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The Law HandbookYOUR PRACTICAL GUIDE TO THE LAW IN NEW SOUTH WALES

12th EDITION

REDFERN LEGAL CENTRE PUBLISHING



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[12.140] The terms o a contract[12.200] Ending a contract

[12.20] The development o contract law[12.50] Essentials o a valid contract

12

Contracts

Carolyn Penold Senior Lecturer, Faculty o Law, UNSW

Contents



360 The Law Handbook

basic principles o contract law are discussed inthis chapter. These apply to purely commercialtransactions (such as between a manuacturingbusiness and its supplier), as well as transac-tions where one o the parties is a consumer.

[12.10] A consumer is a person who acquiresgoods or services or personal or householduse. We are all consumers.

Most consumer dealings, whatever their size,cost or importance, are based on a contract. The

The development o contract law

[12.20] Contracts undercommon lawContract law is largely a product o the common

law – it has been developed by the courts rather

than by parliament passing laws.

A basic common law principle is the assump-

tion that a contract is a bargain made reely

between equal parties (reedom o contract ).Because o this, courts have been unwilling

to set aside or alter contracts except in very

limited circumstances. Even where there has

been unairness or sharp practice the principle

o sanctity o contract has generally prevailed,

and contracts have been upheld.

[12.30] Modern consumer issuesThese days the assumption that contracts are

reely made by equal parties no longer applies

in the consumer context.

Unequal bargaining powerIn the modern marketplace most consumer

goods and services are manuactured, marketed

and sold by large businesses with access to

expertise and resources ar greater than thoseavailable to the ordinary consumer. There is

usually a marked inequality o bargaining

power between the parties, not the equality that

contract law has traditionally assumed.

Limited bargaining opportunityIn practice there is usually little opportunity or

bargaining – goods and services are typically

oered to the consumer on a ‘take it or leave it’

basis, under a standard orm contract (where

the contract is in writing).

[12.40] Consumer legislationTo some extent, the common law o contracthas evolved to take account o these market-place developments.

The major orce or change, however, has

come not rom the courts but rom state andederal parliaments. Particularly since the1970s, parliaments have introduced a widerange o laws designed to protect consumersand enhance the rights and remedies availableto them.

The most important general consumer protectionlaws, such as the recently enacted Australian

Consumer Law, as well as more specifcconsumer protection legislation (such as theNSW Motor Dealers Act ), are discussed in

chapter 11, Consumers.

The careul consumer Avoiding problems is better than trying to fx them.Problems can oten be avoided by taking a ew practicalsteps:• thinkingaboutwhatyouwanttheproducttodo• seeking advice or having an expert check the

product• shopping around for the best deal, comparing

quality and price• inspectinggoodscarefully.

A good source o inormation isCHOICE, an Inormationbody or Australian consumers (www.choice.com.au).

Read beore you sign

Consumers should also be careul about signingdocuments (whether described as contracts, oerorms, order orms, authorisations or whatever) withoutreading them and, i in doubt, getting advice aboutthem. Although consumer protection laws can assistunairly treated consumers in certain circumstances(see chapter 11, Consumers), in many cases once acontract is signed it is nearly impossible to avoid itsconsequences, whether they were clear at the time o signing or not.



12 Contracts 361

[12.50] Essentials o a valid contractA contract is a legally binding agreement –that is, the law will enorce it. For a contractto be valid (and thus enorceable), a number o requirements must be satised:• There must be a concluded agreement

between the parties; this usually involves theacceptance o an oer.

• The parties must have the intention thattheir agreement be legally binding.

• Somebenet(consideration) must be givenby each party in exchange or the otherparty’s promise to do, or not do, whateverthe agreement requires.

• Thetermsoftheagreementmustbecertain,

so that it is possible to work out what theparties intended their words to mean.

• Thepartiesmusthavethe legal capacity toenter into the contract.

• Sometypesofcontractsmustmeetcertainormal requirements; or example, a contractor the sale o land must be in writing.

• Eachparty’sconsent to the agreement mustbe genuine. The contract’s validity may beaected by one or more actors that thecourts regard as vitiating (removing any real

consent between the parties).• Thepersonseekingtoenforcethecontract

must be a party to it (there must be privityo contract between them).

• Totheextentthattheobjectsorpurposesofthe contract are contrary to law, the courtwill not enorce it (legality o contract ).

