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What is Certainty in Australian Contract Law?

An Overview on Certainty in Australian Contract Law

For a contract to be legally effective, the contract must have sufficient certainty and completeness (Seddon & Bigwood, 2023; Robertson & Paterson, 2020). A complex legal inquiry, differences in judicial opinion on when the threshold requirements of certainty and completeness are met adds a dimension of complexity (Carter, 2018).

This article addresses the frequently asked questions on certainty and completeness as part of the legal elements necessary to make a contract:

Even with an appearance of a legally binding agreement, a contract may not enforceable if the Court cannot identify the legal obligations of parties with precision. Further, if an agreement reached is not clear, then this risks the formation of contract not being complete.

There are also challenges when interpreting the obligations of the contracting parties. Legal questions involving breach, remedies, damages may not be answerable in the absence of a clear and final agreement (Carter, 2018). Certainty assists the Court to determine the appropriate remedy and contractual liabilities.

Having established that certainty forms an important part in contract-making, we briefly provide a summary of the legal elements associated with contract formation.

Legal ElementsSummary
Offer and AcceptanceThere should be communication of offer and acceptance. An offer is made by an offeror, and the acceptance of the offer is made by the offeree.
ConsiderationConsideration is an exchange of something that has legal value in return for a promise.
An Intention to Create Legal RelationsParties must have an intention to create legal relations, as an essential element to contract formation.
CapacityParties should have legal capacity to enter into a contract.
CertaintyThe terms of a contract should be sufficiently certain and complete.
FormalitiesDepending on jurisdictional requirements, compliance with legal requirements as to formality may be required for certain kind of contracts

Read More: What is Contract Law?” draws an overview on contemporary legal theories that explain the nature of contract law.

What is Certainty and Completeness?

Certainty may be separated into two classes: certainty and completeness. While certainty and completeness are related concepts, they are distinct. Their interconnectedness “shade into one another” (Seddon & Bigwood, 2023, para 6.4). Judicial opinions echo similar views that a contract should be both certain and complete (Thorby v Goldberg (1964) 112 CLR 597, 607):

“It is a first principle of the law of contracts that there can be no binding and enforceable obligation unless the terms of the bargain, or at least its essential or critical terms, have been agreed upon…There is no binding agreement where the language used is so obscure and incapable of any precise or definite meaning….”

When exploring issues surrounding certainty and completeness, a contract may have either of those issues, or both contemporaneously. Notwithstanding the legal tools to address them “do not differ materially” (Carter, 2018, p. 89).

What is Certainty?

For a contract to be sufficiently certain, the agreed terms should be clear such that the parties can precisely understand their legal rights and obligations. Uncertainty may involve a contract containing terms that are “so vague and imprecise that the court cannot attribute meaning to it” (Robertson & Paterson, 2020, p.143).  If a contract is uncertain in its language such that the Court cannot properly identify the rights and obligations of each party, then the contract may risk being void for uncertainty.

However, the “courts do not take a narrow or pedantic approach to the requirement of certainty” (Robertson & Paterson, 2020, p.143). Rather, the Court will attempt to interpret the meaning of the language used by the parties, “unless it is utterly impossible to do so” (Carter, 2018, p. 90). Therefore, legal academia has distinguished the difference between “difficulty in construing a contractual document” and “inability to give the document at issue any meaning at all” (Carter, 2018, p. 90).

What is Completeness?

A contract should be sufficiently complete. A complete contract should at least have all essential terms intended by the parties’ agreement. An essential term is a “term without which the contract cannot be enforced” (Robertson & Paterson, 2020, p. 139).

Whether a term is essential depends on whether the Court “can enforce the contract in the absence of the term in question” (Robertson & Paterson, 2020, p.139). This depends on the facts and circumstances of each case (Robertson & Paterson, 2020). Common examples of essential terms may include: the identity of the parties, the price, and duration of a contract (Carter, 2018). It has been suggested a term may be regarded as essential if the parties regarded it as essential (Carter, 2018). Others comment that if the essential or its main features are at least, intelligible, then the contract may be “protected by the courts” (Lucke, 1977, p.1).

Regardless, a contract will be uncertain if its essential terms are uncertain (Seddon & Bigwood, 2023). In such circumstances, the nature of the uncertainty is that the “parties’ description of their contractual intention is meaningless, or so unclear that no amount of judicial ingenuity will succeed in determining what was intended” (Lucke, 1977, p.1).

