Principles of Contract Law

Six Principles of Contract Law

It is important to note that your agreement is like any other contract and subject to the normal principles of Australian Contract law.

Most contracts pose no problems – they are usually a simple interchange of cash for goods. But when contracts get more complicated they can, and do, go wrong. This is less likely to occur when the parties understand what they are doing, what their rights and obligations are, and how to recognise potential problems.

A contract is a legally binding promise or a set of promises between two parties. In this context a promise is an undertaking by one person to do something or refrain from doing something if another person does something or refrains from doing something or makes a promise in return.

In order for a contract to be valid certain requirements must be met. These are:

1.Agreement
2.Consideration
3.Intention
4.Capacity
5.Genuine Consent
6.Legality

1. Agreement
There must be an offer and an acceptance with a definite agreement between the parties. In simple terms, one party must make a clear offer, and the other party must accept it.

2. Consideration
Except in very limited circumstances there can be no contract or agreement without consideration. Consideration is the exchange of promises by the parties to the contract or agreement. It can be the payment of money, the delivery of equipment, the promise to do or perform a service or work, the promise not to take an action or not to take or enforce a right.

3. Intention
Each person, on entering a contract, must intend to be bound by it. For a person to be bound to a contract, he must seriously intend to create legal obligations and have intended the agreement to have legal consequences.

4. Capacity
Both parties in a contract must have the necessary mental capacity to understand what they are doing. Under common law anyone has the right to enter into a contract but the following groups of people are considered likely to lack the necessary capacity to a certain extent:

  • young people (persons under the age of eighteen);
  • people who have a mental impairment (including an intellectual disability); and
  • people under the influence of drugs or alcohol.

For a person to avoid a contract on the ground of their incapacity, they must also show that they lacked capacity to enter into a contract and that the other party knew or ought to have known their incapacity.

A contract is voidable at the option of a party who, as a result of mental disorder or intoxication, is unable to understand the nature of the contract being made – provided that the other party knew, or ought to have known, of that person’s disability. The party seeking to withdraw from the contract has the onus of proving both these requirements – that is

  • that they were suffering from such a disability and
  • that the other party was – or ought to have been – aware of it.

5. Genuine consent
Both parties agree to the contract of their own free will; A party’s genuine consent is an essential element of a legally binding contract.

Genuine consent to enter into a contract can be affected by a number of issues. For example, during the contractual negotiations, there may have been:

  • Undue influence. Undue influence exists there is an inequality of power between the contracting parties which results in the weaker party entering into a contract with the dominant party. Where the weaker party cannot be said to have entered into the contract voluntarily because of the influence of the dominant party, the influence is said to be ‘undue’ and the court may set the contract aside.
  • Mistake Where a mistake has occurred which shows that the parties have agreed to different things, or where there are such different beliefs that the contract was never properly understood, the contract may be declared void. Mistake is a complex area of contract law and one where judges have traditionally been pretty unsympathetic to someone who argues that he or she has made a terrible mistake. As a general rule, being mistaken about some aspect of a contract will not provide a party with a right to escape contractual obligations – even if that mistake is fundamental.
  • Misrepresentation is the giving of false information by one party 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.
  • Duress; Duress is defined as ‘actual or threatened violence to an individual to obtain a contractual promise’. If it is established that consent is obtained through duress then the weaker party may choose to avoid the agreement.
  • Unconscionable conduct; Unconscionable conduct also deals with transactions between dominant and weaker parties; it therefore overlaps with duress and undue influence.

Each of these factors or events may mean that consent was not freely given by one of the parties and that party may therefore be able to avoid their contractual obligations.

6. Legality
A contract may be illegal because its subject matter is prohibited by statute or because it infringes a rule of public policy. A contract containing illegal acts, promises or objects would violate this condition.

For example, a contract whereby party A agrees to supply party B with a large quantity of cocaine if B kills C will obviously be considered fundamentally illegal. Where a contract is classified as illegal or contrary to public policy it is generally held to be unenforceable.- but many contracts are not so obviously illegal. As an example, a contract to sell your car to a friend without a roadworthy certificate might be illegal because of the restrictions placed on the sale and purchase motor vehicles by the Transport Operations Act 1995 (Qld).

Following these six principles will ensure your agreement is legally binding and provides the protection and outcome you expect.

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