These elements are considered in detail below.

[12.60] Agreement between thepartiesOer and acceptanceThere is a concluded agreement between partieswhen one party has made an oer to do (or notdo) something and the other party has:• unconditionallyacceptedthatoffer,and• communicatedacceptancetotherstparty.Most consumer contracts are ormed in thisway. The agreement does not have to be inwriting, or even stated; the parties can satisy theconditions by their actions. For example, whena person buys goods rom a shop, handing overmoney constitutes the oer by the consumer to

buy particular goods, while taking the moneyconstitutes acceptance o the oer by the shop.

Oer and counter-oerI A makes an oer and B, instead o accept-ing it, responds with a counter-oer, there is noagreement as yet. I A accepts B’s counter-oer,there is an agreement.

Consumer contracts are oten ormed in thisway, too. For example, when someone buysa car, the price (and possibly other terms) isusually agreed ater a number o counter-oershave gone back and orth between the parties.

Revoking an oerBeore an oer is accepted there is no legalobligation on either party, and each is ree todecide not to go ahead with the deal. Thus anoer can be withdrawn (revoked ) at any timebeore it is accepted, as long as the withdrawalis communicated to the other party.

The oer, i it is in writing, oten specieshow the withdrawal must be communicated; orexample, that the oer may only be revoked bynotice in writing (communicating withdrawalo an oer in writing is sensible anyway).

Rejecting an oerAn oer may be rejected by words or actions.Once rejected, it terminates automatically, andthe person who made it is under no obligationto go ahead i the other party changes theirmind and decides to accept.

How oers are made and accepted There are a number o technical rules about oerand acceptance but, generally, an oer is made i theperson making it is prepared to be bound without

urther negotiation on terms. A person to whom anoer is made accepts it i, in response to the oer, theyunconditionally promise to do what the terms o theoer require, and communicate this acceptance tothe oer-maker.

Conditional contractsThe parties may reach an agreement but makeit subject to a certain event occurring, and untilit does there is no contract and no obligationon the parties. I the event does not occur,the parties do not have to go ahead with thecontract.




that the agreement should be legally binding.This intention is rarely stated, but can beinerred rom the circumstances. The intentionis present in ordinary consumer transactions.

Agreements between relatives or riends The law does not generally assume that relatives orriends intend their agreements to be contracts. Forexample, i A agrees to lend her car to her niece ora week in exchange or the niece helping her painther house, then changes her mind, it is unlikely thatthe court would fnd that the parties intended theiragreement to be legally binding and enorceable bythe court.

However, i it can be established that they did intendtheir agreement to be legally enorceable, the law willtreat it as such. In some circumstances the court maybe more easily convinced that even related parties did

intend to create legal relations; or example, wherean agreement is made between a divorcing husbandand wie, or between a ather and daughter who dobusiness with one another.

[12.80] ConsiderationGenerally, the law o contract does not enorcepromises made without the expectation o anyreturn. Unless the contract is a contract underseal or deed (see Contracts under seal or deedbelow), to be enorced it requires that B gives

consideration– something o value – in exchangeor A’s promise to perorm the contract.

For an ordinary consumer transaction, theconsideration is simply the price the purchaseragrees to pay or the product or service.

Who must receive the consideration?While the agreed consideration must be given bythe person receiving the benet o the promise,it need not necessarily be given to the promise-maker. For instance, an agreement whereby A

promises to pay B a sum o money i B renovatesC’s house will be regarded as being supportedby consideration and will be enorceable byboth A and B (assuming the other elements o avalid contract are present), but not by C.

What is valid consideration?As long as the agreed consideration is givenor A’s promise, it does not matter whether itrefects the usual or market value o what Ahas promised to do, or not do; even a token or‘peppercorn’ consideration, i that is what hasbeen agreed, is enough.

A common example o a conditional contractis an agreement to purchase goods ‘subject tonance’. I the buyer cannot obtain nance,they do not have to purchase the goods.

Note, however, that conditional contractsoten contain terms requiring one or bothparties to take reasonable steps to do what isrequired to allow the contract to be completed(or example, take reasonable steps to obtainnance).

Unilateral contractsGenerally, contracts are bilateral ; each partypromises to do or not do something. However,there is also a class o contracts under whichonly one party promises to do something. Theseare known as unilateral contracts.

