A contract is a binding agreement between two or more people or companies, setting out what each must do and not do.
Anyone over 18 years of age can enter into a contract, and in some cases someone under 18 can too. Most commercial relationships and transactions are regulated by a contract, including buying a car or a house and the employment relationship. Not all contracts need to be in writing, though by law some types of contracts do.
There are three basic elements to a contract. Firstly, there must be an agreement, where someone offers something, and the other person accepts that offer. Secondly, each party to the contract must give something of value (called consideration). This could be money, an item for sale or even someone’s skills and time. Thirdly, each party must willingly enter into a legally binding agreement.
If a party breaches a contract, the other can take action. There are a number of remedies for a breach of contract in New South Wales.
Certain breaches will let the other party consider themselves free from their obligations under the contract. They can however keep the contract going and perform their part of it if they wish.
They can also refuse to perform their part, resist any action brought by the defaulting party, and take action against them for damages resulting from the breach or for an amount equivalent to the goods and services that were provided. This is known as suing on a quantum merit. In this situation, the law considers the innocent party should receive something for the obligations they have performed.
Some breaches do not discharge the contract, either because the breach does not entitle the innocent party to end (or repudiate) it or, although entitled to do so, the innocent party has decided not to repudiate it. In such situations, the party not in default can do three things:
- They can sue for specific performance. This is an order from the court specifically directing the party in default to carry out its obligations under the contract. This remedy is only available in cases where damages will not provide proper compensation for the breach of contract, such as contracts involving the sale of land. If the court cannot oversee the carrying out of the order, specific performance won’t be granted.
- They can obtain an injunction. An injunction is a court order restraining a person from doing or repeating their wrongful conduct. If there are court proceedings pending, an injunction can also be granted where there is a real risk that the defendant may sell or otherwise deal with property that is the subject of the dispute.
- They can also sue for damages. An award of damages for breach of contract is to compensate with money the loss resulting from the breach. If no loss was sustained by the breach, nominal damages may be awarded if a legal right has been infringed.
Where a party has sustained a loss they could be entitled to damages. The injured party should, so much as is possible, be left in the same position as if the contract had been performed.
The damages are an amount that may fairly and reasonably be considered to have resulted from the breach. A prospective loss as well as an actual loss can be taken into account when assessing damages.
Sometimes, a sum, or a formula for calculating a sum, is set out in the contract as the amount payable if there is a breach. Liquidated damages are the amount which the parties agreed would compensate for a breach. If there is a breach, the court will award this amount as compensation, but if the amount is considered to be a penalty, it will not be recoverable.
In certain circumstances, a breach that results in inconvenience and/or distress to the other party may be recoverable.
The aggrieved party must do everything possible to mitigate their losses, otherwise they may not be able to claim the full amount of damage. Where no sum or formula is mentioned, the amount of damages assessed as being the amount of loss actually incurred will be awarded by the court. If a party has not actually suffered a loss, but has been affected by the infringing of some legal right, the court can award a small amount as nominal damages
If a court finds that the terms of a contract are unfair it can rule that they shouldn’t be strictly enforced. It can vary or even void the contract.
The court will look at things like how equal the parties to the contract were and what scope they had to bargain over the terms and conditions. The Australian Consumer Law also specifies some behaviour that is unfair when it comes to buying and selling goods and services, such as misleading and deceptive conduct.