1 Offer and acceptance
A An agreement that the law will enforce. is formed when an The first step in agreeing to make a legally binding agreement. An offer must be accepted before there can be a legally enforceable contract. For example, a person can offer to sell their car for $5000 and a buyer can accept the offer and pay that purchase price. by one A person or organisation directly involved in a court case. Parties include the plaintiff or applicant, the defendant, and any third party added to the action, but not independent witnesses. is accepted by the other party.
An enforceable offer must be distinguished from mere willingness by one person to negotiate further details with the other party. For example, A offers to make and sell calendars featuring Australian paintings to B. Before any agreement is reached on size, quality, style or price, B decides to not proceed further with A’s proposal. At this stage, there is no Able to be enforced by law. contract between A and B because there is no definite offer for B to accept until the essential terms of the bargain have been decided.
An offer does not need to be made to a specific person. It can be made to a class of people, or to the whole world.
An offer is a definite promise to be bound, provided the terms of the offer are accepted. This means that there must be acceptance of precisely what has been offered. For example, a used car dealer, A, offers to sell B a Holden panel van for $1000, without a roadworthy certificate. If B decides to buy the Holden panel van, but insists on a roadworthy certificate being provided, then B is not accepting A’s offer. Rather, B is making a counter offer. It is then up to A to accept or reject the counter offer.
A person can withdraw the offer that has been proposed before that offer is accepted. For withdrawal to be effective, the person who has proposed the offer must communicate to the other party that the offer has been withdrawn. To continue the example above, A may say to B that he A document that sets out what a person wants to happen to their money and other property after they die. check with his supervisor and maybe a roadworthy certificate can be provided. If, while waiting for a reply, B decides he no longer wants to buy the Holden panel van and tells A of his change of mind, then there is no binding contract. It is always advisable to have the details of such conversations in writing, so follow-up any conversations about contracts with an email or letter confirming the details of the conversation.
Acceptance of an offer occurs when the party responding to the offer (called the offeree) agrees to the offer by way of a clear statement to indicate their acceptance or by some conduct or A written law made by parliament. Also called an ‘Act of parliament’, ‘statute’ or legislation. on their part. Acceptance must be unequivocal and effectively communicated to the offeror: the law does not deem or presume a person has accepted an offer merely because they have not expressly rejected it. If, for example, A gives B a quote to provide cleaning services and, after receiving this quote, B tells A to do the work, this constitutes acceptance of the offer and is a binding contract such that B is bound to pay A the quoted amount.
2 Intention to create legal relations
A contract does not exist just because there is an agreement between two or more people. The parties to the agreement must intend to enter into a legally binding agreement. The law is not so concerned with what the parties subjectively intended, but what a reasonable person would consider the parties intended in the circumstances in which the agreement was reached. Such an intention will rarely be stated explicitly in a written document, but will be inferred from matters such as the nature of the relationship between the parties and the nature of the agreement.
Where the parties are entering into an arms-length commercial arrangement, it will generally be presumed that the parties objectively intended to create legal relations and make a binding contract.
Where an agreement is made between family members or friends and is more of a domestic or social arrangement, then it is more likely that an intention to create legal relations will not be found. In these situations, it is important to make it clear, either expressly or otherwise, that the parties intend to enter into a legally binding arrangement.
For example, offering a friend a ride in your car is not usually intended to create legally binding relations, even if that friend offers to give you money for petrol. However, if you wanted to create a legally binding arrangement that you will drive your friend to work everyday in exchange for your friend paying you $20 to go towards paying the running The amount charged by a lawyer for legal work. Lawyers can only charge the amount agreed with the client in a costs agreement or the amount stated by a court in its rules. The party who loses a case usually has to pay all their own costs plus most of the costs reasonably incurred by the other side. See also indemnity costs. of your car, you should put the agreement in writing and expressly state that you both agree to create a legally binding arrangement. Further circumstances from which an objective intention to create legal relations could be inferred would be if an invoice or written receipt was provided upon Formal delivery of legal documents to a person to tell them there are court proceedings against them which they must defend, or to make sure a witness in a case knows when they have to go to court to give evidence. or payment.
