What you should know about Australian Contract Law
In this article, we provide an overview of the key aspects of Australian Contract Law, broadly covering topics ranging from contract formation to termination, remedies for breach, unfair contract terms, electronic contracts, consumer protection laws, and the role of case law and precedents.
All businesses and individuals within Australia need to understand the fundamental principles of Australian Contract Law. It’s what governs contracting and the validity of contracts that may be entered into, whether personally (eg home loans), professionally (eg Employment Contracts) or by the business (eg Services Contracts).
Key Takeaways – The Law of Contract in Australia
- Contract formation under the Contract Law of Australia requires a clear offer, unconditional acceptance, and consideration.
- Parties must have the legal capacity to understand the nature and consequences of the contract.
- Some contracts may require specific formalities, such as writing, to be legally enforceable (eg some Property Contracts).
- Breach of contract occurs when a party fails to perform its obligations, and it may give the innocent party the right to seek remedies for the breach.
- Contracts can end through performance (ie natural expiry after the contractual obligations have ended), mutual agreement, through use of termination provisions (eg as a result of breach, force majeure, suspension etc) or the common law doctrine of frustration. Each may have different implications for the rights and obligations of the parties.
- Remedies for breach of contract include damages and specific performance. Usually the innocent party will need to take the party in breach to court, unless there is an indemnity for breach they can rely upon (and even then it is common to still need to go to court to obtain an order that the breaching party pays out under the indemnity).
- Unfair contract terms in standard form contracts in Australia are regulated to protect consumers and small businesses. The law of Unfair Contract Terms has recently changed, and massive penalties (greater than $50 million per unfair contract term) were introduced on 10 November 2023. Businesses need to change their standard form contracts urgently if you haven’t already done so!
- Misrepresentation and duress can render contracts voidable.
- Exclusion clauses limit liability and must meet reasonableness and notice requirements.
- Implied terms may be automatically included in certain contracts. These are implied by law, and usually are not written into the contract itself – businesses need to get their Contract Lawyers to advise on these terms before executing a contract.
- Unconscionable conduct involves a party taking advantage of vulnerability of the other party – fair and equitable contracts are required.
- Electronic contracts are prevalent, and understanding their validity is crucial. If contracts are not properly signed, even using digital signing programs, the contract may not be valid.
- Consumer protection laws intersect with Contract Law to safeguard consumers’ rights. The Australian Consumer Law is a significant source of implied contractual terms.
- Case law and legal precedents influence contract interpretation and enforcement, and your Contract Lawyer needs to be across these in order to advise you properly.
Australian Contract Law: An Overview of Key Principles
Australian Contract Law is the legal framework that governs the formation, performance, enforcement, and termination of contracts within the country. Let’s explore the key principles that underpin this essential aspect of the legal system.
1. Formation of Contracts
Offer, acceptance, and consideration are fundamental elements of contract formation in Australian Contract Law.
Offer
Parties must make a clear and definite offer on terms that are express and don’t leave “holes” in the agreement.
Acceptance
The other party must unconditionally accept the offer. Submitting a counteroffer is a possibility, but the first party must then accept the counteroffer or there is no valid offer and acceptance. This “backwards and forwards” of offer and acceptance is common in tender processes, particularly with the government.
Consideration
Consideration refers to something of value exchanged between the parties, ensuring that each party gains something from the contract. Often, this is the payment of money by the client in exchange for the performance of works or services by the contractor.
Understanding the rules of offer and acceptance and the concept of consideration is essential for creating legally valid and enforceable contracts.
2. Capacity
The capacity of parties to enter into contracts is an important consideration.
Individuals
Parties must have the legal ability to understand the nature and consequences of the contract they are entering into. This involves assessing the age, mental competence, and legal status of the parties where they are individuals. Contracts with minors or individuals lacking capacity may be voidable or unenforceable. It is therefore crucial for parties to ensure that the other party – if they are an individual – has the necessary capacity to enter into the contract.
Companies
If a company signs a document in accordance with section 127 (or its related sections) of the Corporations Act 2001 (Cth), then the other party is legally able to assume that the document was executed in compliance with the Company Constitution. It can also be taken as the presumption that the company has complied with their obligations under the Corporations Act.
