Consumers and Contracts

Elements of a Contract

Intention to Create Legal Relations

A contract does not exist simply because there is an agreement between people. The parties to the agreement must intend to enter into a legally binding agreement. This will seldom be stated explicitly but will usually be inferred from the circumstances in which the agreement was made.

Intention is simply not an issue in any consumer contract or in any of the ordinary contracts that people make in their lives such as entering into a lease, buying a ticket for a sports event or for travel, selling or buying goods through the internet or a purchase or sale of a car.

Intention can be an issue when domestic or friendly arrangements are made where it may be arguable that they were not intended to be a legally binding contract. For example, a house-sharing arrangement amongst friends may raise this issue. It is usually best to agree on whether such an arrangement is intended to be a contract or just a friendly understanding.

The Parties must be Parties to the Contract and must be Recognised Legal Entities

Who are the parties? -- the privity rule

It is important, firstly, to make the point that the parties to a contract are the only parties that can benefit from it or are bound by it. It is usually straightforward to identify which parties are parties to a contract but this is not always absolutely clear.

If a contract purports to confer a benefit on a party who is not a party to the contract (a third party), then a basic principle -- called the privity rule -- comes into play. A third party cannot enforce any benefit which it was intended by the contracting parties the third party should obtain. Equally, it is not possible by a contract to impose an obligation on a third party.

The privity rule sometimes causes inconvenience or even injustice. For example, in the compulsory insurance that must be taken out when one registers one's car, the insurance policy protects the owner for possible liability for negligence causing personal injuries or death. Suppose the person who is a party to the insurance policy lends the care to a friend. Is the friend protected by the policy? The privity rule would say No. This has been changed by legislation because the policy behind compulsory insurance of this kind is to ensure that injured persons can recover damages.

There are other modifications to the privity rule brought about by legislation. The same modification in respect of liability insurance generally (not just for driving) has been made by the Insurance Contracts Act 1984 (Cth) s 48. This means that if an insurance company provides insurance to cover the party who paid for it and her or his family members as well, a family member could enforce the policy even though not a party to the insurance contract.

The parties must be recognised legal entities

A party to a contract must be

• an individual;
• a corporation; or
• a government.

The concept of legal entity is important for two reasons: it is essential to identify who it is you are dealing with; and it is not possible to make a contract with yourself.

A. Identifying the party

It is not always clear who or what a party is. A community organisation may have a name but its status as a legal entity may not be clear; governments use names (like AusAID); individuals and corporations use trading names; and sometimes there are complications because a party may be called a trust. Ultimately, whatever the "front" a party has, it must be one of the three recognised legal entities listed above.

A community organisation may be an unincorporated association in which case it is not a legal entity. It cannot make contracts. Such an organisation can become a corporation under State and Territory associations incorporation legislation (see Part 60 at (60.3)) and then has "Inc" in its name.

Corporations usually are incorporated under the Corporations Act 2001 (Cth) in which case their names include either "Pty Ltd" or "Ltd" and each company has a unique Australian Company Number (ACN). Or they may be government corporations incorporated under their own specific legislation (like the ANU, CSIRO or the National Gallery). There are other types of corporations under specific legislation (for example, cooperatives and bodies corporate associated with blocks of flats) but the commonest types of corporations are the ones discussed above.

B. Agents

Consumers dealing with retailers, banks, government departments, petrol stations, used car dealers, real estate agents and so forth are contracting with the relevant company (or government) and not with the individuals they actually talk to. In law the individuals who "front" for companies, governments, community incorporated associations are agents.

Generally, the person dealing with an organisation does not have to be concerned whether an individual apparently acting as an agent has authority to act for the company, government or association. The person can rely on appearances so that, if there is no reason to think that the other party is acting without authority, then that individual is deemed to have authority (called "ostensible" or "apparent" authority). In this way the organisation cannot avoid responsibility for what its people say or do. This is provided for in ss 128-9 of the Corporations Act 2001 (Cth) which, in turn, reflects the common law. So the same rules about authority apply whether one is dealing with a company or a government body.

