A brief history
Australian courts take the view that contract law arose in the actions ofFormation
There are five essential elements necessary for legally binding contract formation: # Agreement between the parties. There cannot be a unilateral contract. # Consideration (a bargain requirement: generally, the supply of money, property or services or a promise to undertake, or not undertake a particular act in exchange for something of value); # Capacity to enter legal relations (e.g. of sound mind and legal age); # Intention by the parties to enter into legal relations (private non-commercial agreements between family members may not indicate intention to enter a legally binding contract and therefore may not be enforceable); and # Certainty (the contract has to be complete, certain, clear and binding). where the defendant's newspaper advertisement to the public that a £100 reward would be paid by the defendant to any person who contractedAgreement
The existence of an agreement between the parties is usually analysed through the rules of offer and acceptance.. This may be expressed as a clear indication ("offer") by one party (the "offeror") of a willingness to be bound on certain terms.. accompanied by a communication by the other party (the "offeree") to the offeror of an unqualified assent to that offer ("acceptance"). An offer indicates an intention by the offeror to be bound without further discussion or negotiation, on acceptance of the terms set out. The court will determine the offeror's intention objectively..''Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd'Consideration
The second element necessary for contract formation is consideration. A promise will be enforceable as a contract only if it is supported by consideration,''Beaton v McDivitt'' (1987) 13 NSWLR 16Capacity
Contractual capacity refers to the ability of a party to enter into a legally binding contract. Minors, drunks,. and the mentally impaired. may not possess adequate capacity however the ordinary reasonable person is presumed by default to have contractual capacity... Where there is a lack of capacity to contract, an agreement may be rendered void.Intention
The fourth element is that the parties must create an intention to create legal relations. The intention requirement has often been approached on the basis that parties to commercial arrangements are presumed to intend legal consequences,. while parties to social or domestic agreements are presumed not to intend legal consequences.. Such presumptions determine who bears the onus of proof. In ''Ermogenous v Greek Orthodox Community of SA'', a case relating to the engagement of a minister of religion, the High Court was, however, critical of the utility of a language of presumptions in this context. Preliminary agreements become apparent when parties enter into an agreement, however that is yet to have been formalised in a more intricate agreement which will be signed by both parties. Where one party later refuses to continue with the agreement, the question thus arises whether the first agreement was intended to be enforceable. In '' Masters v Cameron'' the High Court held three possibilities to be available;. # The parties are immediately bound to the bargain, but they intend to restate the deal in a more formalized contract that will not have a different effect; or, # Parties intended to be immediately bound, however their performance of terms is suspended until their intention is formalised through conclusion of legal documentation; or, # Parties do not intend to be immediately bound, instead they intend to be bound only when a properly drawn contract has been signed. There is a prima facie presumption that this third category is evident where the phrase 'subject to contract' has been utilised. Subsequent authorities have been willing to recognize a fourth category in addition to those stated in ''Masters v Cameron''.''Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd'' (1986) 40 NSWLR 62Certainty
For contract formation the agreement must be sufficiently certain and sufficiently complete that the parties' rights and obligations can be identified and enforced. The topic of certainty encompasses three related and often overlapping problems: # The agreement may be ''incomplete'' because the parties have failed to reach agreement on all of the essential elements or have decided that an essential matter should be determined by future agreement; # The agreement may be ''uncertain'' because the terms are too vague or ambiguous for a meaning to be attributed by a court; # A particular promise may be ''illusory'' because the contract effectively gives the promisor an unfettered discretion as to whether to perform the promise.. The case law reflect the tension between, on the one hand, the desire to hold parties to their bargains in accordance with the principle ''Terms
A term is any clause or provision in a contract. The two main issues which arise in relation to contractual terms are: what are the terms of the contract (identification) and what are their legal effects (construction).Express terms
