Contract law is very complex. Although the information given here may be helpful in deciding if a right or remedy exists, expert advice will still be needed.
In particular, you should not sign a document unless you have read it, understood it, agree with it, and want to be legally bound by it. If you are not sure, get legal advice before you sign. Once a contract is signed it is normally a legally binding agreement.
What is a contract?
- A contract is a legally binding agreement between two or more people or companies (called 'the parties').
- It is an agreement that the parties intend to be legally binding - or that they would have intended to be legally binding if they had stopped to think about it.
- A contract is made when promises are exchanged to do something in exchange for something, for example, to supply goods or services for payment of a specified sum of money.
- Each party to a contract is legally obliged to carry out her or his part of the bargain and a party who fails to do so is in breach of contract. A court can require that person to put things right either by fulfilling the contract (called 'performance') or paying compensation for any loss (called 'damages').
For an arrangement to be a contract it must have three identifiable features:
- an agreement between the parties to do or to refrain from doing certain things
- an intention to make the agreement legally binding
- an exchange of value, known as consideration.
Reaching agreement - offer and acceptance
Agreement occurs when one person accepts the other's offer. This can be done in a number of ways. There can be verbal negotiations resulting in agreement. There may be an exchange of letters in which the parties agree on something. An agreement can be made by one or both persons signing a document, such as a lease or mortgage. It can be made by the parties themselves, or through a third person such as an agent or broker. Or it can happen without any real formalities, as when you buy something from a shop. By presenting the goods and your money at the counter, you are offering to buy the items, and by taking your money, the shopkeeper is accepting your offer. You become the legal owner of the goods.
Sometimes, an offer does not get a simple 'yes', but is met with a counter-offer. For example, a car dealer might offer a particular vehicle for a stated price, and the consumer, instead of accepting the offer, might make a counter-offer to take the vehicle at that price if it includes free air conditioning. This is not an acceptance but a counter-offer. It is then up to the dealer whether they will accept this counter-offer, by including air conditioning, or not. If the dealer declines, there is no contract. (Even if the counter-offer is described as a 'conditional acceptance', if it is proposing something different from what was offered, it is a counter-offer, and there is no contract until it is accepted.)
The effect of a counter-offer
Any counter-offer cancels out (rejects) the previous offer. It is then up to the other person whether they want to accept the counter-offer, making a contract, or not. So when the consumer makes the counter-offer to buy the car with air conditioning thrown in, he or she is rejecting the offer to buy the car without air conditioning at the price previously offered. That offer then no longer exists and is not available to be accepted, unless the dealer makes it again.
The effect of acceptance
A contract becomes legally binding the moment the acceptance is communicated. This can be done by telling the other person that you agree, or demonstrating this to them by your actions, or, in some circumstances, just by carrying out the contract. For instance, if a bank advertises that it will waive the application fee on any loan application made before a certain date, you accept this offer by making the application before the date. (There are special rules about offers which are accepted by post, facsimile and the like, and you should seek legal advice if you are unsure whether an acceptance was communicated.)
Withdrawing an offer
Up until an offer is accepted, the person making it can withdraw it at any time, by letting the other person know that they are no longer willing to do that, but if the offer is not withdrawn, it becomes binding as soon as accepted. Once there is agreement, any change needs the agreement of both parties.
Difficulty establishing whether agreement has been reached
During the negotiations numerous offers may be exchanged. A party may at some point argue that a definite contract exists. If you are not sure whether a contract was made, or if you are in dispute with the other person over just what was agreed, seek legal advice. In deciding whether a contract was made, the court will look at all the circumstances. Evidence of money passing between them or of some expense being incurred would suggest a contract.
For there to be a legally enforceable contract, the parties must have intended to enter into a legally binding agreement.
The intention to enter into a legally binding agreement is seldom stated, but is usually inferred from the circumstances surrounding the agreement. For example, when you buy something in a shop, you and the seller both intend that once the goods are purchased, they will be legally yours to do what you like with, and the seller will be legally entitled to keep your money. You do not need to discuss this, because it is understood.
Agreements between friends or members of a family are not usually intended to be legally binding unless the contract is one of a commercial type, for example selling a car or providing a loan to a friend or relation. One common indication that the parties intend an agreement to be legally binding is if one pays money to the other.
Making a contract involves an exchange of something of value to each party. Most often, one person pays money to another, and in return gains a benefit, such as goods or services. Whatever is given (or paid) is called consideration. The presence of consideration distinguishes a 'commercial' contract from an agreement between friends or family members which is not intended to be legally binding. A one-sided arrangement in which one person gets a benefit at the other's expense (such as in the giving of a gift) will not usually be a contract.