C. Must be two different parties

It is not possible to make a contract with yourself. This sounds obvious but can be a problem from time to time. In government, the problem arises when a Commonwealth department makes an agreement with another Commonwealth department. This cannot be a contract because each department is just the legal entity known as the Commonwealth.

Generally this requirement of separateness of the parties to a contract is not a practical problem in ordinary day-to-day contracts.

Agreement, Offer and Acceptance

A contract is formed when the parties are taken to have agreed. It is the moment of agreement that prior negotiations, preliminary exchange of ideas or proposals, bargaining, discussions become a legally binding contract. This is usually demonstrated when an offer by one party is accepted by the other party.

This basic proposition means that people should be very careful in their dealings with each other. If A makes an offer to B, then B has the power (by accepting) to bind A in a contract. Similarly, once a person has accepted, he or she is legally bound and cannot go back unless the other party allows the person who accepted to pull out.

An alternative model

The usual model for ascertaining whether the parties have reached agreement is the offer-acceptance analysis. But this is not the only way. The courts recognise that parties often deal with each other in ways that are not very precise and cannot be pinned down to ascertainable offer and then acceptance of that offer.

It is possible to find acceptance by conduct rather than by the usual way of a person saying "I accept your offer" or else signing a written contract. It is also possible, when there is no ascertainable offer and acceptance, to infer the existence of a contract from the conduct of the parties looked at as a whole.

The consequence of this "looser" analysis is, again, that parties dealing with each other should be careful. Above all, it is very important to be very clear about what is intended and when a commitment to contract takes place. A failure to do this may mean that a person is legally bound to a contract without realising it. There are many cases in the law reports where the basic issue to be resolved was: have the parties committed to contract or were they still negotiating? If the former then each party is legally bound; if the latter then neither party is bound by a contract.

Offer

An offer must be distinguished from mere willingness to deal or negotiate. For example, X offers to make and sell to Y calendars featuring Australian paintings. Before any agreement is reached on size, quality, style or price, Y decides not to continue. At this stage, there is no legally binding contract between X and Y because there is no definite offer for Y to accept until the essential terms of the bargain have been decided.

An offer need not be made to a specific person. It may be made to a person, a class of people, or to the whole world (such as the offer of a reward).

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 offers to sell B a Holden panel van for $1,000, "as is". If B decides to buy the Holden panel van, but insists on a roadworthy certificate from the NRMA 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 an offer which has been proposed prior to that offer being 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 arrange to let B know by lunchtime whether A agrees to B's counter offer. If, while waiting for a reply, B decides not to buy the Holden panel van and tells A of this change of mind, then there can be no binding contract because B's (counter) offer has been withdrawn.

Acceptance

Acceptance occurs when the party answering the offer agrees to the offer by way of a statement or an act. Acceptance must be unequivocal and communicated to the offeror: the law will not deem a person to have accepted an offer merely because he or she has not expressly rejected it.

A. Signature

The most obvious way of committing to a contract is by signing. The law reflects the popular understanding about the significance of signature. If someone signs a contract without reading it, then that person is bound and it is no argument to say that he or she did not realise that the contract contained some clause that is not to their liking.

Conversely, signature is not necessary for commitment to a contract even though there is a document that has a place to sign. Acceptance by conduct has been mentioned above and it is quite possible for a person who did not sign a contract (which was supposed to be signed) to be bound by it if he or she has indicated by conduct that the deal is going ahead.

B. Unsigned contracts -- "ticket" cases

Not all written contracts are supposed to be signed. An example is an airline ticket or a public car park docket. The terms may be on a ticket or may be displayed on a sign or wall. The law takes a somewhat pragmatic approach to the question whether the customer has accepted the terms. The customer is taken to have agreed so long as the customer had an opportunity to read the terms and did not object to them. This rule means that the terms must be available for scrutiny before the contract is made. The rule takes little account of the fact that no-one actually reads the terms or would have almost no time to read them if he or she tried to. Some allowance is taken of this if an exclusion clause is in a ticket (see Exclusion of Responsibility Terms).