Authority to Sign the Contract
Generally, businesses are presumed to have sufficient capacity. The more important issue here is therefore in relation to authority to sign the contract, ie making sure that the person who signs the contract has the correct authority.
Under the Corporations Act, the other party can presume that the person who signed the contract had the necessary authority to do so, unless there is some conduct etc that rebuts the presumption. It is therefore critical that any company signing a contract has its own internal delegations set up and complied with, to ensure only the people with the necessary authority sign the contract.
3. Formalities
While most contracts can be formed orally or through conduct, certain contracts may require writing or specific formalities to be legally enforceable. For instance, some contracts, such as contracts for the sale of land, may need to be in writing to be valid. Most countries, including Australia, have a Statute of Frauds, subsequently incorporated into State and Territory laws, that governs which contracts must be in writing in order to be valid. For example, in Queensland this is section 59 of the Property Law Act 1974 (Qld).
Anyone signing a contract should be aware of the specific formalities that may apply to their particular contract – a good Contract Lawyer can advise.
4. Breach of Contract
Understanding what constitutes a breach of contract is essential for parties to know their contractual rights and obligations. So what is it? A breach occurs when a party fails to perform its contractual obligations at the time or in the manner agreed in the contract.
Depending on the nature of the breach, the innocent party may be entitled to various remedies, such as damages to compensate for losses or specific performance to enforce the contract’s terms. The innocent party will need to go to court to enforce their remedies.
Often, a contract will contain indemnities by the contractor for breach of contract – this is another potential remedy for the innocent party.
5. Termination
Contracts can come to an end through various means, including performance, mutual agreement, termination by a party, or frustration. Parties should be aware of the circumstances under which a contract can be terminated and the implications of termination on their rights and obligations. Your Contract Lawyer can advise on these implications.
6. Remedies
When a breach occurs, the innocent party may seek remedies to address the harm caused. Remedies for breach of contract include damages (which compensate for financial losses incurred), or specific performance (which requires the breaching party to fulfill its contractual obligations as originally agreed). These remedies are at common law, not under the contract itself.
Remedies may also be included in the contract, including termination and indemnities for breach of contract.
7. Unfair Contract Terms
To protect consumers and small businesses, Australian Contract Law regulates unfair contract terms in standard form contracts. These terms are generally one-sided and may place the other party at a significant disadvantage. Businesses must be aware of these laws and ensure that their contracts adhere to the required fair trading practices.
We’ve written a detailed article on the changes to the Unfair Contract Terms over the last 12 months, with massive penalties being introduced in November 2023, if you’d like to check it out. You need to be aware of the substantial penalties that have now been introduced for the inclusion of only one Unfair Contract Term in your contract – these penalties will multiply depending on how many breaches are found.
Keep in mind that the Australian Consumer Law now has an extended definition of Standard Contract Terms and Small Businesses, which applies much more broadly than it used to, including to small businesses with less than 100 employees. Because of the definition, many sophisticated companies may be caught by the definition, which may actually make the Contractor liable for its Unfair Contract Terms rather than the Client!
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8. Misrepresentation
Misrepresentation involves false statements or misleading information provided during contract negotiations. Parties must be honest and transparent in their dealings to avoid potential disputes arising from misrepresentation.
9. Duress and Undue Influence
Examining situations where one party may have been forced or coerced into entering a contract against their will. Contracts formed under duress or undue influence may be voidable.
10. Exclusion Clauses / Limitation of Liability Clauses
Exclusion clauses and Limitation of Liability clauses limit or exclude certain liabilities or obligations that would otherwise apply in a contract. Generally, Contractors will try to include a Limitation of Liability clause while Clients will not want to limit the liability of the Contractor in the event of a breach or other issue under the contract.
These clauses are often tied in with indemnities and insurance provisions in a contract, and often take intensive negotiation to agree. One point that needs to be specifically negotiated between the parties is whether the Limitation of Liability clause limits the exent of the indemnities under the contract, or whether the indemnities are excluded from the Limitation of Liability clause (meaning the indemnities are unlimited). This is a very complex area of Contract Law, so make sure you consult with your Contract Lawyer!
11. Implied Terms
Certain contracts may automatically include terms, even if not explicitly stated. Parties should be aware of these implied terms and their implications on the contract. States and Territory legislation may imply specific terms into the contract. The Australian Consumer Law and Corporations Act are also contenders.