However, although the law demands that on each side the price must be of some real value, what is paid by one need not be comparable in value to what the other party is giving. So there can still be a contract, for example, where a person leases a house to a friend for a nominal rent. As long as there is an exchange of some kind the courts will usually enforce the contract.
Electronic contracts are governed by the same rules of offer and acceptance as traditional contracts, see Agreement. Where a consumer clicks on an ‘I Agree’ or ‘Purchase’ button on a website they are effectively agreeing to a contract.
Contracts formed within Australia, that is, where the offer and the acceptance occur within Australia, are subject to Australian consumer legislation and are consumers have the same rights as those formed in person (i.e. non-electronically).
However, where a contract is formed in more than one country (e.g. the offer is from the United States and acceptance is from Australia), there may be complications in the event of a dispute as the law of more than one country may apply.
If there is no agreement about where a contract was formed the courts will first determine whether there is a term or condition that deals with this. In the absence of such a term or condition, the court will then look at all of the terms and conditions as well as the circumstances under which the contract was formed to see if there is any guidance as to which country’s laws apply.
As with any dispute you should contact the seller directly (whether by telephone or in writing or email) to advise them of your problem. Details of an individual seller’s dispute resolution process are often available on their website.
If not satisfied with the outcome of the dispute resolution process, the next step is to contact the consumer protection agency in the relevant state where the contract was formed (if the contract was wholly formed in Australia) or consumer protection agency in the country where the contract was made in the case of an overseas transaction. See below for a list of Australian consumer protection agencies. The International Consumer Protection and Enforcement Network (ICPEN) provides a list of consumer protection agencies on its website at www.econsumer.gov .
If payment has been made by credit card, it may be possible to have a transaction reversed in some circumstances (e.g. where it was unauthorised or for a transaction that was not fufilled) so you may also want to contact your financial institution.
Australian consumer protection agencies
Some contracts are legally required to be in writing. Some of these are:
- credit contracts and consumer leases, for example, contracts supplying credit or consumer mortgages
- contracts for the performance of domestic building work to the value of $12 000 or more [Building Work Contractors Act 1995 (SA) s 28]
- contracts for the sale of second hand motor vehicles by dealers [Second-hand Vehicle Dealers Act 1995 (SA) s 17]
- contracts for the sale of land, or any interest in or concerning land [Law of Property Act 1936 (SA) s 26]
- unsolicited consumer agreements (e.g. door to door sales, telephone sales) [Competition and Consumer Act 2010 (Cth) Schedule 2 ss 78, 79].
Generally, contracts do not have to be written down to be legally binding. Most of the everyday contracts we make, such as buying a ticket for a movie or going to the doctor, are not put in writing, but they are still legally binding. There is no need for a written agreement, because everyone understands what their obligations are. An oral contract is just as legal and binding as a written one, although sometimes it can be harder to prove exactly what was agreed.
It may be advisable to put a contract in writing. For example, if a contract is of special importance, involves a substantial sum of money, or if there is a possibility of a dispute about it in the future, it is wise to have a written agreement. A lawyer can prepare this for you, and advise you about your obligations and any pitfalls. The written agreement can be helpful in case of a dispute, in proving that there was a contract, and just what was agreed. Without a written agreement, if the dispute has to go to court, the court will only have each party's word to assist it in working out what happened.
Some agreements will not be legally enforceable, even if written down and signed. These include agreements where there was no consideration, or agreements to do things that are illegal.
With certain exceptions anyone over 18 years can enter into a contract.
People under the age of 18 (called 'minors') do not have the same full contracting power that adults do. They can still make contracts, but there are special rules.
In general, for a contract to be binding, the minor will have to affirm the contract, that is, agree to be bound by it, after turning 18. A minor cannot be forced to affirm a contract, so there is a certain risk in contracting with a minor other than as described below.
On the other hand, although many contracts cannot be enforced against a minor, the minor can still enforce the contract against the other party.
Some contracts are binding on the minor without the minor affirming them. For example:
- A minor can make a legally binding contract for goods or services that are usual or appropriate to their way of life (called 'necessaries'). These will be such things as food, clothing, accommodation, medical care, school requirements or sporting goods appropriate to their age and their standard of living. 'Necessary' goes beyond things which are essential for survival and includes things which it would be normal for the minor to have and use at the time the contract is made. A minor can also make a valid contract for services of instructional or educational benefit, which could include such things as music lessons, sports coaching, educational tutoring, etc.