‘Consideration’ is the price paid for a promise made by one party to the other party. The price must be something of value, although it need not be money. Something of value, such as money, given by one person to another person as part of a contract. may be a right, interest or benefit going to one party, or some forbearance, detriment or loss given, undertaken, tolerated or suffered by the other party.
So long as consideration exists and is of real value, a An independent body that hears legal claims brought by parties and decides between them. Serious cases are heard by a judge and jury, or just a judge. Less-serious cases are heard by a magistrate. will not question its adequacy. For example, the promise to pay a nominal amount of money as rent in return for the A document that sets out an agreement between a landlord and a tenant for the renting out of property, or for the use of other personal property such as a car. of a house could be good consideration. However, providing love and affection or a Done by your own free will. See also community treatment order (CTO). gift is not Treated by the law as if something is the case, even if that is not the reality. For example, children may be deemed to have the same home as their parents, whether they actually live there or not. Or a person may be deemed to have given their consent to something if they hear about it and do not object. Compare rebuttable. to be Legally binding or effective. consideration. Also, the consideration must not be illegal or impossible to perform.
There is an exception to this rule: documents under seal (i.e. deeds) do not require consideration for there to be a binding contract.
Deeds are often used in circumstances where the parties intend for there to be a legally binding agreement, even though there is no consideration or there is uncertainty about whether there is valid consideration (e.g. where a parent wishes to gift a car to their child or when parties want to settle their disputes and agree to A document signed by parties ending a court action. The party who began the action agrees to drop it, often in exchange for a payment by the other party. Also called terms of settlement. each other from a claim).
For a A formal legal document that is used for specific purposes, such as trusts, some types of ownership of land, and agreements where no money is going to be paid. Deeds must clearly state that they are a deed, and they usually include the words ‘signed, sealed and delivered’. They are also called ‘contracts under seal’, although attaching a seal with wax is no longer necessary. to be valid in Victoria, it must be in writing and:
- in the case of individuals, be signed and expressed to be sealed and delivered (see ss 73, 73A Property Law Act 1958 (Vic) (‘Property Act’); or
- in the case of companies, be expressed to be executed as a deed and either signed or sealed and witnessed by two directors, or by a director and a secretary, or for a proprietary company that has a sole director who is also the sole secretary, by just the director (see s 74 Property Act; s 127 Corporations Act 2001 (Cth)).
4 Legal capacity
Not all people are free to enter into a valid contract. Contracts involving:
- people who have a mental impairment;
- young people (minors);
- corporations (people acting on behalf of a company); and
may have issues related to To agree to something being done, to approve an action or arrangement. See also informed consent. and legal The ability to understand and be held responsible by the law for your actions. It also refers to a person’s ability to understand and agree to something, such as to undergo medical treatment. Full legal capacity is reached at 18 years of age, when a child becomes an adult..
People who have a mental impairment
People with a mental impairment – or people who are temporarily impaired by drugs and/or alcohol – are protected by the rule that a contract is not valid and enforceable unless the person had the capacity to genuinely consent to its making.
Capacity to give consent involves a general understanding of the nature of the contract but not necessarily its fine details. For example, a person with a mental impairment may have the capacity to understand some contracts (e.g. buying a loaf of bread) but not to understand other, more complicated contracts (e.g. buying a car on A debt that does not have to be paid until some future time. Being allowed to pay later, in the future, for something you are getting now.).
Where a person did not understand, due to a mental impairment, the general nature of a contract they signed, a court can intervene to set aside the contract only if:
the other party knew (or ought to have known) of the person’s mental impairment or lack of capacity and it would be unfair for them to take advantage of that; and
the benefit received by the other person has not been sold to a third party who did not know the previous transaction might not be valid. To escape the consequences of a contract, the other party should be notified of the intention not to be bound by the contract within a reasonable time.
Some people with a mental impairment (temporary or long-term) are assisted by an (1) (wills) Someone who takes legal responsibility for the possessions of a person who has died without making a will, or who is still alive but cannot manage their own possessions. For example, an administrator may be appointed to manage the money, house or other possessions of a person who has a severe mental disability. (2) (companies) A manager appointed by the directors of a company that is in financial difficulty. This may give creditors a better chance of getting their money back because the company can keep trading under supervised management instead of being wound up. appointed by the Guardianship List of the Victorian Civil and Administrative A body set up to hear and decide disputes, usually with less formality and less strict rules of evidence than in a court proceeding. (VCAT). For more information about an administrator’s role, see Chapter 8.6: Guardianship and medical treatment. People with disabilities who have an administrator appointed to act on their behalf are generally not free to enter into contracts, unless this is approved in writing by their administrator or by a VCAT order.