12. Unconscionable Conduct
Unconscionable conduct involves taking advantage of another party’s vulnerability or lack of bargaining power. Understanding and addressing possible unconscionable behavior is essential to ensure fair and equitable contracts.
13. Electronic Contracts
The rise of digital technology has led to an increase in electronic contracts. Understanding the validity and enforceability of online contracts is crucial – you can’t just assume that, because you use a digital execution program like DocuSign, the contract has been correctly executed. Check in with your Contract Lawyer on this one.
14. Consumer Protection Laws
As discussed above, Australian Contract Law intersects with consumer protection laws to safeguard consumers’ rights in contractual agreements. Businesses must adhere to these regulations to protect consumers from unfair contract terms and unfair practices.
15. Case Law and Precedents
Past court decisions and legal precedents play a crucial role in shaping Contract Law. Parties should be aware of how case law influences contract interpretation and enforcement. Staying updated with relevant case law (through their Contract Lawyers) ensures parties make informed decisions in contractual matters.
Conclusion
Australian Contract Law provides the foundation for contracts in Australia. From contract formation to performance to termination and breach, understanding these key principles is essential for individuals and businesses engaged in contractual activities. Complying with the relevant laws and regulations ensures fair and enforceable contracts that protect the rights of all parties involved. In addition, staying informed about case law and legal developments is crucial for making well-informed decisions in contractual matters.
FAQs
1. What are the fundamental elements of contract formation under Australian Contract Law?
In Australian Contract Law, contract formation requires a clear and definite offer, unconditional acceptance of that offer, consideration exchanged between the parties and intention to enter into legal relations. Capacity of the parties is also an important element.
2. How does the capacity of parties affect contract validity?
Parties must have the legal capacity to understand the nature and consequences of the contract they are entering into. Contracts with minors or individuals lacking capacity may be voidable or unenforceable.
3. What are exclusion clauses in contracts?
Exclusion clauses limit or exclude certain liabilities or obligations that would otherwise apply in a contract. Their enforceability depends on factors such as reasonableness and notice given to the other party.
4. What remedies are available for breach of contract?
When a breach occurs, the innocent party may seek remedies such as damages to compensate for losses incurred or specific performance to enforce the contract’s original terms.
5. How does Australian Contract Law regulate unfair contract terms?
To protect consumers and small businesses, Australian Contract Law regulates unfair terms in standard form contracts, which are generally one-sided and may place the other party at a significant disadvantage. Read our article on Unfair Contract Terms.
6. What is unconscionable conduct in Contract Law?
Unconscionable conduct involves taking advantage of another party’s vulnerability or lack of bargaining power, and it must be addressed to ensure fair and equitable contracts.
7. How does electronic contracting work under Australian law?
With the rise of digital technology, electronic contracts have become more prevalent. Understanding their validity and enforceability is crucial in the digital age and in compliance with Australian Contract Law. Contact us if you need advice in this area.
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About the Author
Rachelle Hare
Rachelle Hare is a highly experienced Construction Lawyer and Contract Lawyer, with over 23 years of experience in Tier 1 and Tier 2 Construction Firms, Top Tier Private Practice and Government.With 23+ years of experience as a Senior Lawyer, Strategic Contracting Adviser and Management Consultant in Construction Law, Contracts, Major Projects, Commercial Advisory, Compliance, Procurement, Contract Management and Risk Management, Rachelle has the rare skills to offer you seamless business advice and legal advice to help support your organisation.
As well as a Lawyer and Business Adviser, Rachelle has also acted as a Strategic Procurement Adviser, Compliance Manager, Strategic Risk Adviser and Commercial Manager.Rachelle owns Blaze Business & Legal, a combined Commercial Law Firm and Business Advisory Firm located in Brisbane, Queensland, Australia. Blaze Business & Legal assists a broad range of clients in the Construction Industry and related industries, and advises owners, contractors, subcontractors, NFPs and other organisations on a broad range of Construction Law, Commercial Law, Business Advisory and Management Consulting issues in Brisbane, Queensland and around Australia. Rachelle also owns Blaze Professional Learning, where she offers practical contracting skills, hands-on experience in drafting and working with contracts, and industry insights to help Professionals upskill and advance their careers with real-world skills.
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