- Contracts which give the minor some continuing legal obligations are binding unless the minor chooses to opt out of the contract before, or reasonably soon after, they turn 18. This is called 'avoiding' the contract. Examples of these types of contracts are contracts of business partnership, or contracts to lease land. If the minor avoids the contract, he or she is only responsible for the obligations which have already arisen, not for any future ones. They cannot avoid past obligations or get back money they have paid out in respect of these. However, the minor may be able to get a court order for the return of their property, previously transferred under the contract, on fair terms.
- A minor may make a binding contract with the consent of a court. The minor's parents can apply on his or her behalf, if the minor wishes to be bound; or the other party can apply, if he or she wants to make the contract enforceable against the minor. If the court decides to approve the contract, it will then be legally binding [Minors Contracts (Miscellaneous Provisions) Act 1978 (SA) s 6].
- A minor's performance of a contract may be guaranteed. If the adult party to a contract wants greater security in contracting with a minor, they can ask the parents (or some other adult) to guarantee the minor's performance of the contract. The minor's legal position is unchanged, but the guarantors take on a separate obligation of their own. If the minor does not do as the contract requires, the other party has a separate right to sue the guarantors for any loss.
Normally, a mentally incapacitated person can still make a binding contract.
When a contract may not be binding
The person (or someone on their behalf if they are suffering from the mental incapacity) can apply to the court to undo the contract (called having it 'set aside'), on the basis that when it was made they were suffering from some mental incapacity. The court may undo the contract, if it thinks that the person really was unable to understand the nature of the contract when they made it, and also that the other person knew or should have realised this.
When a contract will be binding
- If there was no way the other person should or could have known about the incapacity, the contract is unlikely to be undone - it will be binding.
- Even if the person has an incapacity, if they were not affected by it at the time of making the contract, they will be bound, regardless of whether the other party knew about the incapacity.
- Furthermore, if the contract was made at a time when the person was affected by the incapacity, if they have had the benefit of goods or services, they can still be required to pay a reasonable price for them, if they were 'necessaries', that is, things reasonably necessary or appropriate to their way of life at the time.
You are not automatically responsible for another person's debts, just because you are married to them or live in a domestic partnership (de facto or same-sex relationship) with them. This is true whether the debt arose before, during or after your relationship.
However, there are several ways in which you can make yourself responsible for your partner's debt. Think carefully before doing so, especially if the arrangement is one which will not benefit you.
The ways are:
- If you enter a contract as a party. For example, if you are a co-borrower with your partner in a loan contract or mortgage, you will be legally responsible to pay the money as well as interest and any other costs provided in the contract. If you borrow jointly (as is usual), then each of you is responsible for the whole amount, not just half each. This means that if the repayments are not made on time, the lender can sue either or both of you for the full amount of the loan. The fact that your partner is the only one who really benefited from the loan (for instance because you borrowed jointly to buy a car for your partner, and your partner has now taken off with the car) does not make any difference. You can still be forced to pay the whole amount. If the lender thinks that you are more likely to be able to pay, they might choose to let your partner off and just sue you. Of course, not all loan contracts are the same. It is wise to get legal advice on the contract before you sign.
- If you guarantee the debt. Sometimes, a lender will ask a borrower to arrange a guarantor, before they will lend them money. This is often done where the lender is not convinced that the borrower can pay back the whole loan. They are looking for someone else whose assets can be used to pay the debt, if the borrower does not pay. A guarantor volunteers their own assets in case the borrower fails to pay. Usually, a guarantor can be required to pay the whole amount of the loan as soon as there is any default. It does not matter why the borrower has not paid, or that they still have the ability to pay - the lender can choose to get the money from the guarantor anyway. If the guarantor does not pay, the lender can sue them and sell any substantial assets they may have, or send them bankrupt. This arrangement is typical of a guarantee, but not all guarantee contracts are the same. If you are thinking about signing a guarantee, get legal advice.
- If you permit your partner to enter the contract as your agent (that is, on your behalf), or by using your power of attorney. Commonly, for example, if you are partners in a business, traders or customers dealing with the business will understand that dealings with either of you include the other. For instance, they may enter contracts with either one of you on the understanding that they are dealing with the partnership. You are both bound, unless you make it clear that this is not the case. If you have been in the habit of dealing with any person or business on the basis that you will be bound by obligations incurred by your partner, and you change your mind about this, make sure that you let those persons know, otherwise you can still be bound. Similarly, if you give anyone your power of attorney, this enables them to deal with your assets and enter contracts on your behalf. It is a powerful instrument and you should think carefully before granting a power of attorney, see: safeguarding a donor's interest.