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Are Illusory Promises Uncertain?

An illusory promise arises when a promisor has unfettered discretion in relation to a promise’s performance (Robertson & Paterson, 2020). Similarly, others describe that a promise is illusory “if it allows the promisor to choose freely whether or not [they] will perform the promise” (Lucke, 1977). The consequence is that the contract may be unenforceable because of incompleteness.

In the High Court decision on Placer Development v Commonwealth (1969) 121 CLR 353, Kitto J expanded on the legal concept of illusory promise:

“The general principles…. Is that wherever words which by themselves constitute a promise are accompanied by words showing that the promisor is to have discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought at all.”

Similarly, others also distinguish between “promises which purport to invest the promisor with a discretion as to the manner of performance, and “whether or not [they] will perform the promise” (Lucke, 1977, p.2).  Therefore, in Thorby v Goldberg (1964) 112 CLR 597, Menzie J distinguished the differences between an illusory and non-illusory promise:

“It is an objection to a contract if one party is left to choose whether he will perform it but it is an entirely different matter if there is an obligation to do a specified thing of a general description but it is left to the party who is to perform it to choose the particular thing that he will do in performance of it.”

However, a contract may not be regarded as illusory if a contract provides that the terms are settled, or that the parties agree to be bound, by the determination of a third-party.

Can the Court uphold uncertain contracts?

The Court may be able to uphold a contract that is uncertain if a contract is capable of being given meaning. Judicial interpretation of “vague, ambiguous, or imprecise expression of contractual promises”  requires examining the contract as a whole and the parties’ intentions (Seddon & Bigwood, 2023, para 6.1).  

When dealing with unclear language, the Court must also balance between the competing issues of the parties’ desire to uphold their agreement on one hand, while risking enforcing an agreement that the parties may have never intended with (Carter, 2018). Further, the Court recognises that it may not be possible to foresee all possible circumstances and is “reluctant to strike down bargains” that people have made in good faith. (Seddon & Bigwood, 2023, para 6.3)

However, ultimately, it is not the role of the Court to be an author of an agreement, or to exceed its role as an interpreter (Robertson & Paterson, 2020).

Can there be a contractual machinery to resolve uncertainty?

Parties may make a valid contract that defers agreement on an essential team if the contract incorporates a legally effective mechanism to supply the term (Robertson & Paterson, 2020). Without limiting the kinds of machinery available, examples may include adopting a machinery in the form of “an arbitration, determination or valuation, or a formula for resolving a postponed term” (Seddon & Bigwood, 2023, para 6.9). Notwithstanding a machinery may fail if it is also vague

Can there be a formula to resolve uncertainty?

Parties may also agree on a formula for settling terms (Robertson & Paterson, 2020). The formula may be precise such as mathematical formulas or set standards. As some standards or formulas may be vague such as the standard of “fair and equitable” or “reasonable”, their validity will depend on whether the courts can regard the formula or standard as sufficiently certain within its context (Seddon & Bigwood, 2023).

Can an uncertain term be severed?

A contract that has an uncertain term may be saved by the court severing the uncertain term as an alternative to a whole contract being made void.  Whether an uncertain term can be severed depends on the essentiality of the term, and the parties’ intention.  Therefore, in the Victorian Supreme Court decision of Brew v Whitlock (No 2) [1967] VR 803, the Court stated that:

“…that where parties in purporting to make a contract leave some party incomplete or uncertain, and that part, though independent in point of form, meaning and operation, is of such substance and materiality in the whole bargain that it cannot be severed from the rest, then, although the parties may have thought that they had made a contract, they have made none at all…”

If the term is essential, then the contract may fail. However, if the relevant provision is not essential, then the critical question for the Court is whether an agreement can remain valid in the absence of that provision.

Bibliography

  • Carter, J. (2018). Contract Law in Australia (7th ed). LexisNexis.
  • Lucke, H. (1977). Illusory, vague, and uncertain contractual terms. Adelaide Law Review, 6(1), 1-25.
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.
  • Seddon, N. & Bigwood, A. (2023). Cheshire & Fifoot Law of Contract. LexisNexis.

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

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

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