A person with an intellectual or psychiatric disability is only liable to pay a reasonable price for Things such as food and basic clothes that the law says are needed for people to live a reasonable life. A minor, in Victoria someone under 18 years old, cannot enter a legally enforceable contract, except for necessaries. sold and delivered (s 7 Goods Act 1958 (Vic)). ‘Necessaries’, and the rules applicable here, are dealt with in ‘Young people’, below, because the definition is the same for both groups.
The term ‘young person’refers to anyone under the age of 18 years (s 3 Age of Majority Act 1977 (Vic)). Young people are sometimes called minors or infants.
The exact capacity of young people to bind themselves to, and be bound by, a contract is limited and unclear, because no Act of parliament completely covers this area of law. The Supreme Court Act 1986 (Vic) (ss 49–51) is a useful reference.
Binding contracts and young people
Contracts for the supply of ‘necessaries’ are generally binding. There are no hard and fast rules to identify what is ‘a necessary’, but necessaries include basics such as food, clothing, a place to live, medicine, and other things that a young person needs to live a reasonable lifestyle.
Binding contracts for necessaries also include contracts relating to a young person’s education, apprenticeship or something very similar, if it can be shown to benefit the young person. While a court has not yet considered the issue specifically, mobile phones are probably necessaries if a young person requires one for educational or work purposes.
A young person who is contracting for the supply of necessaries must pay a reasonable price (although that may not be the contract price) for any necessaries actually sold and delivered. (‘Delivery’ is a technical term. Generally, delivery takes place when the seller has given the buyer the power to take the goods away.) Where necessaries have been sold but there has been no delivery, the young person does not have to take delivery or pay for the goods.
Non-binding contracts and young people
Two classes of contracts are not binding on a young person:
- contracts that are not for necessaries; and
- contracts for the repayment of money lent or to be lent (that is, any form of A contract relating to the giving of credit.).
Where a young person has already paid money under a non-binding contract, that money is not recoverable unless no benefit has been received by the young person. However, the young person can refuse to make any further payments under the contract. It is not certain who then owns the goods that are not necessaries. It appears that they become the property of the young person unless the young person has fraudulently misrepresented their age.
Even after turning 18, a person cannot confirm a prior contract and then become bound by it. Any money paid by a young person under such circumstances may be recovered.
Bankrupt people are not deprived of their general capacity to enter contracts. However, there are provisions of the When a debtor who cannot pay their debts has their money and property taken over and managed by a trustee who uses it to pay back creditors. The debtor is then called a bankrupt. Act 1966 (Cth) (‘Bankruptcy Act’) that relate to dealings and contracts by bankrupts. For example, applying for or buying goods and services on credit for an amount of $3000 or more without disclosing your bankruptcy is an A criminal act prohibited by state or commonwealth criminal law. An offence is either a summary offence (minor) or an indictable offence (serious). and you would be liable for a penalty under the Bankruptcy Act (s 269). (See ‘The effect of bankruptcy on debts’ in Chapter 5.3: Understanding bankruptcy.)
A corporation is an artificial body created by law. A corporation has a legal existence, or ‘personality’, that is separate from the individual people who constitute it.
However, a company has the legal capacity of a natural person and therefore has the capacity to enter into contractual relations (see s 124 Corporations Act 2001 (Cth)). This is so even if there is an express An order made by the Supreme Court of Victoria or the High Court of Australia prohibiting a body from acting outside its authority. See also jurisdiction; prerogative writ; ultra vires. contained in the company’s constitution that governs its operations. Such transactions are not deemed Having no legal effect. A void agreement has something wrong with it, so it cannot be a legally binding contract. For example, a verbal agreement to buy land would be void, because the law says those contracts have to be in writing. simply because the exercise of such powers is in breach of the restrictions placed in the company’s constitution (s 125(1)).
