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What is a contract?

A contract is a legally binding agreement between two or more persons. For example, if you purchase any goods, buy a house, engage a builder to carry out work on your house, borrow money, order goods or machinery from a manufacturer, or sign up for a telephone plan, these are all types of contracts.

The law of contracts is vital to the law which affects consumers. It is a complex area and is governed both by the general law – that is, laws which have evolved from decisions made over the years by judges, and laws introduced by government.

Who can make a contract?

In New South Wales, a person is able to make a contract when they reach 18 years of age. However, there are some circumstances when a person who is younger than 18 will be bound by a contract into which he or she has entered. Basically, it depends on the type of contract and the degree of understanding that the person had about the contract.

In certain circumstances, a person who is mentally ill or intellectually disabled at the time may not be bound by a contract entered into.

What makes a contract?

A contract involves certain basic elements. They are:

• Agreement (arising from an offer and an acceptance);
• Consideration - an exchange of some benefit or something of value by the parties, for example a party pays a sum of money for goods supplied by another party, or money is paid for work carried out by the other party; and
• An intention to enter into legal relations - that is, the parties intended to enter into a legally binding agreement (although this is often not specifically stated, it is usually implied).

The parties must also have the legal capacity to enter into a contract, for example as discussed above, in relation to age and mental capacity.

Who decides the terms of a contract?

Generally the terms of a contract are for the parties to decide. However, the law may ‘imply’ terms into the contract. One implied term is that goods sold for a particular purpose are able to be used for that purpose – for example that a machine which is sold
as a clothes dryer will dry your clothes.

Despite the wording of a contract, there are some circumstances in which a court might decide not to enforce its strict terms. For example, you may have rights under the Australian Consumer Law. This applies to contracts made from the beginning of 2011.

What if a contract seems to be harsh or unfair?

The Australian Consumer Law includes:

• a general ban on misleading and deceptive conduct in trade or commerce;
• a general ban on unconscionable conduct in trade or commerce and specific bans on unconscionable conduct in consumer and some business transactions; and 
• a provision that makes unfair contract terms in consumer contracts void.

In considering whether conduct may have been unconscionable, the courts may take into account factors such as:

• the relative strengths of the bargaining positions of the supplier and the consumer;
• whether the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; 
• whether the consumer was able to understand any relevant documents; 
• whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer by the supplier; and 
• the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent goods or services from a person other than the supplier.

Terms deemed to be unfair in standard consumer contracts will also not be enforceable, where they:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract; 
• are not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and 
• would cause detriment to a party if they were applied or relied on.

Does a contract have to be in writing?

Generally contracts do not have to be in writing, but there are particular cases when the contract must be in writing for it to be binding, for example guarantees, the sale of a house, and credit sales or other credit agreements. However, it is usually better to have the details of an agreement and any variation in writing so both parties have a record of what has been agreed and are aware of what they are obliged to do, particularly when money is involved.

Are you bound by a clause you did not read?

If you sign a written contract then generally you are bound by all of its terms even if you did not read or understand them.

There are various types of contracts which you may come across in everyday life which do not require your signature, for example, a car park ticket or a drycleaning docket which has clauses printed on the back. Generally, the rule is that you are bound by the clauses if you have read them or if you knew they were there but did not bother to read them, or if
the other person took reasonable steps to draw them to your attention.

It is important that you read all the terms of a contract before you enter into it, and you should not sign any document until you are fully aware of what its terms and conditions are and what they mean.

What happens if the terms of a contract are broken?

Once you make a contract you will be committing a breach if you do not comply with its terms, or if you change your mind and decide not to perform your side of the contract.

If a party breaches a contract there are a number of remedies available, including:

• damages (a sum of money) to compensate the 'innocent party for any loss suffered - this is the most common remedy;
• a court order requiring the party who has breached the contract to carry out his/her obligations;
• a court order forbidding the party from breaching the contract; and
• a court order declaring that the contract is at an end and requiring the party who has breached the contract to put the 'innocent party in the position he/she was in before the contract was entered into.

The type of remedy and its availability would depend very much on the type of contract and the type of breach. A Solicitor can advise you as to the best means of dealing with the problem.

How can a solicitor help me?

A solicitor can:

• Explain the terms of a contract and advise you as to your rights and obligations under that contract;
• Advise you as to the consequences of entering into a contract before you commit yourself to it;
• Discuss the contract with the other party or his/her Solicitor so that terms which you may not have agreed to or which might disadvantage you may be altered or removed;
• Take instructions to prepare a contract for you to enter into with another party;
• Advise and assist you if the other party breaches the contract;
• Advise and assist you if you are accused of breaching a contract.