An express term is an enforceable, promissory statement, written or oral, that makes up part of a contract. Only terms made reasonably available to each party before a contract is made can be incorporated into the contract... For example, a party can incorporate terms when the other party knows, before or at the time the contract was made, that a delivered document or a displayed sign on premises contained the contractual terms in question.. However, for tickets with unusual and obscure terms, the passenger must be given reasonable notice and time to read the provisions, especially if they refer to terms found elsewhere. If parties have had a history of dealings, the contractual terms introduced in earlier contracts may be incorporated into a subsequent contract, as being known by the parties. For these terms to be incorporated into the present contract, the course of dealings between the parties needs to have been regular and uniform, contractual in nature, consistent, and sufficiently long. Although some statements made before the contract was entered into may have been intended to operate as terms, not all such statements will in fact operate as terms. Whether or not a statement made during negotiations is an enforceable term depends on whether or not the contract is one that is fully in writing, or one that contains an oral agreement. If a contract is fully in writing, then no statements made outside of the contractual document will be enforceable. This is known as theImplied terms
Apart from the terms expressly agreed, by reason of what the parties have written or said, implied terms may also exist to impose obligations on the parties or to qualify the terms of their bargain. Implied terms are not necessarily excluded by entire contract clauses.Terms implied in fact
A term may be implied ‘in fact’ into a contract, to give full effect to the presumed intentions of the contracting parties. Terms implied in fact are terms that are ‘tailored’, and therefore unique, to the particular contract in question. Terms implied in fact are traditionally said to be based on the ‘presumed’ intentions of the parties concerned.. In formal contracts, in ascertaining a party's presumed intentions, reliance is placed on the rule handed down inTerms implied in law
Terms implied in law are terms automatically implied in contracts of a particular class or description deriving from legal principles rather than the intentions of the parties to the contract.. For a term to be implied in law, the relevant test is whether the omission of the term would significantly diminish the rights of the parties under contract. This has been referred to as the test of necessity, which has been differentiated from the business efficacy test conducted in the implication of terms in fact, due to the former test taking into regard considerations of policy, and among other things such as the nature of the contract, and justice and policy.Terms implied by custom
A term can also be implied by customs.. The existence of a custom or usage that will justify the implication of a term into a contract is a question of facts. There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract. The custom is only to be inferred from a large number of individual acts which shows an established understanding of a course of business. The implied term cannot contradict an existing express term. However, a person may still be bound by a custom notwithstanding the fact that he had no knowledge of it.Construction of terms
Where the terms of the contract are ambiguous or susceptible to more than one meaning, evidence of surrounding circumstances and context may be admissible to assist in its interpretation. The High Court has recently reiterated the ''Codelfa'' ruling regarding the use of existence evidence in the interpretation of contacts.. For example, this would commonly invite one to examine the commercial purpose of the transaction, its background and context, common practices etc.. Moreover, courts tend to favour an interpretation that produces a reasonable commercially accepted result and avoids unjust or inconvenient consequences to both parties. It is also important to note that the subjective intention of the parties is irrelevant. The construction of contractual documents is determined by what a reasonable person in the position of the party would have understood the words to mean. With regard to a recent judgment made by the High Court in ''Western Export Services Inc v Jireh International Pty Ltd'', Justices Gummow, Heydon andEffect of a signature
The '' L'Estrange Rule'' '' L'Estrange v F Graucob Ltd'' 9342 KB 29Illegality
A contract may be illegal because it is prohibited byTermination
TheExpress right to terminate
A contract may include an express term grant an express right for either or both parties to terminate. Such a clause may provide for the termination of the contract in 3 ways, 'at will' (granting a right to terminate at any time), with notice (granting a right to terminate in compliance with a notice termination procedure), or when triggered by specified events (such as a breach of contractual condition or non-fulfilment of a contingent condition).Implied right to terminate
Where a contract does not contain an express right to terminate, courts may find that the contract includes an implied right for one or both of the parties to terminate the contract. An implied termination clause usually requires the giving of reasonable notice of termination. What constitutes 'reasonable notice' is a question of fact, and will depend on the circumstances of the individual case.Termination by Subsequent Agreement