A contract will require each party to do something. Some of the requirements will be spelled out in the contract (called 'express terms'), while others are never mentioned, but are still part of the agreement (called 'implied terms').
Where the contract is written down and signed, both parties are bound to do what it says (subject to some exceptions). Where some terms are in writing but are not signed by the parties, they are only binding if the party concerned knew about them, or the other one at least took reasonable steps to bring them to their attention before the contract was made. For instance, if you buy a car-parking ticket, there may be printed conditions on the back of the ticket. If nothing is done to bring these to your attention and you do not see them before the contract is made, they may not form part of your contract. On the other hand, if the carpark staff tell you about the conditions first, you can be bound by them, even if you chose not to read them or ask about their meaning.
It is also possible for oral statements to form part of the contract. If an intelligent bystander, listening to your discussions, would have thought that a party was giving their word that the statement was true, it can be a term of the contract. If it turns out to be false, they may be in breach and liable to pay damages.
Sometimes, terms which are never mentioned at all are, just the same, part of the contract. They may be implied by the circumstances. For instance, when you visit your doctor, you probably do not discuss whether the doctor will agree to keep your medical details confidential, or whether you will have to pay the doctor's bill. There is no need to, because these things are understood. Your doctor is still legally bound to keep your confidence, and you are still legally bound to pay the bill.
Terms can also be automatically implied into a contract by law, even if the parties do not know this. For instance, the Sale of Goods Act 1895 (SA) , requires that when goods are sold, they must be of merchantable quality and reasonably fit for their purpose. If they are not, the buyer is entitled to a refund or substitute goods, even though nothing was said about this at the time of the sale, or even if the seller said that they do not give refunds. Most terms that are implied by the common law are now stated in legislation such as the Sale of Goods Act 1895 (SA) and the Australian Consumer Law which provide for certain basic terms to be part of the contract. These terms are known as statute implied terms.
When a term is implied by an Act of Parliament, the Act will also say whether the parties have a choice to exclude that term. If it says that they cannot do that, then the term will still be part of the contract, even if both parties agree that it will not apply. For example, the parties cannot agree that the Australian Consumer Law will not apply to them. Such an agreement would have no effect.
The general answer to this question is 'yes'. This is true even if you did not read the contract, or were unsure what it meant. To be safe, you should never sign a contract unless you have read it, fully understand it, and want to be legally bound to do what it says. If you are unsure, you should not sign, but should get legal advice. Once you sign it, the other party can take you to court to force you to carry it out, or to pay for their loss if you do not go ahead.
However, there can be exceptional cases where you are not bound, even though you have signed.
- Cooling-off periods: In contracts to buy land, door-to-door sales contracts, and contracts to enter a retirement village, the law sets a cooling-off period for you to reconsider after signing. During this period you can legally opt out of the contract. This only applies to these special contracts, not to all. You should receive a notice of your cooling-off rights at the time of signing. Only a short time is allowed - for land contracts, 2 days, for door-to-door sales, 10 days, and for retirement villages, 15 days. If during this time you decide that you do not want to go ahead, you need to give the other party a written notice telling them this. (Just saying you have changed your mind is not enough.) Once they get the notice, you have no further legal obligations under the contract. If you do not give a notice within the period, you are legally bound by the contract and your right to get out of it no longer exists.
- If the other person, or someone on their behalf, gave you a false impression about the nature of the document you were signing, or the terms in it, you may not be bound by the document. However, this can be hard to establish if the document itself clearly tells you what the true situation was.
- If it should have been obvious to the trader from your conduct when you signed that you had no idea of the real nature of the document, for example because you are unable to read, or it was written in a foreign language, you may not be bound. In exceptional cases, there may be a defence known as non est factum (which means 'it is not her or his deed'). This is where a person has signed a contract without any idea of its nature. However, this defence is not available just because the person was not careful and did not read the contract. It must be shown that, for example, through the person's illiteracy or poor vision the document signed was radically different in practical effect from the document the person believed she or he was signing.
Even where grounds exist to rescind a contract, courts are extremely reluctant to set aside the transaction if it would affect people other than the parties themselves.
Agreement not to be bound
Of course, it is also possible for the parties to a contract to agree not to go ahead with it. Even after signing, if both sides agree that they do not want to go ahead as promised, they can agree to let each other out of the contract. For example, if a trader has not yet given delivery of the goods to the buyer, and the buyer has changed their mind about buying the goods because they are unable to pay for them, the buyer may ask the trader to agree to let them out of the contract. The trader may prefer to find a buyer who can pay, and may agree to end the contract. However, the trader does not have to do this, and nothing can be done to force them. They are unlikely to agree if the goods have been used by the buyer, as their value will have been affected.