A company has the capacity to enter into contractual relations, but such relations are only binding on the company if those acting on behalf of the company do so with the company’s express or implied authority (s 126(1)). The courts have been quite liberal in their interpretation of implied authority. It has been found that in cases where directors with express authority have acquiesced and allowed a director with no authority to frequently enter contractual relations on behalf of the company, that such directors have implied authority and therefore can contractually bind the company.
During their imprisonment, prisoners may enter contracts, including contracts to buy and sell property. The usual restrictions about supervision and censorship of anything coming into prisons applies, so the permission of Corrections Victoria is required before a prisoner may sign for, deliver or receive any document. (For more information, see Chapter 3.8: Imprisonment, supervision and prisoner rights.)
Entering into a contract must involve the elements of free will and proper understanding of what each of the parties is doing. In other words, the consent of each of the parties to a contract must be genuine. Only where the essential element of proper consent has been given is there a contract that is binding upon the parties.
Proper consent may be affected by any of the following matters:
- Making a statement or doing something that is false, to try to get someone to do something they would not otherwise do, for example buy goods of poor quality. or misleading conduct;
- Forcing someone to do something they do not want to do. An agreement signed under duress will be invalid.;
- Taking unfair or improper advantage of the weakness of another person. The influence is to make them agree to do or not to do something they would not do of their own free will. or unconscionability; and
- unfair contract terms in standard form contracts.
Only limited types of mistakes will cause a contract to be non-binding on the parties: they must be mistakes that go to the very basis of the agreement.
For example, a contract of sale for a car that both parties assume exists, but has actually been destroyed by fire, is non-binding on the parties.
By contrast, where the parties are only mistaken about the model of the car, the mistake does not go to the heart of the bargain and so such a contract would be binding.
Another example is when a person signs a written document mistakenly believing that it relates to something different from what it actually relates to. In this case, the person may not be bound by it. This means that if A signs a document that A reasonably believes to be a character reference to assist B obtain a loan from a finance company, and the document is actually a A binding promise made as reassurance that another person will carry out their legal obligations (e.g. paying a debt). The person making the promise is called a guarantor. If the person being guaranteed fails to pay, the guarantor becomes responsible for the debt. of the loan contract, then the guarantee would not be binding on A.
A third example is when C cannot read, due to blindness, illiteracy or other disability. Someone else tells C what is in the document and C signs it. The document C signed is not what C was told it was. The document C signed would not be binding on C.
By contrast, if a person who signs a document – believing it to be a contract – does not read the terms and conditions, that person is bound by the contract and is not entitled to plead mistake.
Other factors may also be relevant to a successful plea of mistake. For instance, whether or not the (1) A defendant’s response to the legal claims made against them in court by a prosecutor or plaintiff. (2) A lawful excuse for conduct: for example, causing minor injuries to someone while saving them from certain death. (3) ‘The defence’ is also a way of referring to the defendant and their legal team. of mistake will be allowed often depends on whether an innocent third party will be adversely affected by a decision that the contract is non-binding. Again, if the signer failed to take reasonable precautions, the defence will not succeed.
Misrepresentation or misleading conduct
Misrepresentation or misleading conduct in a contract scenario can be dealt with under the (1) The system of law developed by the English courts through precedent and adopted in ‘common law countries’ in the British Commonwealth (as opposed to Roman law (civil law) or ecclesiastical law). (2) The case law made by judges in that system. (3) Case law that is not part of the law of equity. (4) Historically, the rules of law common to all people in England, as distinct from local or customary laws. and equitable principles. However, misrepresentation or misleading conduct is now often dealt with under the Australian Under the Australian Consumer Law, a person who buys goods or services for less than $40 000 or for personal or home use. Law (ACL). Whether a party relies on the common law and equitable principles and/or the ACL depends on the nature of the transaction (e.g. whether the transaction was made in trade or commerce), the type of misrepresentation, and the remedy a party is seeking.
This section focuses on the common law and equitable principles. For information about Found in a statute of delegated legislation. For example, a statutory authority or body is aperson or organisation that has special powers given by parliament to do work for the public benefit. protections against Something done by a manufacturer or seller that is unfair, dishonest or likely to mislead a consumer when buying goods or services., and the making of false representations in relation to the sale of goods and services, see Chapter 7.2: Consumer protection laws.