Parties may terminate a contract by making a subsequent agreement under which they both agree to release the other party from their obligations under the original contract. This subsequent contract must comply with the ordinary rules of contract formation, including consideration. Where both parties still have obligations to perform under the contract, each party will provide consideration in agreeing to release the other part from his or her remaining obligations. In cases where contracts have been partly performed (where one party has fully performed their obligations under the contract), the non-performing party can also provide fresh consideration by an ''accord and satisfaction.'' This is the purchase of a release from an obligation by giving any valuable consideration that is not the actual performance of the original obligation. The need for consideration can be avoided by executing a deed. Where parties make no express statement of how the subsequent agreement interacts with the original, it can be inferred from the circumstances whether the original contract has been terminated. The parties may have intended the subsequent agreement to replace the original contract, or they may have intended it to vary the terms of the original contract. Whether the agreement was intended to replace or vary the original is a 'matter of degree'. Dependent upon the circumstances in each case different aspects may be considered by a court. ''Concut v Worrell'' illustrates some factors that may be assessed in employment relationships.Termination for breach
In the absence of an express term for the termination of a contract, whether a breach of the contract gives rise to a right for the innocent party to terminate the contract depends on the classification of the term as a: # Condition: An aggrieved party will be entitled to terminate for any breach of that term by the other party regardless of the gravity or consequences of that breach. The appropriate test is the test of essentiality. 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 a substantial performance of the promise and this ought to have been apparent to the promisor. This is an objective test of the parties' intention at the time of formation of the contract. # Warranty: Warranties arise if, in the absence of a clear expression to the contrary, there is no possibility that a breach of a particular term would deprive the aggrieved party of all or part of their expected benefit from the contract as a whole. Therefore, the aggrieved party will not be entitled to terminate merely by reason of a breach of the term by the other party. # Intermediate or innominate term: the aggrieved party's right to terminate will depend on the severity of the breach and its consequence. The seriousness of the breach will determine whether termination is allowed or the party can sue for damages. at p. 641-2. If the breach is likely to have serious consequences for further performance then they will be entitled to terminate.;see also . The test for serious innominate terms is whether the breach would deprive the aggrieved party of substantially the whole benefit intended under the contract. The test for whether the term is essential and therefore gives rise to the right to terminate is: #whether it appears from the general nature of the contract, 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 #and that this was apparent to the promisor.Termination for failure of contingent condition
Parties may make the formation and performance of their contract conditional upon the occurrence of a specified event that neither party promises to ensure will occur. If the event does not occur, then one or both parties will be entitled to terminate the contract.. The parties must do everything reasonably in their power to see that the contingent condition is fulfilled. The time for fulfilment of a contingent condition may be expressly specified in the condition. If no time is specified, the courts will construe the contract as requiring the condition be fulfilled within a reasonable period of time, having regard to the circumstances of the case. In certain contracts, it may be unclear if non-fulfilment of a contingent condition has occurred where there is a subjective requirement in the contract, such as whether one party has achieved "''satisfactory'' finance." If the contingent condition is a subjective fact, parties must act "honestly" or genuinely believe the condition to be true. Both parties may act together to agree to waive a contingent condition, meaning that they would be bound by that agreement and many not terminate the contract for non-fulfillment of the condition. A party can waive the contingent condition if the contingent condition was for the benefit of that party.Termination for repudiation