Exclusion clauses are clauses, usually written down, that say that one party to the contract will not be responsible for certain happenings. For example, if you join a gym, it is common for the contract to say that the gym owner will not be responsible if you are injured while exercising. If you arrange to park your car in a public carpark for a fee, the owner will often seek to include in the contract a provision that they will not be responsible for damage to your vehicle, or theft of goods from it, while it is in the carpark.
These clauses can be valid, as long as:
they have been properly included in the contract and
- are not contrary to law.
To be properly included in the contract, the clause cannot be tacked on after the contract has been made. If there is a signed contract containing the clause, this will usually have the effect of including it. If there is no signed contract, but there are printed documents or signs posted stating the terms, these can be included in the contract if they are brought to your attention before the contract is made.
For example, a driver entering a car park who takes a parking ticket from a machine is only bound by terms which are brought to their attention before taking the ticket. This is because the contract is formed when the ticket is taken. The car park owner cannot rely on an exclusion clause printed on the back of the ticket if they did not do anything beforehand to make the driver aware of it, for example, by prominently displaying the exclusion clause at a point before the ticket is taken. If the car is damaged due to insufficient care by the parking company, it will be liable despite the exclusion clause [Thornton v Shoe Lane Parking Ltd. (1971) 1 All ER 686].
What are reasonable steps to take in order to draw a condition to the notice of a consumer will vary from case to case. Although most car parks now have printed signs in front of their ticket windows stating that they accept no responsibility for cars left on their premises, (which probably makes it an exclusion clause that is a term of the contract) there are still ways in which the effects of these clauses can be avoided.
The exclusion also has to be legal. There are some important obligations to a consumer that are placed on a trader and these are implied by statute into consumer contracts and cannot be excluded, see: unsatisfactory goods and services and Exclusion Clauses and the Australian Consumer Law.
Courts always give exclusion clauses the narrowest reading possible, and where there is any doubt the interpretation most favourable to the consumer is adopted. An exclusion clause will generally not cover a breach which occurs outside the 'four corners' of a contract, such as where a trader does something that was not authorised by the contract.
Where a trader has attempted to limit or exclude liability of an implied term a consumer should seek legal advice as the law on this point is both complex and uncertain.
|Typical Exclusion Clauses||
The Australian Consumer Law*
( *Schedule 2 of the Competition and Consumer Act 2010 (Cth))
|All other conditions and warranties, statutory or otherwise and whether express or implied, are hereby excluded, and no guarantee, other than that expressly herein contained, applies to the product to which the guarantee relates, or any accessory or part thereof.||
Conditions and warranties implied and the rights and remedies created by the Australian Consumer Law cannot be excluded – see Schedule 2 Competition and Consumer Act 2010 (Cth), s 64A. Any attempt to do so is made void by the terms of the Act, and makes the company liable to prosecution under the Act.
|The company accepts no responsibility for loss or damage through any cause whatsoever.||
Under section 60 of the Australian Consumer Law, contracts for the supply of services to consumers contain an implied warranty that the services will be rendered with due care and skill. This warranty cannot be excluded, so the clause is void.
|We exchange goods or give credit but do not refund money.||If a company supplies goods directly to consumers, those consumers have a non-excludable right under section 261 of the Australian Consumer Law to return the goods and obtain a refund where there has been a breach of a condition implied by the Act.|
Service will not be available under this warranty unless the form below is completed and returned to the registered office of the company within fourteen days from the date of purchase.
|Under section 64, failure to return the registration card does not extinguish a consumer's statutory rights.|
|New products are covered by this warranty for a period of 12 months.||Consumer's rights under section 54 extend beyond the stated warranty period and may be exercised if there are, for example, inherent defects which appear after the expiration of that period.|
Parties to a contract can agree in advance on the amount of damages that must be paid if either breaches the contract. This can avoid the need to go to court to work out the amount due if a breach occurs. If the agreed amount represents a genuine estimate of the likely loss, the courts will enforce the clause. The agreed amount must be paid even if the real loss is more or less than that.
However, if the amount specified in the contract is not a genuine estimate of the value of the loss, but is only a threat to make the other party perform the contract (that is, a penalty), it will not apply. Instead, the court will work out the actual value of the loss that must be paid.