Oering a reward

The reward situation demonstrates a unilat-eral contract. For example, i A oers a rewardor the return o a lost dog, B is unlikely topromise to nd and return the dog. Howeveri, in response to the oer, and beore the oeris revoked, B does nd and return the dog,the contract is now complete. B has acceptedthe oer by perorming the very act whichA requested, and A is now bound to pay thereward.

Are advertisements oers? The general rule about things such as advertisements,catalogues and shop displays is that they are not oersby the seller but ‘invitations to treat’ – an indication thatthe seller is willing to consider oers to purchase thegoods at the advertised price. The contract is ormednot when the consumer oers the advertised price, butwhen the seller accepts the money. This means that theseller can reuse the buyer’s money without being inbreach o contract i, or example:• thepricehasgoneupsincetheadvertisement

• thegoodsarenolongerinstock• thepricewaswronglystated• thesellersimplynolongerwantstosellthegoods.Although the consumer has no remedy against theadvertiser in contract law, there may be other remediesavailable under consumer protection laws. Seechapter 11, Consumers.

[12.70] Intention to be legallyboundThe second element necessary or a valid andenorceable agreement is that the parties intend



12 Contracts 363

Requirement to pay or necessaries

Even where the contract is set aside, the personis still liable to pay a reasonable price or anygoods or services provided i they can airly beregarded as ‘necessaries’ (both at common lawand under s.7 o the Sale o Goods Act 1923).

Goods are necessaries i they are suitableto the ‘condition in lie’ o the person orderingthem and to the person’s actual requirements atthe time o sale and delivery.

Intoxication

Considerations similar to those applying to aperson with intellectual disability or mentalillness apply to a person who was intoxicatedby alcohol or drugs at the time o entering intothe contract.

People under 18 In NSW, a person has full capacity to enterinto a contract when they reach 18 (the age o majority).

People under 18 are minors. Contractsentered into by minors are covered by theMinors (Property and Contracts) Act 1970.In general, a contract made by a minor will bebinding rom the outset i:• itwasfor theminor’sbenetwhenitwas

entered into (s.19), and• theminorknewtheyweremakingalegally

binding agreement (s.18).I these two conditions are met, the minor willnot be able to get out o the contract simplybecause they were under 18 when it was made.

Repudiating a contract

Repudiation is also covered by the Minors(Property and Contracts) Act 1970. I thecontract was not or the minor’s benet whenit was entered into, or the minor did not under-stand what was done, the minor can end the

contract (repudiate it) by serving a signedwritten notice on the other party (s.33), i:• thecontract is not for theminor’sbenet

at the time o repudiation (s.31)• theminordidnotarm the contract ater

turning 18 (that is, show by words or actionsthat they wish to continue with it) (s.30),and

• the repudiation occurs before the minorturns 19 (s.31).

The critical period is the year ater the minor’s18th birthday. The right to repudiate is lost

once:

What is not valid considerationThere is no valid consideration where the‘consideration’ is:• sovagueastobemeaningless• merelytheperformanceofanexistinglegal

duty – something A is legally obliged doanyway, or

• a promise to compensate for somethingalready done without expectation o pay-ment ( past consideration).

Contracts under seal or deed

I there is no consideration (that is, one party agreesto give something but receives nothing in return), theagreement can still be made legally binding i it isin the orm o a contract under seal or deed . In most

cases (not all) a deed is enorceable like an ordinarycontract.

[12.90] Legal capacity to entercontractsSome people’s capacity to enter into valid,enorceable contracts is limited by law.

Intellectual disability or mental illnessA person with an intellectual disability or

mental illness is legally capable o entering intoa binding contractual arrangement. However,the person can have the contract set aside i they can show:• thattheywere incapableofunderstanding

the nature o what they were agreeing towhen the contract was made, and

• thattheotherpartykneworoughttohaveknown o their disability or condition.

The required level o understanding varies

according to the nature and complexity o thecontract. For example, a person may have thecapacity to understand a contract to buy goodsrom a supermarket, but not to understand amortgage.

The ability to have a contract set aside onthe basis o disability or mental illness may belost i, at a time when the person has recoveredtheir mental capacity, they show by wordsor conduct that they intend to continue withthe contract. It is, thereore, important to act

quickly once mental capacity has returned.




Mistake

Generally, a person must ull their obligationsunder a contract even i they made a mistake(about, perhaps, the quality o goods boughtunder the contract).