Legislative modifications to rules of offer and acceptance

Some legislative modifications to the rules of offer and acceptance have been made to protect consumers. For example some legislation allows a consumer who has accepted an offer (and thus made a binding contract) to nevertheless pull out of the contract (called a "cooling-off period"). An example is under the Australian Consumer Law provisions applying to unsolicited consumer agreements (see Terminating unsolicited consumer agreements ("cooling off period")).

As already noted, it is possible for an offer to be accepted by the conduct of the party to whom it was made. Unscrupulous companies used to take advantage of this by sending unsolicited goods by mail and then, if the goods were used or not rejected, this was taken to be acceptance. This problem is taken care of by s 41 of the Australian Consumer Law which provides that the goods become the property of the recipient free of any obligation to pay 3 months after they have been received. This period can be shortened to 1 month if the recipient sends a notice to the company which sent the goods that complies with s 41(5). The company is also permitted to take back the goods before the expiry of the period.

Consideration

Consideration is the "price" paid for the promise or promises of the other party. Fundamentally, consideration requires that the agreement that has been reached constitutes an exchange between the parties. Contrast

• I promise to deliver a ton of gravel to you next Friday and you agree; with
• I promise to deliver a ton of gravel next Friday, payment on delivery, and you agree.

The first agreement is not a contract. It is a gift promise which, unless embodied in a deed under seal, is not legally enforceable.

The second agreement is a contract so long as the price can be ascertained (the seller's usual price is enough). The second agreement is initially just an exchange of promises and those are the consideration moving from each side. People often make the mistake of thinking that consideration is the money or goods or services. These are performance of the contract.

The price must be something of value, although it need not be money. As just noted, it usually is the counter-promise or promises provided by the other party. Consideration may be some right, interest or benefit going to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party.

In most contracts consideration is not an issue because there is always an exchange contemplated by the agreement.

So long as consideration exists, the court will not question its adequacy, provided that it is of some value. For example, the promise to pay a peppercorn in return for the lease of a house would be good consideration. Of course, the consideration must not be illegal or impossible to perform.

There is another way to make a legally binding obligation: documents under seal (called "deeds") do not require consideration for there to be a binding promise. However, deeds are used primarily in business and so are not discussed further in this chapter.

Legal Capacity

The law requires that a party to a contract has capacity to enter a contract. This means that the person is recognised in law as being able to commit to a contract. Most people and companies have capacity and so in the vast majority of contracts this is not a problem. In the following circumstances, capacity to contract may be an issue:

• people who have a mental impairment;
• young people (see below)
• bankrupts;
• corporations (people acting on behalf of a company); and
• prisoners.

People who have a mental impairment

Generally speaking, people are free to enter into contracts even though they may have a mental impairment, or be temporarily disabled by drugs or alcohol. They are, however, sometimes vulnerable to being bound by contracts they do not fully understand. The question of capacity to make the contract often arises only after the contract is in place.

People with disabilities and their advocates will find some protection in the rule that a contract is not valid and enforceable unless there was genuine consent to its making. This is discussed further at Undue influence and unconscionability.

Capacity to give consent involves a general understanding of the nature of the contract (not necessarily its fine details). A person with a mental impairment, for example, may have the capacity to understand some contracts (for example, buying a loaf of bread), but not to understand other, more complicated contracts (for example, buying a car on credit). The law recognises that people with impaired capacity nevertheless must be able to purchase the necessities of life, for example, food, clothing, accommodation, medical services and so forth. The Sale of Goods Act 1954 (ACT) s 7(2) provides that a reasonable price must be paid for necessary goods sold to someone with a disability. What are "necessaries" and the rules applicable here are dealt with under Young people (because the definition is the same for both groups).

Where a person with a disability did not understand the general nature of the contract, a court can intervene to set aside the contract only if

• the other party knew, or ought to have known, of the disability or lack of capacity; and
• the person with the disability can give back most of the benefit he or she received under the contract, and
• the benefit received by the disabled person has not been sold to a third party who did not know the previous transaction might not be valid.

Generally, 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.

If the contract was made during a period when the person was able to understand it (legally termed a lucid interval), the contract will be binding even though the other party knew of the disability.