Disputes often occur about whether the amount stated in the contract is a penalty or a genuine estimate. The court uses the following principles in working this out:
- it does not matter what the contract calls the sum. The court will make up its own mind about whether it is a penalty or not
- if the sum is obviously a lot more than the real loss which could result from a breach, it is likely to be a penalty
- if there are lots of possible breaches of contract, which could produce different amounts of loss, but only one sum is provided for breach of contract, that is probably a penalty.
- fit for all purposes of which goods of that kind are commonly supplied; and
- acceptable in appearance and finish; and
- free from defects; and
- safe; and
Acceptable quality is determined in relation to:
- the nature of the goods; and
- price; and
- any statements made on packaging or labels; and
- any representation made about the goods by the supplier or manufacturer; and
- any other relevant circumstances relating to the supply of the goods.
Action against manufacturer or supplier?
Where defective goods have been provided, consumers have the right under the Australian Consumer Law to take action against either the supplier/retailer [s 259] or the manufacturer [s 271]. See also Guarantees.
What remedies are available?
The remedies available against a supplier of goods are determined by whether the failure to comply with guarantees provided under the Australian Consumer Law is a major or non-major failure.
A major failure is defined as a failure to comply with a guarantee under the following sections
- 51 (title);
- 52 (undisturbed possession);
- 53 (undisclosed securities);
- 54 acceptable quality;
- 55 (fitness for any disclosed purpose);
- 56 (supply by description); or
- 57 (supply by sample or demonstration).
- the goods would not have been acquired by a reasonable consumer fully advised of the nature and extent of the failure; or
- the goods depart in one or more significant respects from description (if supplied by description) or sample (if supplied by sample); or
- the goods are substantially unfit for a purpose for which goods of the same kind are commonly supplied and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; or
- the goods are unfit for a disclosed purpose that was made known to the supplier, etc and they cannot, easily and within a reasonable time, be remedied to make them fit for such a purpose; or
- the goods are not of acceptable quality because they are unsafe.
[Competition and Consumer Act 2010 (Cth) Schedule 2, s 259]
Where a major failure can be demonstrated the consumer may reject the goods (subject to the limitations imposed in s 262) or seek compensation for any reduction in value of the goods below the price paid for them [s 259(3)].
A non-major failure is not defined specifically by the legislation but would appear to be anything falling outside the definition provided of a major failure.
In the event of a non-major failure, the consumer is limited to requiring the supplier to remedy the failure within a reasonable time [s 259(2)]. If the supplier refuses or fails to comply with this requirement the consumer may have the failure remedied themselves and then recover all reasonable costs incurred from the supplier or, under s 262, notify the supplier that they reject the goods and the ground or grounds for rejection.
Where there has been no direct contract between a consumer and a manufacturer, a consumer may have a claim for negligence for injury or damage to property caused by use of defective or harmful goods. Such an action would be based on breach of a common law duty of care which a supplier or manufacturer owes to consumers, or of the Australian Consumer Law (i.e. Schedule 2 of the Competition and Consumer Act 2010 (Cth).
Misrepresentation is the giving of false information by one party (or her or his agent) to the other before the contract is made, which induces them to make the contract. If you make a contract in reliance on a misrepresentation and suffer loss as a result, you can cancel the contract or claim damages.
The false statement must be one of fact, as opposed to a statement of opinion or a promise. For example, a seller saying that his property is worth $150 000 is expressing an opinion, but a seller saying that he paid $150 000 for it is making a statement of fact. A promise cannot be a misrepresentation because the statement made is about the future, and cannot be true or false at the moment it is made. Similarly, claims in advertisements, such as 'our soap powder washes whiter than white' or 'our beer will make you feel on top of the world' are not regarded by law as representations of fact and so cannot be misrepresentations. However, factual statements in advertisements, such as 'this vehicle is equipped with passenger airbags and ABS braking' are statements of fact and can be misrepresentations if false.
Some latitude is allowed to people selling privately to make statements commending an article in order to arouse interest in potential buyers. In such situations the borderline between misrepresentation and commendatory or promotional expression could be thin indeed. Rather than relying on the seller's statements, you should carefully inspect the item for yourself, and if necessary, have an expert examine, test or value it for you. Also remember that it may be difficult to claim based on a misrepresentation by the seller about something which should have been obvious to you. For example, if the seller told you that the vehicle had only done 20 000 km but the odometer showed twice that, the court will probably not accept that you placed any reliance on what was said.
A misrepresentation is innocent where the trader believes that the statement she or he is making is true and consequently has no intention to deceive the buyer. It is fraudulent where the trader makes the statement knowing it to be false or without believing in its truth, or without caring whether it is true or false. In that case, the maker may be guilty of the offence of fraud as well as misrepresentation.