If you think that misrepresentation or misleading conduct has occurred in the context of a contract, consider the statutory protections under the ACL. It can be easier to prove misleading or deceptive conduct and false representation under the ACL, and the ACL provides more flexible remedies compared to the common law and equitable principles.
What types of remedies are available for misrepresentation?
The remedies that are available for misrepresentation are The ending of a contract in a manner that places the parties to the contract in the position they were in before the contract existed (where restitution is possible). For example, in a rescission of a contract for the sale of a car the seller would get back the car and the buyer would get back their purchase money. See also termination. and/or A court order for money to be paid to someone to compensate them for a loss suffered as a result of a civil wrong or breach of contract. For example, a person who caused a serious permanent injury to another person can be ordered by the court to pay damages that compensate the injured person for their loss of income from being unable to work. See also aggravated damages; compensatory damages; general damages; liquidated damages; nominal damages; special damages. and/or The end of something. Contracts terminate when the parties have done what they agreed. A contract can also be terminated without being completed, for example if one party breaks the contract, or it is impossible to carry out..
Under the common law and (1) Fairness and justice. (2) A right to property that the court will recognise even though it does not amount to full legal ownership. (3) A set of legal rules that aims to reduce any harshness that would result from strict application of the law. rules, if a person is induced to enter into a contract as a result of another party’s misrepresentation or misleading conduct, then the misled party may choose to ‘rescind’ the contract. This means that the contract is void from the beginning and is unenforceable. Rescission of a contract also means that both parties are restored to the positions they were in before they entered into the contract (this may require the court to order some monetary adjustments).
For example, A induces B to enter into a contract of sale to purchase a business by presenting overinflated profit and loss statements that show the business to be much more profitable than it actually is. B can choose to rescind the contract on the basis that A misrepresented the business’ profit and loss statements and engaged in misleading conduct. Rescission would result in B having any money that they paid for the business returned as if the contract of sale never occurred.
If it is not substantially possible to restore the parties to their original positions, then rescission may not be available.
If the misled party chooses to rescind the contract, then they cannot To take legal action in a civil case. the other party for breaching the contract (because, for example, the misrepresentation constitutes a term of the contract). This is because it is not possible to both cancel a contract from the beginning and sue for breaching it.
So using the above example, if B wanted to keep the business, despite the misrepresentation (and assuming the misrepresentation constituted a term of the contract), B could choose to keep the contract and instead sue A for breach of contract Failing to do what was agreed in a contract. and claim any damages, including loss of profit, that they would have suffered as a result of the misrepresentation.
Under the ACL, the court has the Power to choose whether to do something or not. For example, a judge may have discretion to allow a party extra time to complete a document if it would be unfair to enforce the legal time limit. to order rescission.
Rescission is a defence to any action for damages or Carrying out the precise obligations that are set out in a contract. For example, a contract might require the sale of a piece of land. If the parties do not perform a contract a court can order specific performance. against the misled party.
A misled party may also have a right to damages (either in addition to, or instead of, rescission):
- in the A civil wrong that causes harm, intentionally or otherwise. A person affected by a tort can take action in court to claim compensation for damage caused by the wrong, or an injunction to stop the wrong continuing. of deceit, where there is fraudulent misrepresentation;
- in the tort of An act that breaches a duty to take reasonable care and results in loss or damage to another person. See also tort., where there is negligent misrepresentation;
- under the ACL; and
- where the misrepresentation constitutes a term of the contract (whether as a condition, an ‘intermediate term causing a substantial loss of benefit’ or a A promise in a contract. For example, a promise by a manufacturer that goods will be repaired or replaced if they turn out to be faulty.), and the other party breached that term with misrepresentation. For more information about conditions and warranties, see ‘The terms of a contract’, below.
It is important to note that in the first three scenarios above, the misled party may have the right to damages, even where the misrepresentation does not constitute a term of the contract.
Where this is the case, the amount of damages is not the amount necessary to put the misled party into the position they would have been in had the misrepresentation been true. Rather, damages is the amount necessary to put the misled party into the position they would have been in had the misrepresentation not occurred.
