Contract law forms the foundation of much of Australia’s legal system, with legally binding contracts being entered into every day by millions of Australians.
From things as simple as purchasing milk from a convenience store, to as complex as signing a credit agreement for the purchase of a house, a contract is the base upon which most monetary transactions occur.
Our contract lawyers have addressed some of your common questions surrounding contract law in Australia.
What is a contract?
For the purposes of Australian contract law, a contract is an agreement made between two or more parties which can be legally enforced through the courts. They are often based on promises to perform a certain action, for example, to buy something now and pay it off later, or to take out a loan.
Does a contract have to be drafted or reviewed by a lawyer to be legally binding?
Not at all. A contract does not have to be drafted or reviewed by a lawyer. The majority of contracts have nothing to do with lawyers. Contract law is so important and thoroughly ingrained in society’s operation that it would be impossible to operate if there was a requirement for lawyers to be involved in every contract.
Does a legally binding contract need to be written?
Contracts can be written or spoken. As long as certain conditions are met (detailed in the next question), a contract has been entered. Some more complex contracts must be written in order to be legally binding. Examples of contracts that must be written include:
- Those relating to the sale, purchase, or mortgaging or houses and land;
- Consumer credit or finance contracts;
- Those relating to the sale or purchase of a car from a licensed dealer;
- Sales agreements made through door-to-door selling;
- Contracts that relate to something that is to be carried out more than one year from the date on which the agreement was formed.
Many other contracts, such as those relating to most everyday transactions, do not need to be written to be legally binding.
What conditions apply to legally binding contracts?
In order to be legally enforced, a contract must be formed in a way which satisfies the following conditions:
- All parties to the agreement intend to form legal relations, in the sense that they intend for the contract to be legally binding;
- An offer is made by one of the parties, which is then willingly accepted by the other/s;
- Some consideration is given in return for the promise to carry out this offer. Consideration usually refers to money or some other benefit;
- All parties to the contract must have the legal capacity to enter into a binding contract.
When can a contract not be enforced?
If a contract does not meet the conditions set out above, it may not be enforceable. However, even if it does satisfy the above conditions, a contract cannot be enforced if it:
- Contains an agreement to do something that is unlawful;
- Breaches other legal requirements, such as an injunction;
- Contains agreements made between family members which the parties did not intend to legally enforce.
What does ‘capacity’ refer to when entering a contract?
Generally, capacity refers to an individual’s ability to work things out for themselves. Under the law, there are certain parties or groups of people which are not able to enter contracts due to a lack of capacity. For example:
- Someone suffering for persistent and damaging alcoholism may lack capacity;
- Minors (people under the age of 18) lack the capacity to enter into many written contracts;
- Bankrupts do not have capacity in some cases, as they may be unable to meet any obligations laid out in a contract;
- People suffering from mental disorders may lack contractual capacity.
What do I do if another party isn’t meeting their obligations under the contract?
It may be a good idea to seek legal advice if another party has breached a contract you have entered. A simple breach, such as a late payment, could possibly be resolved through speaking to the offending party and reminding them of their obligations. But if a breach is serious, or repeated, it may be best to enforce the contract. A contract lawyer will be able to review your contract and decide the best way to enforce it.
What do I do if I can’t meet my contractual obligations?
Under Victorian, and more recently, Commonwealth law, unfair contract terms are illegal. This does not include consumer credit contracts, so long as the lender makes clear what the total cost of a loan will be. If you believe a contract which you have entered contains unfair terms, you may be able to challenge the contract through the Victorian Civil and Administrative Tribunal (VCAT).
It is always best to obtain legal advice as soon as possible if you believe that your rights have been infringed. If the cause of the dispute is something simple, such as an unforeseen circumstance, you may be able to resolve the issue with the other party through communication.
What do I do if someone fails to meet an agreement that was made verbally?
Although unwritten contracts are enforceable (so long as they meet certain conditions), it can be hard to demonstrate exactly what was said or agreed to. A court may need to rely on the testimony of witnesses, or refer to any available documents in order to make a judgement. Courts also examine what would usually happen under the circumstances, for example, if the verbal agreement is made by a motor mechanic the court will view the case in relation to what normally happens in such agreements made by motor mechanics. It is always best to seek legal advice if you are considering enforcing a contract, especially if you are unsure about the strength of your case.
What should I do before entering into a contract?
If the contract is written, ensure that you read it carefully. Check that its terms and conditions are clear, and that your rights and obligations are understood by you and any other party/s. If the contract does not accurately reflect your personal, legal, or commercial interests, you may ask that terms be changed, added, or removed to better reflect your understanding of the agreement. If you are uncertain about some part of the agreement, you may insist that an escape clause be included.
Remember that once signed, a contract becomes a legally binding document. Do not sign unless you fully understand your obligations according to the agreement, and are sure that you can meet these obligations.
A lawyer may be able to assist you in drafting or amending a contract to ensure that your interests are protected; this may be well worth the cost if the agreement is a complex one with large amounts of consideration involved.