Australian contract law

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Australian contract law is based on the inherited English contract law, with specific statutory modifications of principles in some areas. Australian law has developed through the decisions of Australian courts, especially since the 1980s, and various pieces of legislation passed by the Parliament of Australia and by the various states and territories. See contract law for very general doctrines relating to contract law. In Australia, the law of equity has also played an increasing part in changing the laws regarding contracts, and what occurs when they are breached.

Formation[edit]

There are six essential elements necessary for legally binding contract formation: (1) an agreement (offer and acceptance); (2) consideration (generally, the supply of money, property or services however anything will suffice as consideration be it money, or a promise to undertake, or not undertake a particular act); (3) Capacity to enter legal relations. E.g. Of sound mind and legal age (4) Intention by the parties to enter into legal relations (private non-commercial agreements between family members may not necessarily constitute a contract as intention to create legal relations is often not present) and (5) Formalities - In most jurisdictions contracts do not need to be represented in writing however exceptions apply. (6) Certainty.

The foundation of the legal relations called contract is the agreement of the parties. In order for an agreement to be a contract (or a variation to an existing contract) it must be supported by consideration. The agreement must also be sufficiently certain and complete to be enforced in the courts and the parties must have intended their agreement to be a contract. The absence of any of these elements will signify either that there is in law no agreement or that the agreement is not enforceable as a contract.

Agreement[edit]

The existence of an agreement between the parties is usually analysed through the rules of offer and acceptance.[1] This may be expressed as a clear indication ("offer") by one party (the "offeror") of a willingness to be bound on certain terms[2] 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. It's distinguished from an "invitation to treat", which is a request to others to make offers to engage in negotiations with a contract in mind.[3] An offer may be made to become liable to anyone who, before it is withdrawn, accepts the offer. It may be restricted to certain classes of people;[4] or on the other hand be made to anyone who, before it is withdrawn, accepts the offer,[5] including unascertained persons,[6] or to the public at large.[7] However, an offer is ineffective until it has been communicated,[8] either by the offeror or a third person acting with the offeror's authority.[9]

An acceptance of the offer resulting in a binding contract must take place with knowledge of the offer and an intention to accept the offer. Although acceptance need not be express and may be implied from conduct, it must correspond with the offer;[10] be unequivocal;[11] and in general, be communicated to the offeror. Where a purported acceptance proposes one or more additional or different terms it is ineffective as an acceptance, unless the variation is solely in favour of the offeror.[12] A purported acceptance will also be ineffective if made at a time when the offer has lapsed by virtue of time; if it is made subject to a contingency and that contingency ceases to exist; if the offeror dies and the offeree has notice of this fact; by the revocation of the offeror or the rejection by the offeree.

However, the rules of offer and acceptance are merely "an aid to analysis",[13] and may sometimes prove inconclusive or artificial. A contract can be made without an identifiable offer and acceptance, provided the parties have manifested their mutual assent. The "acid test" in a case where offer and acceptance cannot be identified, according to Justice Cooke in Meates v Attorney-General, "is whether, viewed as a whole and objectively from the point of view of reasonable persons on both sides, the dealings show a concluded bargain."[14]

Consideration[edit]

The second element necessary for contract formation is consideration. A promise will be enforceable at common law only if it is supported by consideration or made under seal. Consideration can be anything from money to a promise to undertake or not undertake a particular act, even a mere peppercorn could suffice.[15]

"Consideration" in this context means that a promise is given in return for a promise received. The usage of the word derives from expressions such as: "I will give you ten pounds in consideration of the apples you are delivering to me."

Illusory Consideration: An agreement may be held as void if a vital provision is deemed to be illusory. That is, that one part has a discretion either to the performance or to the content of that provision.[16] Note, if one party has some latitude or discretion as to the manner in which certain agreed provisions will be effected, but that discretion is limited, then the provisions are not illusory.[17]

Capacity[edit]

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.[18]

Intention[edit]

The fourth element is that the parties must manifest 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 has, however, been critical of the utility of a language of presumptions in this context.[19]

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 refuses 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;[20]

  1. Parties intended the preliminary agreement to be immediately binding, however to be later expressed in a formal document; or,
  2. Parties intended to be immediately bound, however their performance of terms is suspended until their intention is formalised through conclusion of legal documentation; or,
  3. 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.[21]

Formalities[edit]

In most jurisdictions contracts do not need to be represented in writing but exceptions apply. Oral contract are as enforceable as written contracts. However, there are a number of exceptions that have been created by statute. Examples are marine insurance which to be binding must be documented in written form.[22] Also consumer credit must be documented in written form with a copy provided to the consumer. These requirements have been put in place by statute in order to protect consumers and/or prevent such acts as fraud.

Certainty[edit]

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:[23]

1. 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.
2. The agreement may be uncertain because the terms are too vague or ambiguous for a meaning to be attributed by a court.
3. 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 pacta sunt servanda and, on the other hand, the courts' reluctance to make a bargain for the parties. Although there have been differences in Australian judicial opinion as to the role of the court in giving effect to a contract,[24] in general the courts give primacy to the need to uphold agreements,[25] particularly executed agreements[26] and commercial arrangements.[27]

Terms[edit]

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).