By contrast, where the misrepresentation constitutes a term of the contract, the amount of damages is based on the amount necessary to put the misled party into the position they would have been in had the contract been performed (i.e. as if the misrepresentation was true).
If the misrepresentation constitutes a condition of the contract (i.e. it is essential to the parties), or is an intermediate term of the contract (a breach of which would cause substantial loss of benefit), a misled party may choose to terminate the contract (which is different to rescinding the contract). The effect of terminating a contract is that the contract is valid up to the date of termination, but is then at an end and the parties are discharged from any remaining obligations they have under the contract. Under the ACL, the court has the discretion to order a contract be terminated.
A misled party can sue for ‘loss of bargain’ damages, which is the amount necessary to put the misled party in the position they would have been in had the contract been completed and the parties had fulfilled all their obligations.
If the misrepresentation constitutes a warranty (that is, it is a non-essential and subsidiary term of the contract), then the misled party is not entitled to terminate the contract, but they are entitled to damages for the loss suffered as a result of the breach of that warranty.
What type of misrepresentation was made?
Under the common law and equitable principles, there are three types of misrepresentation:
- fraudulent misrepresentation;
- negligent misrepresentation;
- innocent misrepresentation.
To prove An intentionally dishonest act, or lack of action, done to deceive someone and bring some advantage over those who have been deceived., it is necessary to show that the person making the statement knew it was false, had no belief in its truth, or knew it might be false and recklessly went ahead and made it anyway, not caring whether it was true or false. This is a subjective test; if the person who made the representation honestly believed that the representation was true, no matter how unreasonable, negligent or silly, then that person has not made a fraudulent misrepresentation. Accordingly, it is very difficult to prove fraud.
However, once fraud is proven, the misled party can rescind the contract if they were induced to enter into the contract due to such fraud or sue for damages for deceit. It may be possible to recover damages for the loss caused by the fraud even where the loss was unforeseeable. As set out above, the misled party may also be entitled to contractual remedies (e.g. damages/termination) if the fraudulent misrepresentation constituted a term of the contract.
To prove negligent misrepresentation, it must be shown that:
- the person making the representation owed a An obligation to take reasonable care to avoid harming other people or their property. Breach of a duty of care that causes damage or loss to another may give rise to an action in tort. to the other party to ensure that any information they gave was true and reliable; and
- the person breached that duty of care because the statement was misleading or false and made without due care; and
- the misled party suffered loss or damage by relying on that misrepresentation, which was reasonably foreseeable and not too remote.
A duty of care will be found where the person making the representation could reasonably be expected to foresee that the statement would be relied on. This can be due to some special skill or superior knowledge that they possess, as compared to the other party, and it is reasonable in the circumstances for the other party to rely on the statement.
If the negligent misrepresentation caused the misled party to enter into the contract, then the misled party can rescind the contract or sue for damages for negligence. Unlike fraud, the misled party can only recover damages that were reasonably foreseeable. The misled party may also be entitled to contractual remedies (e.g. damages/termination) if the negligent misrepresentation constituted a term of the contract.
An innocent misrepresentation is where a misrepresentation is made with no intention to deceive and without any negligence.
If the misled party is nevertheless induced to enter the contract, either because it was a reasonable consequence of the misrepresentation (even though the representor did not intend or expect this) or because of its own idiosyncrasy, the misled party may be entitled to rescind the contract. However, it is arguable that if no reasonable person would have been induced to enter the contract or rely on the misrepresentation, then the misled party would not be entitled to rescind the contract.
Where there is innocent misrepresentation, the misled party is not entitled to damages for any tort.
The misled party is only entitled to the contractual remedies of damages/termination if the representation constituted a term of the contract, and the other party breached that term by their misrepresentation.
Proper consent may be affected by duress. Under the common law, duress is where there has been actual or threatened violence either to the other contracting party directly or to their immediate family, near relatives or close associates. The duress may be made by someone acting under the instructions of the party to the contract. The effect, though, will have been that a party has been forced into the contract by being deprived of their free will to act.
Duress now extends to contracts entered into as a result of threats to a party’s economic wellbeing, that is, a threat to a person’s business or trade. This form of duress is called economic duress.