Where one party manifests an unwillingness/inability to perform his/her contractual obligations, the other party has the right to terminate. This does not depend upon the subjective intention of that party. An intention to repudiate may be evinced through either express or implied conduct, or may be ascertained from a combination of smaller breaches.. The unwillingness/inability to perform must relate to whole of the contract, to a condition of the contract or be "fundamental". This may be evidenced by a single act or by an accumulation of conduct.. It has been laid down by the High Court in ''Shevill v Builders Licensing Board'' (Shevill) that the lessor cannot claim for loss of damages but is entitled to receive arrears in rent because the lessor could only rely on a contractual right to terminate, and not on a common law right. It is noteworthy that the said anti-''Shevill'' clauses have been commonly included in the leasing agreements since ''Shevill'', which provide that specified terms are essential terms or conditions, that any breach of such terms will be fundamental and the landlord has the rights to claim for damages on termination on the ground of a breach of essential terms. The High Court confirmed that the anti-''Shevill'' clauses are effective in ''Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited''. A party may also repudiate a contract through a lack of willingness or ability to perform some particular obligations. That will be the case where the particular obligations is "fundamental", and it would deprive the aggrieved part of substantially the whole of the benefit of the obligations remaining to be performed under the contract. Anticipatory Breach is an important aspect of the doctrine of repudiation. Anticipatory Breach occurs where one party repudiates their obligations under the contract prior to the time set to perform obligations. In response, an aggrieved party may, by accepting the repudiation, elect to terminate the contract and claim damages. However, in an instance where an aggrieved party chooses not to accept the repudiation occurring before the time set for performance, the contract will continue on food and the aggrieved party will have no right to damages unless and until an actual breach occurs. A party that acts on a genuine but erroneous view of its obligations under the contract will not for that reason alone have repudiated it. That party may still be willing to perform the contract according to its tenor; to recognise its heresy; or to accept an authoritative exposition of the contract Renunciation is an alternate term where the conduct of a party is no longer willing or able to perform see ''Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited.''Termination by frustration
Frustration occurs whenever the law recognises that without fault of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.. The elements of frustration are: # The event occurring after the contract was made, must make it physically or legally impossible to perform what was originally promised (i.e. it is not enough that it makes it more difficult or more expensive) # The party seeking to rely on the frustration is not at fault for the frustrating event; # The contract must not have exhibited an intent that one or other was to bear the risk of occurrence of events of this kind; # Frustration is seldom found in unexpected (and unprovided for) circumstances that could reasonably have been foreseen at the time of contracting. A contract may be frustrated by events which cause, or are likely to cause, an inordinate delay in the performance of the contract. The delay must be such as to seriously affect the intended performance of the contract.. Examples of frustration include: *where as a result of a change in the law, performance of a contract is rendered illegal; *where a particular thing which forms the subject matter of a contract, and whose continued existence of which is essential to the performance of that contract, ceases to exist; *where the basis of the contract is dependent on the continued existence of a particular set of circumstances which cease to exist;''Horlock v Beal'Termination by delay
Whether delay gives rise to a right to terminate will depend on the terms of the contract. Where the contract stipulates a time for performance, the issue is whether the time stipulation can be regarded as being a condition of the contract, that is the time is considered to be "essential" and time is "of the essence". If time is of the essence and there is a failure by one party to perform their obligations under the contract by the appropriate time, the innocent party will have a right to elect to terminate the contract. Where the contract stipulates a time for performance, however time is not of the essence and there is a failure by one party to perform their obligations under the contract by the appropriate time, the innocent party may still gain a right to terminate for the delay through use of the notice procedure. Either the delay must be shown to be unreasonable, after which a party can issue a notice with regards to termination, or the offending party must already be in actual breach of the time stipulated in the contract... The notice must specify a reasonable time for completion, indicate that time is of the essence and that failure to adhere to the conditions will result in termination of the contract. Additionally, the non-offending party must be ready, willing and able to perform their contractual obligations at the time the notice is issued. Where there is no time is specified for performance, the law implies an obligation to perform within a reasonable time. In such circumstances, it is highly unlikely that time will be viewed as being "of the essence", unless failure to perform within a reasonable time will have serious consequences for the aggrieved party..Restrictions on termination