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 either or both of the parties or to qualify the terms of their bargain. Although some statements made before the contract was entered into may be intended to operate as terms, not all such statements operate as terms.

A term may be implied ‘in fact’ into a contract, to give full effect to the presumed intentions of the contracting parties.[28] 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.[29]

In formal contracts, in ascertaining a party’s presumed intentions, reliance is placed on the rule handed down in BP Refinery v Hastings Shire Council (1977)[30] where, for a term to be implied, the following conditions must be satisfied:
(1) Reasonable and Equitable: it must be reasonable and equitable.[31] Reasonableness alone is not a sufficient reason for implying a term.[32]
(2) Business Efficacy: it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it.
This question may be interpreted as being whether or not reasonable persons would consider that the proposed term was necessary to enable the contract to operate in a businesslike manner.[33]
(3) Obviousness: it must be so obvious that “it goes without saying”.
Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’ [34]
(4) Clarity: it must be capable of clear and precise expression.[35]
(5) Consistency: it must not contradict any express term of the contract.[36]
This criteria has been approved by the High Court on numerous occasions.[37]

In the case of an informal contract, where the parties have not attempted to stipulate the full terms, the courts should imply a term upon referring to the imputed intention of the parties, provided that the particular term is necessary for the effective operation of the contract.[38] In implying terms in an informal contract, the High Court has suggested that a flexible approach is required.[39] In a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, the court should imply a term by reference to the imputed intentions of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case.[40] Obviousness also remains an important element in implying a term in an informal contract.[41]

A term can also be implied by customs.[42] The existence of a custom or usage that will justify the implication of a term into a contract is a question of facts.[43] 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. However, a person may still be bound by a custom notwithstanding the fact that he had no knowledge of it.

Illegality[edit]

A contract may be illegal because it is prohibited by statute or because it infringes a rule of public policy.[44]

Delay[edit]

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.[45]

Australian legislation affecting contracts[edit]

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 merchantibility. 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[edit]

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, mistake and special disadvantage are some of the situations in which equity may intervene and make the contract voidable or void.[46][47]

Australian case law[edit]

A number of decisions from Australian courts have also affected the circumstances where legal action can be taken regarding contracts. A number of Australian cases have introduced the concept of acting "unconscionably" as a reason for overturning the validity of a contract: Commonwealth v Verwayen [48], or where one party is at a "special disadvantage": Commercial Bank of Australia Ltd v Amadio.[49]

References[edit]