However, i the person makes a mistake o act o a particular kind, the contract may bevoid (in eect, there is no contract), or voidable.The types o mistake that have this eect arediscussed below.

Common mistake

In the common mistake situation, both partiesare under the same misapprehension (orexample, A sells goods to B which have beendestroyed, but neither A nor B is aware o this).

Mutual mistake

In the mutual mistake situation, the parties areat cross-purposes about the subject matter o the transaction (or example, A thinks he isbuying a particular table while B thinks sheis selling him a quite dierent table).

Unilateral mistake

In the unilateral mistake situation, one party ismistaken about the terms o the contract or theidentity o the other party and the other partyknows this, or ought to know it.

Non est actum

In the non est actum (‘it is not my deed’)situation, a person signs a document unda-mentally dierent in character rom whatthey thought they were signing (or example,A signs a document giving B an option to buyA’s property, under the impression that it is anauthority to enter and inspect the property).

This deence is only available where:• the person had no ability to understand

what they were doing, and• allowingthedefencewouldnotbeunjustto

the other party.Successfulnon est actum claims are very rare.

Rectifcation o a written contract Rectifcation o a written contract is allowed wherean obvious mistake or ‘slip’ has been made when apreviously complete agreement is put into writing.

• thecontractisafrmed,or• thepersonturns19.

Settling disputes

I there is a dispute about the eectiveness o the repudiation, or about money paid or goods

or services received beore repudiation, eitherparty can apply to the court (the Local, DistrictorSupremeCourt,dependingontheamountindispute – see chapter 1, About the legal systemand chapter 14, Court).

The court can:• conrmthecontract(decidethattherepu-

diation has no eect), or• order each party to compensate theother

or goods or services received so that, as aras possible, they are in the same position

as they were beore the contract was made(Minors (Property and Contracts) Act 1970s.37).

A party will rarely be entitled to the returno property previously transerred under thecontract.

BankruptsThe Bankruptcy Act 1966 restricts bankruptpersons obtaining credit or entering intocontracts or goods or services involving anobligation to pay more than a certain amount(ss.269, 304A) without inorming the otherparty o the bankruptcy. However, the person’sgeneral capacity to enter contracts is not lostbecause o bankruptcy.

[12.100] Formal requirementsThere is no general requirement that a contractbe in writing, and oral agreements that meetthe requirements or a valid contract will beenorced by the courts. However, some contracts

are not legally binding unless they meet certainormal requirements. For example, some mustbe in writing, including:• agreements for the sale and purchase of

land (see Buying a home in chapter 29,Housing)

• creditcontracts(seechapter15,Credit).

[12.110] Genuine consentSometimesacontractwillnotbeupheldbecausethere was a lack o genuine consent on the parto one (or more) o the parties.



12 Contracts 365

contracts are concerned by consumer protec-tion legislation, now known as the ‘AustralianConsumerLaw’inbothfederalandNSWjuris-dictions (see chapter 11, Consumers).

The common law doctrine is still relevant,however, where the legislation does not applyto the particular transaction in question.

Undue inuenceThe doctrine o undue infuence is relevant i someone enters into an agreement, but theirdecision to enter into that agreement was not aree and independent decision due to the undueinfuence o another person.

This doctrine can generally be relied on onlywhen someone has entered into an agreementthat is clearly not in their interests.

Onus o proo

In certain relationships (such as parent anddependent child, trustee and trust bene-ciary, solicitor and client, religious adviserand ollower, doctor and patient) the onus o proo rests with the dominant party to showthat the transaction was not the result o undueinfuence.

In other relationships (such as husbandand wie) the onus o proving the claim restswith the party claiming to have been unduly

infuenced.

DuressUndue infuence applies where a person’s will isovercome. Duress applies in the more extremesituation where someone enters a contractagainst their will in response to such things asactual or threatened violence or imprisonment.The threats or violence may be directed againstthe person signing, a amily member or someoneelse with whom they are closely connected.

Duress is hardly ever relevant to consumertransactions. It is oten appropriate to reer asituation involving duress to the police.

Unconscionable dealingAccording to case law in this area, the uncon-scionable dealing doctrine applies where:• oneparty is at a ‘special disadvantage’or

under a ‘special disability’, and• thestrongerpartyknewaboutit,orought

to have known about it, and• the stronger party takes advantage of the

weaker party’s special disadvantage in a

MisrepresentationThe common law doctrine o misrepresentationapplies to statements that induce a person toenter into a contract (in contrast to statementsorming part o the contract itsel). Common

law misrepresentation is established where thestatement:• relatestoamatteroffact (notlaw,future

intention or opinion), and• isfalse,and• is made with the intention of persuading

the other party to act on it, and• is one of the circumstances inducing the

other party to enter into the contract.I misrepresentation is established, the personmay be able to rescind (get out o) the contract.They may also have a right to claim damages

(nancial compensation) or any loss sueredas a result, but only i the other party actedeither raudulently or negligently.

Fraudulent misrepresentation

The conduct o the person making the state-ment may have been raudulent i:• theyknewitwasfalsewhenitwasmade,or• theydidn’tcarewhetheritwastrueornot

(it was made ‘with reckless indierence’).Fraudulent misrepresentation requires a highdegree o proo, and is dicult to establishwithout strong evidence.

Negligent misrepresentation

I the person making the statement was in aspecial relationship with the other party whichmeant that they had a duty to ensure that thestatement was true, their conduct may havebeennegligent.Suchadutyariseswhen:• the person making the statement could

reasonably be expected to oresee that theother party would rely on it, and

• itwasreasonablefortheotherpartytorelyon it in the circumstances.

Innocent misrepresentation

The misrepresentation is innocent , and nodamages can be claimed, i the person makingthe statement:• didnotknowitwasfalse• wasnotcarelessaboutitstruth,and• wasundernodutytoensureitstruth.

Consumer protection legislation

The common law doctrine o misrepresentationhas been largely replaced as ar as consumer




A person who did not directly participatein dealings leading to a contract may still be aparty to it i the person who negotiated it actedon their behal as an agent or through a powero attorney.

[12.130] Illegal contractsAs a matter o public policy, the courts willnot enorce contracts that are illegal. Examplesare:• contractstocommit:

– a crime– a civil wrong– a raud on a third person

• contracts to fraudulently avoid payinggovernment taxes and charges

• contractsharmfulto:– public saety– the administration o justice– public lie generally

• contractsforasexuallyimmoralpurpose.The courts will also reuse to enorce a contractto do anything prohibited by statute.

The eect o entering a contract A contract is ormed when an oer is accepted, androm that moment the parties are legally bound toperorm their obligations. The terms o the contract

can be changed only i all parties agree to the changes.I a party ails to carry out their obligations, they willbe ‘in breach o contract’, and the other party may beentitled to end the contract and/or be compensated orthe breach.

way which is not consistent with goodconscience.

Special disadvantage or special disability

A person may be at a special disadvantageor special disability because o age, illness,

inexperience, ignorance, impaired aculties,drunkenness, illiteracy, or other circumstancesor combination o circumstances.

The disadvantage must be special, not justthe disadvantage o unequal bargaining power.It must seriously aect the person’s ability tolook ater their own interests.

Evidence o unconscionable dealing

The ocus is on whether the circumstances o the negotiations were unconscionable ( proced-ural unconscionability), rather than whether

the terms o the contract are unconscionable(substantive unconscionability). Harsh orunreasonable terms (rom the weaker party’spoint o view) may, however, suggest thatunconscionable dealing has occurred.

Consumer protection legislation

The doctrine has been extended, in the case o consumer contracts, by legislation prohibitingunjust contracts and unconscionable conduct(see chapter 11, Consumers).

[12.120] Privity o contractOnly a party to a contract can enorce it orhave it enorced against them. This is called thedoctrine o privity.

[12.140] The terms o a contractA contract basically consists o various promisesmade by the parties; or example, A promisesto deliver certain goods to B and B promises topay A a certain sum o money. These promisesare known as the terms o the contract.

[12.150] Express and impliedtermsThe terms o a contract may have beenexpressly agreed to by the parties, or they may

be implied.

Implied terms

Implied terms are neither written nor verbal,but are understood to be in the contract becauseo:• thecircumstancesoftheagreement,or• thelaw.

Terms implied by legislation

The most important implied terms or consum-ers are those in consumer protection legislation,which may imply conditions about quality,tness or purpose, and the exercise o due



12 Contracts 367

In a signed documentI a document containing an exclusion clauseis signed, the clause becomes part o thecontract.

In an unsigned documentI there is no signed document the tradermust show that the other party was aware o the clause, or that steps were taken to drawthe exclusion clause to the consumer’s attentionbeore the contract was made – that is, beorethe oer was accepted (see Documents that arenot signed at [12.160]).

A common exclusion clause A person drives into a parking station and takes a ticket

rom a machine. There is a contract; an oer has beenmade by the parking company and accepted by thedriver. I there is a clause on the ticket excluding anyresponsibility or damage to the car while it is parked,however, it will probably only be eective i thecompany took reasonable steps to draw attention to itbeore the driver completed the contract by taking theticket (or example, by a sign at the entrance).

What cannot be in an exclusion clauseThe Australian Consumer Law implies a numbero ‘guarantees’ − such as tness or purposeand acceptable quality − into all consumercontracts. Terms in consumer contracts whichpurport to exclude these guarantees are void.However, terms may ‘limit’ liability or breacho such guarantees, so long as the limits areair and reasonable (Australian Consumer Laws.64A).

[12.190] Cooling-o periodsA cooling-o period is a time ater a contractis made in which a party can decide not to goahead with the contract, without penalty orwith a minimal penalty only.

Right to a cooling-o periodThere is no general legal right to a cooling-o period, and only a ew areas where the right isconerred by statute.

care and skill into various types o consumercontracts (see chapter 11, Consumers).

[12.160] Written and oral termsThe terms o a contract may be in a document

(signed or unsigned), or in oral statements, ormay be partly written and partly oral.

Documents that are not signedWhen the terms o a contract are in writingbut not signed (or example, the terms on theback o a ticket or on a sign in a store), they areconsidered to be part o the contract i the partywishing to enorce them can show that either:• theotherpersonknewtheywerethere,or• reasonable steps were taken to draw the

terms to the person’s attention beorethe contract was made.

[12.170] Conditions andwarrantiesAt common law a term o a contract may beeither:• acondition, or• awarranty.A condition is a term without which therewould be no contract. It goes to the heart o the

contract. A warranty is a term dealing with aless important aspect o the contract.

Why it mattersWhether a term is a condition or a warrantycan be important i there is a breach o contract.The breach o a condition entitles the party notat ault to terminate the contract, whereas abreach o warranty only gives a right to sue orloss or damages (see Ending a Contract − bybreachat[12.250]).

[12.180] Exclusion clausesIt is quite common or traders to put an exclu-sion (or exemption) clause in a contract thatexcludes or limits their liability or deects ingoods or or damage done to the consumer ortheir property by the goods. These clauses arealmost always contained in a written document,which may or may not be signed.




A cooling-o period as a term in acontractThe parties can agree to include a cooling-o period as a term o the contract. In standardconsumer transactions this is very rare.

Statutory cooling-o periods Statutes that provide or cooling-o periods include:• theConveyancing Act 1919 (a fve-day cooling-o

period in contracts or land purchase, which canbe excluded i the parties agree (s.66S) and thepurchaser has received legal advice (s.66W))

• theMotor Dealers Act 1974 (a one-day cooling-o period or car purchases where a dealer has providedor arranged credit (s.29CA), which can be excluded,or extended, i the parties agree. A decision toterminate must be in writing, and the purchasermust pay $250 or 2% o the price (s.29CC))

• theCorporations Act 2001 (Cth) (a 14-day cooling-o period in relation to ‘fnancial products’ (defnedin s.763A), including investment and insurance(s.1019B)).

[12.200] Ending a contractA contract may be discharged or terminated ina number o ways.

[12.210] By perormanceThe contract ends automatically when theparties have carried out all their obligations.

[12.220] By agreementTermination specifed in the contractThe contract itsel can speciy that it will end:• ataparticulartime(forexample,acontract

to rent a ridge or six months), or• becauseoftheoccurrence(orotherwise)of

a specied event (or example, an agreementto buy a car may include a provision thatthe contract terminates i the buyer cannotobtain nance).

New contract o terminationThe parties can agree to end the contract at anytime ater it has been made. This agreement isalso a contract, and all the elements listed inEssentialsofavalidcontractat[12.50]mustbepresent, including consideration.

Consideration in the new contract

Where both parties still have obligations underthe old contract, the new contract will consisto promises by each party not to enorce thepromises made under the old contract, so each

receives something o value.

I one party has already perormed theirobligations but the other has not, there may notbe enough ‘consideration’ to make the agree-ment legally binding. The other party mustgive something o value; or alternatively theagreement could be documented as a deed (seechapter 1, About the legal system).

[12.230] By rustrationSometimes,afterthepartieshaveenteredintothe contract, an unoreseen event occurs thatresults in a situation undamentally dier-ent rom that which the parties had in mindwhen the contract was made; or example, thecontract is or personal service and the personwho was to perorm it dies.

In such cases the law regards the agreementbetween the parties as having been rustrated ,

andatanend.InNSW,suchagreementscomeunder the Frustrated Contracts Act 1978.

In some cases a party might be able toclaim compensation or an obligation that wassupposed to be perormed beore the contractwas rustrated but was not perormed (s.7).

Where one party has ullled their part o the contract and has not received any benetrom the other – or example, by paying orsomething that was then destroyed – the otherparty may be required to return the money

(ss.10, 11).



12 Contracts 369

would not have entered the contract unlessthey believed it would be ullled)

• a breach that substantially deprives theother party o what they intended to obtainunder the contract.

A party who decides to terminate a contractor breach should notiy the other party imme-diately. The right to terminate can be lost bydelay, leaving the innocent party with only aright to damages.

Eect o the termination

Termination o the contract means that bothparties are released rom their uture obliga-tions, but any rights which either party alreadyhad (such as the right to be paid compensationor the breach) remain.

Has a breach occurred?It can sometimes be hard to decide whether abreach has occurred and whether it gives riseto a right to terminate (either at law or underthe contract). A person should not attempt toterminate a contract unless they are certainthat:• the other party has committed a breach,

and• this breach gives them the right to

terminate.

Termination without legal entitlement

Someonewhoattemptstoterminateacontractwhen they are not legally entitled to do socommits a serious breach, and could be liableto pay damages to the other party.

DamagesThe innocent party is generally entitled tocompensation or losses suered due to a breacho contract. However, not every loss caused bya breach will be compensated.

I it can be shown that the party in breachshould have realised when they entered thecontract that the sort o loss suered (i not itsextent) was reasonably likely to result rom thebreach, compensation will be payable. Unusuallosses will only be compensated i it was clear atthe time o contracting that a special loss mightoccur in the circumstances o the case.

Damages are awarded or breach o contractwith the general aim o putting the innocentparty in the position they would have been in i the contract had been properly perormed.

[12.240] By repudiationWhere one party by word or act indicates,either beore or during perormance o theirobligations under the contract, that they arenot willing to perorm or continue perorming

those obligations, that party is said to repudiate the contract.Repudiation by one party gives the other

the right to terminate the contract and sue ordamages. For example, i A agrees to sell a carto B, then sells it to C who has made a betteroer, A has repudiated the agreement with Bwho can immediately terminate the contractand sue A or any loss suered as a result o therepudiation.

[12.250] By breachThe contract may come to an end i one partycommits a serious breach o contract .

A party who ails to carry out an obligationunder a contract is in breach o contract. It is nota crime; it happens all the time in various ways(or example, when a retailer supplies deectivegoods or a borrower makes a late payment).The consequences depend on the seriousness o the breach and the terms o the contract.

Certain breaches give the innocent party the

right to terminate the contract immediately, andto sue or damages suered as a result o thebreach. In other cases, the innocent party hasno right to terminate, but can claim damages.

Right to terminate the contractI one party breaches a contract, the other partydoes not automatically have a right to termi-nate it. This right is only available i:• itisprovidedforinthecontract,or• thebreachissufcientlyserious.

Where the right is contained in the contract Somecontractscontainatermgivingonepartythe right to terminate ollowing a particular kindo breach (or any breach) by the other party.Any clear provision to this eect is decisive.

Where the breach is serious

Where the contract has no term giving a partythe right to terminate the contract ollowing abreach, only a serious breach will give the otherparty a right to terminate. A serious breach is:• abreachofaconditionorfundamentalterm

(a term is undamental i the other party




a loss that they could reasonably have avoided,the loss will not be compensated.

For example …A homeowner employs a plumber to fx a pipe, but thenext day the pipe springs a major leak. The homeownertries to contact the plumber without success or threedays. By the time the plumber is inormed o theproblem, major water damage has occurred.