It is a defence to misrepresentation if the person making the statement can show that they believed on reasonable grounds that it was true, or that someone else made the statement and he or she had no reason to know that it was made, or was not true.
If you relied on a misrepresentation in entering a contract, you can:
- rescind (cancel) the contract
- sue for to compensate for any loss.
Rescinding a contract
If you want to cancel the contract because of the misrepresentation, you must do this promptly when the misrepresentation is discovered. If you wait, you may lose this right. The right can also be lost if:
- you have in some way acted unfairly
- you know of the misrepresentation and of the entitlement to rescind, but do something which shows that you want to go on with the contract
- you cannot restore the other party substantially to the position she or he was in before the contract was made, for example, if the goods have been used or damaged
- a person who is not a party to the contract has obtained some right over the goods and would suffer if the contract were set aside. In the case of a contract for the sale of goods, a seller who fails to rescind before the buyer resells the goods to another person can lose the right to rescind. The new owner can keep the goods if they are bought in good faith and she or he did not know of any problem with the buyer's right to the goods.
You rescind the contract by telling the other party that you are doing so, and returning the goods in good condition. If the other party accepts this, the contract ends. However, if the other party still wants to go on with the contract, they can apply to the court. Under the Misrepresentation Act 1972 a court can declare a contract of sale to be legal even if a consumer has already rescinded, or is entitled to rescind, the contract. However, the court can still award damages for the misrepresentation.
As an alternative to rescission, you can sue for damages. The court will consider whether the statement was a misrepresentation, whether you relied on it in entering the contract, and whether you have sustained some loss as a result. The seller may not be ordered to pay damages if she or he can prove either of the following:
- that she or he had reasonable grounds to believe and did believe the statement was true
- that someone else made the statement, for example an employee and the trader did not know and could not reasonably be expected to know that the representation had been made or that it was untrue.
In addition, it is an offence if the misrepresentation was made by a trader, see: False or misleading representations .
Sorting out the problem with the other party
This can be an effective approach, and does not involve the time and expense of going to court. As soon as a problem arises, you should contact the other party. If the problem involves goods bought from a trader, as soon as you discover the problem you should avoid using the goods and contact the trader.
The complaint should be made to someone in a position of authority in the trader's business. Where there is a reasonable basis for complaint, most reputable traders will immediately give a refund, exchange the goods or repair a defect. However, if the trader does not respond to the complaint, the Office of Consumer and Business Affairs may be able to assist with negotiations.
See also: Consumer remedies.
If you cannot sort out the complaint by negotiation, depending on the situation, you will have to consider whether to refuse to carry out your side of the contract and risk being sued by the other party or, in the opposite situation, whether you wish to sue. There is a risk in not performing your obligations under the contract, as, if you are not justified in your belief that the other party is in breach, they may succeed in suing you. Before refusing to carry out the terms of the contract, it is advisable to obtain legal advice.
Sometimes a contract will specifically say that one party may end the contract if there is a particular kind of breach (or perhaps any breach) by the other. Any clear provision to this effect will be decisive.
If there is no express provision, the general rule is that a very serious breach by one party will allow the other party to choose whether or not to end the contract.
To be serious, the breach would have to be either:
- a breach of any term that has very serious consequences - that is, the effect of the breach must substantially deprive the innocent party of what was intended to be obtained under the contract
- breach of a vital term - that is, a term in relation to which, at the time the contract was signed, the party's words and conduct showed that the party considered that strict compliance with the term was essential.
If the other party's breach is very serious, you can end the contract, but you do not have to. You can choose to go on with the contract, and still keep your right to claim damages (compensation). If you decide to end the contract, you should tell the other party immediately.
The party in breach of contract can be ordered to compensate the innocent party for losses caused by the breach. Damages are awarded to put the innocent party in the position she or he would have been in had the contract been properly performed. For example, the party in breach may be ordered to reimburse money the claimant has had to pay as a result of the breach and possibly profits that would have been made had the contract been properly performed.
Usually a contract does not say how much the damages will be. In that case, unless the parties are able to agree about it, it is up to the court to decide. The party claiming damages must prove to the court the amount of the loss and the fact that the loss was caused by the breach. He or she must also prove that the loss is reasonably closely linked to the breach (that is, it is not 'too remote').
The court considers whether the loss is too remote, by looking at the term breached and at the loss that has, in fact, been caused. The court then asks whether the party in breach should have realised at the time of contracting that that sort of loss (if not its extent) was reasonably likely to result if that particular term were breached.