Restrictions on the right to terminate for non-fulfilment of a contingent condition
A party may lose the right to terminate for non-fulfilment of contingent condition if the party has prevented the condition's performance or has intimated that they do not intend to perform the contract.. Furthermore, a party who waives the right to rely on non-fulfilment of contingent condition will be bound by this decision once it has been communicated to other party. The right to terminate for non-fulfilment of a contingent condition can also be restricted by doctrines of estoppel, good faith,''Renard Constructions (ME) Pty Ltd v Minister for Public Works'' (1992) 26 NSWLR 23Election and affirmation
When the aggrieved party gains the right to terminate (whether by breach, repudiation or other causes), they must make a decision whether to terminate or not. This decision is referred to as 'election'. The Aggrieved party must elect whether to terminate the contract, or to affirm it (and thus continue it). Once a decision is made, it cannot be reversed. For there to be an election the aggrieved party must be aware that they have the right to terminate and must display unequivocal conduct that is only consistent with the performance of the contract..Election
If the aggrieved party elects to terminate, both parties are discharged from future obligations and the aggrieved party can receive damages. In order for this to occur, the aggrieved party must be ready and willing to perform the contract at the time of breach.Affirmation
In order to affirm a contract, the aggrieved party must have # Knowledge of facts giving rise to right to terminate. # Act in a way that is unequivocally consistent with choice to continue contract Because the Aggrieved Party has affirmed the contract, they do not have the right to terminate any longer. The non-performing party is thereby absolved and is treated as a normal party. They are henceforth entitled to rely on subsequent events e.g. frustration or breach of term by the Aggrieved party to their own advantage.Australian legislation affecting contracts
Most States have effected statutes relating to the sale of goods, such as the ''Sale of Goods Act 1896'', (Qld) which imply conditions and warranties in relation to fitness and merchantability. However, in many instances such implied terms can be displaced by the contrary intention appearing in the contract between the parties. This has meant that, in practice, in many sale of goods contracts these provisions are displaced. There are similar implied terms under the Australian Consumer Law relating to fitness and duty to take reasonable care in some classes of contract, and these particular terms are unable to be displaced by contrary intention: that is, the term will be implied into a contract of that kind irrespective of the parties' intention. The Australian Consumer Law, together with Fair Trading legislation in all states, also allows a corporation or person to be sued where they have engaged in misleading or deceptive conduct regarding commercial or trade matters.When Equity may intervene
The common law will hold a contract to be binding as long the essential elements for a contract are present (i.e. agreement, consideration, certainty etc.). However, in certain situations equity may intervene and make the contract either voidable or void.... The rule in ''Yerkey v Jones'' and the principles of ''non-est factum'', misrepresentation,. and special disadvantage. are some of the situations in which equity may intervene and make the contract voidable or void. To note, a defence to the principle in ''Yerkey v Jones'', is that the "wives guarantee" will not apply if the lender can show that they took reasonable steps to ensure they had reasonable grounds for believing that the consent was fairly obtained. Furthermore, equitable relief seeks to remedy unconscionability and not to punish the wrongdoer. An important equitable remedy is the order of equitable rescission where the advantage over its common law counterpart is that the parties need not be restored precisely to their position before the contract.Vitiating factors
A number of decisions from Australian courts have also affected the circumstances where legal action can be taken regarding contracts, recognising factors that change contractual obligations. These include situations involving "unconscionable dealings", where one party is at a "special disadvantage", or where a party exercises "undue influence", and will commonly result in the contract being declared void or voidable by the court. Other vitiating factors may include "misrepresentation" if it amounts to a false statement of a material fact made by the representor to the represent in order to induce the represent to enter into the contract and which has this effect, "misleading and deceptive conduct", "mistake", "duress",. and "unconscionable conduct". In general law, the remedy for vitiating factors is rescission and full restoration, even in cases of third party impropriety.References
External links
The Law Handbook series published in each state :* NSW Chapter 12 :* NT: :* Qld: :* SA: :* Tas: :* Vic: