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What is an enforceable contract in Australia?

An Overview on Enforceable Contracts

An enforceable contract is a legally binding agreement that the parties to an agreement have entered. A legally binding agreement comprises the following legal elements: Offer and Acceptance, Consideration, Intention to Create Legal Relations, Capacity, Certainty and Formalities. In Australia, disputes often arise on legal questions involving contracts, and whether terms and conditions may be enforced against other parties.

In this article, we address the frequently asked questions about enforceable contracts, and they include:

Why are contracts important to commercial arrangements?

While there have been attempts to precisely define the term, contract, it is generally agreed that the essence of a contract contains an agreement or a promise, that may be enforceable at law (Graw, 2021). Legal scholars also share similar views that contracts carry essential elements in being able to be enforced and recognised at law (Paterson & Robertson, 2020; Cootes, 2010).

Classical contract theory emerged and developed during the 19th century that shifted contract law towards being a separate and distinct area of law. It provided theoretical justification for the purpose of enforceable contracts, and whilst an abstract construct, provided greater understanding in the role of contract and contract-making in society and the market (Cootes, 2010).

Though there are competing theories on the substantive nature of a contract, contracts are everywhere and are engaged on a daily basis. In classical contract theory, a contract represents contractual obligations that parties voluntarily assume when freely entering into a transaction (Parterson & Robertson, 2020).

Normative standards are shaped by, and also shapes, contract law. The performance of enforceable contracts and contract-making are guided by the standards and expectations prescribed in contract law. However, the legal principles are intended to create environments that assist in forming contracts that express, and give effect to, the parties’ intentions.

Read More: What is Contract Law?” explores the different types of legal theories that explain the nature of contract law.

For a contract to be enforceable, the following legal elements should be met as a legally binding agreement: Offer and Acceptance, Consideration, an Intention to Create Legal Relations, Capacity, Certainty and Formalities. A summary of the legal elements for an enforceable contract is described below.

Legal ElementsSummary
What is Offer and Acceptance?Offer and Acceptance must be communicated by a party making the offer and there is acceptance of the offer by another party.
What is Consideration?Consideration is an exchange between parties that has legal value. When assessing consideration to a contract as the agreed price, the consideration should be sufficient but need not be adequate.
What is an Intention to Create Legal Relations?Parties to an enforceable contract must have an intention to create legal relations. Depending on the setting or context, an intention to create legal relations is determined objectively.
What is Capacity?Parties to an enforceable contract must have contractual or legal capacity to enter into a contract. Generally, when a party does not have contractual or legal capacity, the contract may not be legally binding and could potentially be set aside.
What is Certainty?An enforceable contract should be sufficiently certain and complete as to its essential terms. A contract that is not certain or complete, would lack certainty and not be complete.
What are Formalities?While enforceable contracts may be verbal or written, certain types of contracts must comply with formality requirements based on the jurisdiction of each state or territory in Australia. This may include requiring certain kinds of contracts to be in writing and signed between the parties.

For further information about the legal concept of contract-making:

Why are express terms and implied terms important?

The rights and obligations of a parties to an enforceable contract will generally be known by identification of terms contained in the contract. The terms of an enforceable contract could be express or implied. It is not uncommon that disputes arise regarding whether particular terms form part of a contract agreed between the parties, obligations that the parties expected from each other to a contract, and the expectations surrounding the performance of a contract.

What are express terms?

An express term are terms that have been expressly agreed by parties to a contract. The terms may be written or oral, or both written and oral.

However, generally in commercial transactions, the parties to a contract will identify the express terms by recording them in a written document. If the terms of a contract are recorded in writing, generally, when identifying and interpreting those terms, the evidence that is admissible is limited by the common law principle, the Parol Evidence Rule.

In summary, the Parol Evidence Rule limits the kind of extrinsic evidence that may be relied on to vary, interpret, or explain the meaning of a written enforceable contract.

For further information about the legal concept of express terms:

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What are implied terms?

An enforceable contract may also contain implied terms. Implied terms are not express terms and may be formed by implication as being a term of a contract. A common type of implied term is an implied term by fact to give business efficacy. In BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, a decision that has been approved by the High Court in Australia, the general principles for an implied term to be implied by fact was set out: 

  1. The term must be reasonable and equitable.
  2. The term must be necessary to give business efficacy to the contract.
  3. The term must be so obvious that it goes without saying.
  4. The term must be capable of clear expression.
  5. The term must not contradict any express terms in the contract.

Different types of implied terms, also include implied terms that are implied by law, and implied terms that are implied by custom.

Read More: For further information, an introduction to implied terms is drawn in “What are implied terms in Australia?“.

When is a contract voidable?

There are certain situations that may cause a contract to be voidable. This may involve situations such as duress, undue influence and unconscionability.

What is Duress?

Duress is a legal concept that involves a party applying pressure to another party to enter into a contract and the pressure is illegitimate. Generally, if duress is established that a party was illegitimately pressured to enter into a contract, then that contract may be voidable, and the person affected by duress may elect to set aside the contract if there are no bars.

What is Undue Influence?

Undue Influence occurs if the influence of one party causes another party to not be able to exercise free will when entering into a contract. While undue influence may be shown by fact, presumptions of undue influence may arise depending on the relationships between the parties. Generally, if undue influence is established, then the contract may be voidable, and the person affected by undue influence may elect to set aside the contract if there are no bars. 

What is Unconscionability?

Unconscionability may arise both at common law, and in statute under the Competition and Consumer Act 2010 (Cth), more particularly, the Australian Consumer Law. Generally, unconscionability arises when a party enters into a contract with a special disability, and that special disability is evident to the other party that it would be unconscionable for the other party to take advantage of that special disability. Generally, if unconscionability is established, then the contract may be voidable, and the person affected by unconscionability may elect to set aside the contract if there are no bars.

What are unfair terms?

As general principles in classical contract law theory do not closely critique ethical performance in contract-making, or certain conduct between private parties, introduction of statutory regimes to regulate contract-making and performance of contract have been introduced to modify the risk allocation between contracting parties. This reflects a regulatory view that parties should be guided away from negotiating in positions of high imbalanced bargaining power, or from engaging in unconscionable, misleading or deceptive conduct.

An example is the Unfair Contract Terms statutory regime. The Unfair Contract Terms statutory regime derives legal effect from the Australian Consumer Law, and Australian Securities and Investments Commission Act 2001 (Cth).  The Unfair Contract Terms statutory regime applies to standard form contacts and small business contracts.

In broad terms a term may be held by the Court to be unfair if it meets the following legal elements described in the summary table:

Legal ElementsSummary of Legal Elements
Significant ImbalanceA term causes significance imbalance in the parties’ rights and obligations arising under a contract.
Not Reasonably NecessaryA term is not reasonably necessary in order to protect the legitimate interests of a party advantaged by the term.
DetrimentA term would cause detriment (whether financial or otherwise) to a party if the term were to be applied or relied on

Bibliography

  • Cootes, B. (2010). The Essence of Contract. In Cootes, B., & Bigwood, R (Ed.), Contract As Assumptions: Essays on a Theme. Bloomsbury.
  • Graw, S. (2021). An Introduction to the Law of Contract (10th ed). Thomson Reuters.
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters

Implied Terms | Express Terms | Frustration | Legally Binding Agreement | Termination | Consideration | Intention To Create Legal Relations | Offer and Acceptance | Certainty | Repudiation | Privity | Classification of Terms | Contract Law (Theories) | Causation | Remoteness | Damages |

If you are looking for legal expertise and have any questions, connect with an author or a member of our litigation and dispute resolution team.

Do you need legal advice? Call us on (03) 5331 1244 to get in touch and arrange an appointment with one of our lawyers.

You can also connect with us by filling out your details and telling us about your information for legal advice below:

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Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

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