To prove duress, it must be shown that:
- a party applied unlawful or unconscionable pressure (whether physical, economic or psychological pressure) to force the other party to enter into the contract; and
- such pressure meant that the other party had no reasonable alternative but to enter into the contract, and
- such pressure was a cause of the other party entering into the contract.
The consequence of establishing duress is that the contract is Able to be cancelled, but having full legal effect until that happens. A voidable agreement is one that may have something wrong with it, so either of the parties could cancel it if they wanted to. There are certain restrictions on what is, and is not, voidable that require advice from a lawyer. See also rescission. at the election (i.e. the choice) of the wronged party. Where the wronged party elects to have the contract declared void, both parties will be restored to their original positions as if the contract had not been entered into. This may require a court to order monetary adjustments or Making good, returning things to the way they were. For example a court can order restitution of stolen goods to someone who is entitled to them; a party to a contract that has been rescinded is entitled to restitution that restores the status quo.. While it is arguable that duress is a tort that gives rise to a right to damages, this is not entirely clear.
However, duress is likely to be a contravention of various provisions of the ACL where it is done ‘in trade or commerce’. This includes Behaviour that takes unfair advantage of a vulnerable person in a contract or other transaction. The vulnerability can be due to factors such as poor education, disability, language difficulties or being affected by alcohol. under sections 20, 21 and 22 of the ACL, which would give rise to a range of more flexible remedies, including rescission and damages. (See also ‘Unconscionable conduct’ in Chapter 7.2: Consumer protection laws.)
Undue influence or unconscionability
Proper consent may be affected by undue influence. Undue influence is exercised by taking unfair and improper advantage of the weakness of another party, to the extent that it cannot be said that the other party voluntarily entered into a contract.
The main reason for the rule against the use of undue influence is to correct abuses of A type of property ownership or arrangement where one party, known as the trustee, holds property or money for the benefit of another party, referred to as the beneficiary. and confidence. It is applied where the parties are in a relationship where one party may be able to exercise considerable influence over the other party.
There are two categories of undue influence. The first is where no special relationship exists, but the stronger party has exerted dominance and influence over the weaker party. The weaker party has to prove that undue influence has been exerted.
The second category of undue influence is where the parties are in a special relationship of confidence; most cases of undue influence fall into this category. Such a relationship exists when one party’s position towards the other’s position involves a dependency or trust, in the form of authority or an expectation to give fair and independent advice to the weaker party.
Where a special relationship is found to exist, a presumption of undue influence will arise. It is then necessary for the stronger party to show that the contract was not the result of any undue influence. This could be shown by, for example, the weaker party obtaining independent advice before entering into the contract.
A special relationship of confidence and the presumption of undue influence can be established in two ways. First, the parties may be in a well-recognised special relationship; for example, A legal practitioner (lawyer) who sees clients and opens files to deal with their legal matters but usually does not appear in court. See also barrister. and client, doctor and patient, parent and child, Someone who is legally responsible for taking care of another person or their property. and ward, and religious or spiritual adviser and devotee.
Second, the special relationship, although not falling within any well-recognised relationship, is such that the complaining party is able to show that the other party was in a position of influence.
For example, it could be that the relationship between a bank and its customer gives rise to the bank occupying a special position of trust in connection with the conduct of the customer’s affairs. (It has to be stressed that in ordinary circumstances no presumption of undue influence arises out of a banker–customer relationship.) See, for example, Commercial Bank of Australia Ltd v Amadio  HCA 14 (for a summary of the Amadio case, see ‘Unconscionable conduct’ in Chapter 7.2: Consumer protection laws).
The consequence of establishing undue influence is that the contract may be held voidable at the election (i.e. the choice) of the weaker party.
For details of complaints of undue influence in relation to some types of loan contracts and related complaints of unjust contract, unconscionable dealings, harsh and oppressive contracts, etc., see ‘Unjust contracts’ in Chapter 5.8: Mortgages, consumer leases and other finance products.
As with duress, undue influence is also likely to be a contravention of various provisions of the ACL where undue influence is exerted in ‘trade or commerce’. This includes unconscionable conduct under sections 20, 21 and 22 of the ACL, which would give rise to a broader range of remedies, including rescission and damages (see ‘Unconscionable conduct’ in Chapter 7.2: Consumer protection laws).
