What is a Contract?

Recently I dealt with a client who was involved in an ongoing arrangement with another person. The client did not consider that arrangement to be a “contract” because the terms of the arrangement were not committed to writing. In essence, he believed that in order to have a contract you had to have a formal written document signed by both parties.

It came as somewhat of a shock to the client when I explained that there was a contract in place and that he was bound and obliged to continue with the ongoing arrangement.

It is a common misconception that people have. That is to have a contract you must have a written agreement signed by both parties, etc. It is true to say that this applies to the sale of land because of specific legislation that requires a contract for the sale of an interest in land to be in writing but in all other cases, you do not need to have a written agreement in order to have a contract between two or more parties.

What is a contract and what needs to happen for a contract to be formed? Firstly, in simple terms, a contract is an agreement between two or more parties which is legally binding.

Secondly, the elements of a contract are “offer” and “acceptance” by “competent persons” having legal capacity who exchange “consideration” to create an obligation on each party.

This might involve a service station “offering” to sell you fuel at a certain price and your “acceptance” by attending at the service station and filling your car with the fuel. Once you have “accepted” the “offer” by filling your car with fuel, there is a binding contract which obliges you to pay money to the fuel station. If you fail to do this, then you will be breaching the contract which will then allow the service station to commence legal action against you for “breach” of contract for the cost of fuel.

We enter into contracts on a daily basis when we buy everyday items such as clothes, food, etc. Because of the nature of these transactions, most contracts do not take the form of a written document.

When there is a breach of a contract it then becomes necessary for a determination to be made as to what has been agreed between the parties. In some instances, there will be “express” terms which are ones that are clearly set out in the contract between the parties. This might involve making a request for a specific item and if ultimately, that specific item is not provided then there is a breach of an “express” term of the contract.

What flows from that breach of contract can be either a right of termination on the part of the customer or, in other instances, a right to claim for damages or compensation.

There are also “implied terms”. These terms can be implied by the Court or alternatively, by various pieces of legislation that apply, in particular, to consumer based contracts. The most well known of such legislation is what was formerly known as the Trade Practices Act which has now become the Australian Consumer Law (“ACL”). Essentially, the ACL provides inherent protection to a consumer of goods by providing a number of statutory guarantees concerning the title to the goods and the quality of the goods. The purpose of these guarantees is to imply terms and conditions into consumer contracts to ensure that minimum standards and obligations are adhered to when goods or services are provided to every day consumers.

More specifically, Section 54 of the ACL states that where goods are “of a kind ordinarily acquired for personal, domestic or household use or consumption”, the goods must be of “acceptable quality”.

A specific example might be that where a consumer acquires an expensive refrigerator. The standard of “acceptable quality” might require that refrigerator to last for, say, 7 to 10 years. If it does not then there is a breach of the implied statutory guarantee which would enable the consumer to seek redress and possibly demand a new refrigerator even after expiration of the standard warranty period that is usually given by the manufacturers of such products. When you are next asked as to whether you would like to pay extra for an extended warranty please stop, think and appreciate that you perhaps do not need to pay for an extended warranty. That is because the contract that you are entering into with the relevant store selling the goods will have a statutory guarantee implied into that will require that particular item to last for a reasonable period of time having reference to such factors as the price that you are paying. If you buy an expensive refrigerator, the expectation is that is should last for perhaps a longer period of time than a very cheap refrigerator. If such a refrigerator broke down after, say, five years you still might be able to rely upon the statutory guarantee and demand a new one.

When a party breaches a contract the other innocent party may have a number of choices about what to do as a consequence of that breach. Firstly, the aggrieved party might seek “specific performance” which is a Court Order which is intended to make the defaulting party complete their contractual obligations.

Alternatively, in many circumstances, it is not feasible for various reasons to seek specific performance and instead, “damages” can be pursued to compensate the innocent party for either direct or consequential loss or losses sustained as a result of the breach of the contract. In an extreme case, punitive damages might also be awarded but this usually occurs where there has been fraud or some other case of extreme conduct.

Contracts can take many forms and are an integral part of our every day life. Both the Courts and Government have endeavoured to establish a set of rules of interpretation and legislative protection to ensure that there is a level of fairness to ensure that the average person is protected. In order to avoid a contractual dispute then, it is recommended that the essential terms of any agreement be reduced to writing which might avoid a “he said/she said” type situation which then requires a Judge to determine what was agreed which then gives rise to an uncertain outcome which no doubt most people would wish to avoid.