to pay for goods if the goods are not what the consumer ordered.

It is often more difficult to work out whether there is a right to terminate if the other party has only breached some of the terms of the contract. Broadly speaking, there will only be a right to terminate if the breach is serious.

The innocent party must notify the other party if he decides to terminate the contract. The contract comes to an end at that time. Any obligations which arose beforehand (such as the right to damages for breach of contract) continue and can be enforced.

It should be noted that if a party attempts to terminate a contract when they have no legal right to do so, that would be a repudiation of the contract which would give the other party the right to terminate and recover damages. This is why a consumer should seek legal advice before refusing to perform his side of the contract.

REMEDIES AFTER BREACH OF CONTRACT

This section contains information about what you might be able to do if there has been a breach of a contract.

Informal remedies

If the breach involves defective goods or services a simple solution might be to approach the supplier of goods yourself, stating:

  • Why the goods or services are defective
  • What you want them to do about it.

It is often more effective to put your concerns in writing and if you are complaining about defective goods you should also send a copy of the letter to the manufacturer. If your claim involves a significant sum we recommend that you seek legal advice before presenting a letter of demand to a supplier or manufacturer.

Damages

"Damages" refers to the payment of money to compensate the innocent party for breach of contract. The basic principle behind an award of damages is to put the innocent party back into the position he would have been in had the contract been performed. An award of damages might therefore include money to compensate you for anything you've paid out as a result of the breach (eg cost of repairs) and money for loss of profit.

Damages are assessed on a once and for all basis when you go to court - you will not be able to go back to court for a review if you suffer more loss later on.

The innocent party has a duty to minimise his damages.

Termination

A party will be entitled to terminate a contract if the other party refuses to carry out any of his obligations, that is if there is a total breach of contract.

It is often more difficult to work out whether there is a right to terminate if the other party has only breached some of the terms of the contract. Broadly speaking, there will only be a right to terminate if the breach is serious.

The innocent party must notify the other party if he decides to terminate the contract. The contract comes to an end at that time. Any obligations which arose beforehand (such as the right to damages for breach of contract) continue and can be enforced.

It should be noted that if a party attempts to terminate a contract when they have no legal right to do so, that would be a repudiation of the contract which would give the other party the right to terminate and recover damages. This is why a consumer should seek legal advice before refusing to perform his side of the contract.

Specific Performance

Sometimes you will want the other party to actually do what they promised to do rather than to pay you damages . Specific performance is a remedy whereby a court has a discretion to order that a party perform their side of the contract. There are several factors which are relevant to whether a court will decide whether to order specific performance. For example:

Damages must be inadequate compensation - this will depend on the circumstances of the case but where you have purchased land, or rare objects, the court is more likely to consider damages to be inadequate.

A court won't order specific performance where there are ongoing obligations to be performed and that would involve the court in ongoing supervision.

Where there has been delay in starting court proceedings and it would be prejudicial to the other party to grant specific performance.

IMPLIED CONDITIONS AND WARRANTIES IN CONTRACTS

The general law of contracts is sometimes deficient in the protection it gives to consumers. State and federal Parliaments have attempted to improve protection for consumers by enacting legislation which implies into certain types of contracts extra terms.

Some of these implied terms are:

  • If you sell goods, you are promising that you own them in the first place and have the right to sell them
  • That the goods are free from any debt or charge. You would not be able to sell something which still had money owing on it unless the buyer agreed to accept that before they entered into the contract.
  • That where you are selling goods by description, that is where the buyer has not seen the goods, they must match the description. Similarly, if the buyer has bought something on the basis of a sample, the goods supplied must match the sample.
  • If a consumer makes it known to a seller the purpose for which they want to buy goods, there is an implied term that the goods must be fit for the that purpose.
  • That the goods must be of "merchantable quality". This means that they have to be fit for the purpose for which such goods are usually bought.

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