  1. ^ For a High Court case illustrating the adoption of the offer and acceptance approach to formation see, for example, R v Clarke (1927) 40 CLR 227; [1928] ALR 97; (1927) 1 ALJ 287.
  2. ^ See Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 at 457 per the Full High Court; [1954] ALR 453; (1954) 28 ALJ 94.
  3. ^ Retailers have sometimes taken advantage of this distinction to engage in bait advertising (advertising goods at attractive prices but not in fact intending to sell in more than minimal quantities, if at all), but the Trade Practices Act 1974 s 56, and each State's Fair Trading Act now makes this a criminal offence.
  4. ^ See for example North-West Co-op Freezing and Canning Co Ltd v Easton (1915) 11 Tas LR 65 (application for shares directed to provisional directors of company about to be formed held to be offer to company when formed).
  5. ^ See Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 at 258; [1891-94] All ER Rep 127; (1892) 67 LT per Bowen LJ, CA (defendant’s newspaper advertisement to public that £100 reward would be paid by the defendant to any person who contracted influenza, after having used preparation according to printed directions, held to be an offer to public).
  6. ^ See for example Westminster Estates Pty Ltd v Calleja [1970] 1 NSWR 526; (1970) 91 WN (NSW) 222 (offer to "A or his nominee" is effective and may be accepted by nominee once appointed, even though nominee’s identity not ascertainable at time when offer made)
  7. ^ See Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256; [1891-94] All ER Rep 127; (1892) 67 LT 837, CA.
  8. ^ See, for example, Henthorn v Fraser [1892] 2 Ch 27 at 37 per Kay LJ (an offer to sell is nothing until it is actually received).
  9. ^ See for example Banks v Williams (1912) 12 SR (NSW) 382 (decision of government Minister approving purchase of certain goods not offer capable of acceptance when communicated without authority by member of Minister’s department).
  10. ^ See for example Tonitto v Bassal (1992) 28 NSWLR 564; NSW ConvR ¶55-644, CA(NSW) (option to purchase land not validly exercised where three documents were required to be sent and one was sent for another purpose at an earlier time).
  11. ^ See, for example, Appleby v Johnson (1874) LR 9 CP 158; Spencer’s Pictures Ltd v Cosens (1918) 18 SR (NSW) 102
  12. ^ See Ex parte Fealey (1897) 18 LR (NSW) L 282, SC(NSW), Full Court (defendant’s order for insertion of half inch advertisement in the plaintiff’s newspaper accepted by inserting one inch advertisement the rate for which was the same as for half inch advertisement).
  13. ^ Greig and Davis, The Law of Contract (1987) at 246.
  14. ^ [1983] NZLR 308, 377.
  15. ^ For the definition of Consideration in English Law, see Currie v Misa (1875) LR 10 Ex 153 per Lush J at p. 162; (1875-76) LR 1 App Cas 554.
  16. ^ Thorby v Goldberg [1964] HCA 41; (1964) 112 CLR 597, <http://www.austlii.edu.au/au/cases/cth/HCA/1964/41.html>;see also Placer Development Ltd v Commonwealth [1969] HCA 29; (1969) 121 CLR 353 (27 June 1969)AUSTLII; see also Foakes v Beer [1884] UKHL 1 (16 May 1884) BAILII
  17. ^ Thorby v Goldberg [1964] HCA 41; (1964) 112 CLR 597, <http://www.austlii.edu.au/au/cases/cth/HCA/1964/41.html>.
  18. ^ Hart v O'Connor [1985] AC 1000 at 1018–1019.
  19. ^ Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 AUSTLII
  20. ^ "Masters v Cameron [1954] HCA 72 [1]
  21. ^ "Masters v Cameron [1954] HCA 72 AUSTLII
  22. ^ Marine Insurance Act 1909 (Cth)
  23. ^ The categories of uncertainty, incompleteness and illusory promises are not always clearly distinguished and often overlap. See for example G Scammell & Nephew Ltd v Ouston [1941] AC 251; [1941] 1 All ER 14.
  24. ^ Compare Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 and Hall v Busst (1960) 104 CLR 206.
  25. ^ See Meehan v Jones (1982) 149 CLR 571 at 589; 42 ALR 463 at 473 per Mason J (traditional doctrine that courts should adopt a construction which will preserve the validity of the contract).
  26. ^ See F & G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyd’s Rep 53 at 57 per Lord Denning MR.
  27. ^ See generally Prints for Pleasure Ltd v Oswald-Sealy (Overseas) Ltd [1968] 3 NSWR 761 at 765-6.
  28. ^ See Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at p345.
  29. ^ Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337
  30. ^ BP Refinery (Westernport) Pty Ltd v Hastings Shire [1977] UKPCHCA 1; (1994) 180 CLR 266 (27 July 1977)
  31. ^ BP Refinery (Westernport) Pty Ltd v Hastings Shire [1977] UKPCHCA 1; (1994) 180 CLR 266 (27 July 1977)
  32. ^ Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982 HCA 24; (1982) 149 CLR 337 (11 May 1982)
  33. ^ Breen v Williams ("Medical Records Access case") [1996 HCA 57; (1996) 186 CLR 71 (6 September 1996)
  34. ^ Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982 HCA 24; (1982) 149 CLR 337 (11 May 1982)
  35. ^ Ansett Transport Industries (Operations) Pty Ltd v Commonwealth [1977 HCA 71; (1977) 139 CLR 54 (23 December 1977)
  36. ^ BP Refinery (Westernport) Pty Ltd v Hastings Shire [1977] UKPCHCA 1; (1994) 180 CLR 266 (27 July 1977)
  37. ^ Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982 HCA 24; (1982) 149 CLR 337 (11 May 1982); Byrne v Australian Airlines Ltd [1995 HCA 24; (1995) 131 ALR 422; (1995) 69 ALJR 797; (1995) 185 CLR 410 (11 October 1995); Hospital Products Ltd v United States Surgical Corporation [1984 HCA 64; (1984) 156 CLR 41 (25 October 1984)
  38. ^ Hawkins v Clayton [1988] HCA 15 AUSTLI; see also Byrne v Australian Airlines Ltd [1995] HCA 24 [2]
  39. ^ Hospital Products Ltd v United States Surgical Corporation [1984 HCA 64; (1984) 156 CLR 41 (25 October 1984); Hawkins v Clayton [1988 HCA 15; (1988) 164 CLR 539 (8 April 1988)
  40. ^ Hawkins v Clayton [1988 HCA 15; (1988) 164 CLR 539 (8 April 1988)
  41. ^ Byrne v Australian Airlines Ltd [1995 HCA 24; (1995) 131 ALR 422; (1995) 69 ALJR 797; (1995) 185 CLR 410 (11 October 1995)
  42. ^ Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226 AustLii; See also Byrne v Australian Airlines [1995]
  43. ^ Con-Stan Industries v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226; (1986) 64 ALR 481; [1986] HCA 14
  44. ^ Pastoral Company Pty Ltd v First Chicago Australia Ltd [1978] HCA 42; (1978) 139 CLR 410 (2 November 1978)
  45. ^ [3] Ringstad v Gollin & Company Pty Ltd [1924] HCA 57; (1924) 35 CLR 303 (19 December 1924)
  46. ^ see also; Garcia v National Australia Bank Limited [1998] HCA 48
  47. ^ see also; Guimelli v Guimelli [1999] HCA 10 Austlii
  48. ^ Commonwealth v Verwayen
  49. ^ See also Blomley v Ryan (1956) 99 CLR 362; See also Kakavas v Crown Melbourne Limited [2013] HCA 25 AustLii; See also Bridgewater v Leahy [1998] 194 CLR 457

External links[edit]