In general, courts have decided that the kinds of losses that a party in breach should have expected to result are:
- losses that would normally result, in this sort of situation, from breach of this sort of term
- any special losses that the party in breach should have realised were likely to arise in this particular case.
The person in breach can also be made to pay compensation for losses if, at the time of contracting, it was made clear that the loss might occur in the circumstances of this particular case.
The party claiming damages must keep their loss to a minimum (called 'mitigating' the loss). They cannot just sit back and do nothing about the loss, expecting compensation. For example, if the contract is for the hire of equipment, and similar equipment can be hired elsewhere to do the job, this equipment should be hired and the hire fees claimed as damages. Or for example, if a tenant leaves early, in breach of a fixed term lease, the landlord should do their best to find another tenant as soon as possible. They will not be able to claim for losses they could reasonably have prevented.
Where a consumer breaches a credit contract or decides to end the contract, the Consumer Transactions Act 1972 (SA) limits the damages that the credit provider can recover. The Act sets out how to calculate the amount payable to the credit provider.
The court will sometimes order a party to carry out the actual requirements of the contract (called 'specific performance'), rather than pay damages, if damages would not compensate the other party fairly. It would be unusual in most consumer transactions for a court to make such order, as an order to pay damages would be adequate justice. However, a court may order a person to comply with a contract where damages are inappropriate or inadequate because of the subject matter of the contract, for example, where the contract was for the sale of a particular house, block of land or work of art. In a contract for the sale of land the court will order a vendor who fails to transfer the land to the purchaser to comply with the contract. Legal advice should be sought in these circumstances.
A contract is illegal if it involves doing something that is a criminal act or a civil wrong, or against the public good. For example, it is an offence to sell a firearm to a person not licensed to hold one, so a contract to sell a firearm in these circumstances is illegal. A contract whose purpose is to get the party to it to break another legally binding contract that the party has made already is also illegal. Moreover, a contract which otherwise would be legal is illegal if its subject matter is to be used for an unlawful purpose. So, if a firearm dealer were to agree to sell a firearm to a person licensed to hold a firearm knowing that the buyer intends to use it to kill someone, that contract would be illegal.
Courts will not enforce an illegal contract. Money paid or property transferred under an illegal contract cannot normally be recovered. There are exceptions however. For example, where a contract is made illegal by a statute passed for the protection of a class of people, a member of that class can get back money paid or property transferred by her or him under the contract. So a tenant would be able to recover money paid to a landlord which the landlord is prohibited by an Act to collect.
The law about illegal contracts is very complex. If there is any doubt about the legality of a contract, seek legal advice.
Most contracts come to an end by being completed. Once everything required under the contract has been done, the parties are discharged from further obligations under it, and it ends. A contract can also be ended (discharged) by rescission following a breach (discussed above), by mutual agreement or where it becomes impossible to carry it out (called 'frustration').
Certain serious breaches of a contract give the innocent party the right to cancel it. If they decide to cancel ('rescind'), they must inform the party in breach at once. The contract comes to an end from the moment the party in breach is informed of cancellation. Neither party is bound by the contract from then on. However, any obligations that arose before then (for example, obligations to pay damages for breach) survive and can be enforced.
The parties to a contract can agree at any time to end it. Such an agreement is itself a contract, so there must be consideration. If both parties have obligations under the contract which have not yet been carried out, release from those obligations counts as consideration, so nothing more is required.
Where one party has already fully performed their side of the contract, they may require the other party to give value in exchange for release from the remaining obligation. The party promising to release the other party may change their mind before the value is paid. However, if the party in breach has relied on the agreement and has changed their situation in some way, a court may force the party promising release to keep to the agreement.
Sometimes circumstances change so much after a contract is made that it is impossible to carry it out. For instance, the subject matter of the contract may be destroyed, as where there is a contract to buy a painting, but before it can be handed over, it is stolen or destroyed by fire. If this happens without the fault of either party a court may find that the contract has automatically ceased ('become frustrated'). In that case neither party will be bound. The court must be satisfied that there is no provision in the contract that the contract should continue to bind even if such an event should occur.
The Frustrated Contracts Act 1988 (SA) provides that in some circumstances, partial frustration of a contract need not result in the failure of the whole contract. For example, when the circumstances constituting frustration make it impossible to fulfil a particular part of the contract, only that part is frustrated and there remains a part of the contract which can be fulfilled and which continues to bind the parties.
The Act does not apply to contracts to which the Crown is a party nor to contracts entered into before the Act came into force in 1988. Also specifically excluded are six other types of contract, including a contract for insurance and partnership agreements.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.