Unfair contract terms in standard form contracts
What is a standard form contract?
A standard form contract is a contract that has been prepared by one party and the other party has little or no opportunity to negotiate the contract’s terms. In other words, the contract is offered on the basis of ‘take it or leave it’.
While previously only applying to consumer contracts, the regulations now extend to small business contracts entered into or renewed on or after 12 November 2016.
Unfair contract terms in standard form contracts are regulated by the ACL. Where a term of a standard form contract has been held to be unfair, the term is deemed to be void. However, the contract will continue to bind the parties if it can operate without the unfair term.
A term is unfair when:
- it causes a significant imbalance in the parties’ rights and obligations under the contract; and
- it is not reasonably necessary to protect the legitimate interests of the supplier; and
- it causes detriment to another party.
- In determining whether a contract term is unfair, a court must consider the transparency of the term and the operation of the contract as a whole. For example, highly advantageous terms might be balanced against other disadvantageous terms. Certain terms cannot be determined to be unfair (e.g. the price of a good, service or the main subject). Unfair contract terms are discussed in more depth in Chapter 7.2: Consumer protection laws.
6 Illegal and void contracts
The law will not To make people obey a law or the terms of an agreement, using police powers or court orders. all contracts. A contract (or a term of a contract) that involves illegal conduct may be void and unenforceable. Whether contracts that are illegal by A law made by parliament, either state or Commonwealth. Also called an Act, and Act of parliament or legislation. will be deemed void and unenforceable depends on the particular statute and the ordinary principles of statutory interpretation. Contracts absolutely prohibited by statute will be deemed to be void, whether the parties know of the illegality or not.
However, where one party performs a legal contract in an illegal manner, the other party (if they have no knowledge of the illegality) may still enforce the contract or recover damages for breaching it. They may also recover money or other property transferred under the contract. The precise extent of the enforceability of, or the recovery of any money paid under, a void contract depends on the statute.
Certain types of contracts are illegal at common law because they are contrary to public policy. These include contracts:
- to commit a crime, a tort or a fraud;
- that are sexually immoral;
- that prejudice public safety, including good relations with other states or countries;
- that prejudice the administration of justice;
- that tend to promote corruption in public life;
- to defraud the revenue;
- to oust the jurisdictions of the courts;
- that are prejudicial to the status of A voluntary, formal and legally binding agreement between two people to have a permanent relationship together. There must be a statement in front of official witnesses who register the marriage with the authorities. See also cohabitation; de facto; divorce; domestic relationship.;
- in A commercial arrangement that prevents a business from freely buying or selling goods or services. For example, a seller may promise the buyer of a business that the seller will not set up a new business within 10 kilometres for 4 years. A contract like this cannot be enforced if it goes on for too long, or covers a very wide area. (unless the restraint is reasonable both between the parties and in the public interest). In these cases, the courts will look at the relative bargaining power of the parties. Restraint imposed between equals is viewed with more favour than, for instance, a contract between an employer and employee in unequal bargaining positions.
Illegally formed contracts are generally void and unenforceable by either party at common law.
Where legally formed contracts are performed illegally (i.e. the illegal conduct was not an intended or required part of the contract, but merely incidental to the way it was performed), then the contract is not void, but:
- no remedies are available to the guilty party; and
- the innocent party retains all rights and remedies (provided they did not know the contract was to be performed illegally).
Where only a part of a contract is contrary to public policy, then the contract is not entirely void, but only so far as it is contrary to public policy. That is, the offending term(s) can be severed, provided that the rest of the contract continues to make sense.
Money paid or property transferred under a contract that is void at common law may be recoverable because the effect of the contract being void is that there is no contract, so the parties should be returned to their original positions.
Other kinds of conduct that might or might not affect the enforceability of a contract are covered by the ACL, which include prohibitions against:
- misleading or deceptive conduct;
- unconscionable conduct; and
- misrepresentation in particular matters,
all of which are discussed in Chapter 7.2: Consumer protection laws (see ‘Misleading or deceptive conduct’, ‘Prohibition of misrepresentations’ and ‘Unconscionable conduct’).