The plumber will be able to argue that the home-owner should have employed another plumber tofx the pipe in the meantime, which would havegreatly reduced the damage caused by the leak. I this argument succeeds, the homeowner will only beentitled to compensation or the initial damage, not orthe damage occurring as a result o the delay in havingthe work repaired.

Compelling perormanceUnder general contract law, it is rare or a courtto make an order requiring the party in breachto perorm the contract, as damages are usuallyconsidered adequate compensation. Contractsor the sale o land are an exception. In suchcontracts, the court may order the party inbreach to carry out the contract and completethe sale.

In contrast to the position under the general

law, specic perormance type remedies areavailable under various statutory consumerprotection laws (see chapter 11, Consumers).

Damages clauses in the contractThe contract may indicate the damages to bepaid, or how damages should be calculated, i there is a breach.

Pre-estimates o loss

An agreed amount o damages or a breachmust be a genuine pre-estimate o the likelyloss that would result rom the breach. This isthen the amount to be paid i there is a breach,regardless o the actual loss. Where the agreeddamages are not really a pre-estimate o loss,and are in act a penalty or breaching thecontract, the amount o damages is limited tothe actual loss suered rather than the agreedamount.

Where payment is by an initial deposit,

ollowed later by the balance, the contract mayprovide that the damages will amount to theloss o the deposit.

Where there is no provision or damagesI there is nothing in the contract about theamount to be paid, the party claiming damagesmust show the actual amount o the loss causedby the breach.

The duty to mitigateWhen there is a breach o contract, the innocent

party has a duty to take all reasonable steps tominimise their losses (mitigation). I the party inbreach can show that the innocent party suered



12 Contracts 371

[12.260] Contact pointsI you are dea or have a hearing or speech impairment and/or you use a tty or a computer with amodem,youcanringanynumberthroughtheNationalRelayServicebyphoning133 677 (localand chargeable calls) or 1800 555 677 (ree calls) or 1300 555 727(SpeakandListencalls).For

more inormation, see www.relayservice.com.au.Non-EnglishspeakerscancontacttheTranslatingandInterpretingService(TIS)on 131 450 touse an interpreter over the telephone to ring any number. For more inormation or to book an inter-preter online see www.immi.gov.au/living-in-australia/help-with-english/help_with_translating/.

Australian Competition andConsumer Commissionwww.accc.gov.auph: 9230 9133Infoline:1300302502

CHOICEwww.choice.com.au

ph:957733991800069552

Australian Direct MarketingAssociationwww.adma.com.auph:92775400

Australian Retailers’ Associationwww.retail.org.auph: 1300 368 041

Australian Securities and

Investments Commissionwww.asic.gov.auph: 9911 2000Inoline: 1300 300 630

Consumer Credit Legal Centrewww.cclcnsw.org.auThe Consumer Credit Legal

Centre deals with mattersconcerning credit, debt,bankruptcy and banking issues.It does not deal with generalconsumer issues.

ph: 9212 4216credit & debt hotline:

1800 007 007

Consumer, Trader and TenancyTribunalwww.cttt.nsw.gov.auph:1300135399

NSW Fair Tradingwww.airtrading.nsw.gov.auph: 133 220or98950111

Financial Ombudsman Servicewww.os.org.auph: 1300 780 808

Public Interest Advocacy Centrewww.piac.asn.auph:88986500

Telecommunications IndustryOmbudsman (TIO)www.tio.com.auph:1800062058interpreterservice:131450

[12.270] Internet• AttorneyGeneral’sDepartment(NSW)–www.agd.nsw.gov.au• AustralasianLegalInformationInstitute(AustLII)–www.austlii.edu.au• AustralianCompetitionandConsumerCommission–www.accc.gov.au

• CHOICE–www.choice.com.au/ACA• AustralianSecuritiesandInvestmentsCommission–www.asic.gov.au• ConsumerAffairsDivision,Treasury(Cth)–www.accc.gov.au/content/index.phtml/

itemId/288179• LawandJusticeFoundationofNSW–www.lawoundation.net.au• LegalAidCNSW–www.legalaid.nsw.gov.au• MinisterialCouncilonConsumerAffairs–www.consumerlaw.gov.au• OfceofFairTrading(NSW)–www.airtrading.nsw.gov.au• StandardsAustralia–www.standards.org.au