Some people with disabilities (temporary or long term) are assisted by a manager appointed under the Guardianship and Management of Property Act 1991 (ACT). For further information on the role of a manager, see DisabilityAndGuardianship. People with disabilities who have a manager appointed to act on their behalf are generally not free to enter into contracts, unless this is approved in writing by their manager or by an order of the ACT Civil and Administrative Tribunal (previously the ACT Guardianship and Management of Property Tribunal).

Young people

The term young person is used here to refer to anyone under the age of 18 years (s 5 of the Age of Majority Act 1974 (ACT)). Sometimes, legal writing refers to "minors"or "infants", although the latter is now unusual.

The exact capacity of young people to bind themselves and be bound by contract is limited but it is also not clear, because no legislation completely covers this area of law. The law is overly complicated. Only in New South Wales has the law been rationalised in a sensible way. See Seddon and Ellinghaus, chapter 17.

A. Binding contracts and young people

Contracts for the supply of necessaries will generally be binding. There are no hard and fast rules to identify what is a "necessary", but it does include the sorts of things the young person needs to live a reasonable lifestyle, so that it includes basics such as food, clothing, a place to live, medicine, and so on. It will also include any contracts relating to the young person's education, apprenticeship or training, if it can be shown to be of benefit to the young person. Whilst a court has not yet considered the issue specifically, mobile phones are probably not necessaries. The young person contracting in this situation will be held bound to pay a reasonable price (although that may not be the contract price) for 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, though this has been a matter of some controversy for a very long time.

Minors are also bound by contracts of apprenticeship or of service, since it is to their advantage to acquire the means of earning a livelihood. But these contracts must be substantially for the minor's benefit and will not be enforceable to the extent that the contract includes harsh or unfair terms.

Yet another category is a contract that is binding on a young person unless avoided during minority or within a reasonable time of turning 18. This category involves ownership of shares or real property.

The previous Consumer Credit Code did not specifically deal with contracts of loan to minors except in connection with a guarantor's liability of a young person's loan. The common law therefore applies to a loan taken out by a minor. The contract may be binding if the loan is for necessaries or the loan is made in connection with other contracts discussed under this heading. A guarantee of a young person's loan will not be binding on the guarantor unless the guarantee document includes a prominent warning that the guarantor may not be able to recover from the under-age debtor: s 55(3) of the former Consumer Credit Code.

B. Non-binding contracts and young people

Contracts that do not fall into the above categories are not binding on young people unless confirmed or "ratified" after turning 18.

Where a young person has already paid money under a non-binding contract, that money will not be recoverable unless no benefit has been received by the young person. The young person can, however, refuse to make any further payments under the contract. It is not certain who then owns goods that are not necessaries. It appears that they become the property of the young person unless the young person has fraudulently misrepresented his or her age.

After turning 18, a person can confirm ("ratify") a prior contract and then become bound by it. The ratification must be in writing: Mercantile Law Act 1962 (ACT) s 15.

Bankrupts

Bankrupt people are not deprived of their general capacity to contract. However, there are provisions of the Bankruptcy Act 1966 (Cth) that relate to dealings and contracts by bankrupts. For example, obtaining credit of $4,145 (indexed under s 304A) or more without disclosing your bankruptcy is an offence and liable to penalty under s 269 of the Bankruptcy Act. See "The Effect of Bankruptcy on Debts" in Chapter 24.

Corporations

A corporation is an artificial body created by law. The corporation has a legal existence separate from the individual people who comprise it. However, a corporation or company has the legal capacity of a natural person and therefore has the capacity to enter contractual relations (see s 124 of the Corporations Act 2001 (Cth) ('the Corporations Act')). This is so even if there is an express provision contained in the company's constitution which limits the company's powers. Transactions are not deemed void and beyond the company's powers 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 capacity to enter into contracts but such contracts 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. A company has to deal with the outside world through its people. The Corporations Act ss 128-9 provide that anyone dealing with a company is entitled to assume that the person they are dealing with has authority to act for the company unless the outsider knows, or has reason to know, that the company representative lacked authority. It is therefore difficult for a company to deny that a person, apparently acting for the company, lacked authority and could not bind the company.

Prisoners

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 the prison still apply, so that the permission of prison authorities is required before a prisoner may sign for, deliver or receive any document.