Contract Law: Elements And Types Of Contracts

Contracts and Legislation

Relevant Legislation

There are two types of legislation concerning contracts:

• Contract Law
• Consumer Law

The Competition and Consumer Act of 2010 (CCA) is the main legislation that governs contracts. The Consumer Law, which is contained in the Competition and Consumer Act of 2010, controls ‘consumer transactions for all goods and services, except financial services’ (Tadros, 2017). There is also the Securities and Investments Commission Act 2001, which controls unfair consumer and small business contract terms. Contents of this act include:

• Examples of unfair terms
• Terms that define the main subject matter of consumer and small business contracts
• Contracts to which unfair contract terms do not apply
• Contraventions of unfair consumer and small business contracts

Need

When there is a clear conflict between legislation and case law in court, the legislation will over-rule the case law since legislation is the law made by the Act of Parliament. Although legislation defines a clear set of rules to follow, it may not account for all possible situations a case may present. Therefore, the judge will interpret the legislation within the context of the case, where the law is created based on that topic). The dynamic nature of cases presented in court will allow for differences to be identified in the legislation, which will in turn, further refine the corresponding legislation.

Contract Elements

Capacity

In order for a contractor to enter into a contract, there must first be contractual capacity between the contractor and the principal. Contractual capacity refers to a party’s ‘legal ability to enter a contract’ (Craddock Murray Neumann Lawyers, 2014). Under section 124 of the Corporations Act 2001, a company has the same legal capacity as an individual, including the ability to make an agreement (Clarke, 2010). In the case of companies, they must comply with its objects clause, or it is said to be contracting outside of its capacity and therefore is acting ultra vires. Ultra vires refers to ‘any act which fell outside those specified in the objects clause that is beyond the company’s capacity’ (Choo, 2019). The objects clause provides the purpose for which the company exists and going beyond its objects clause will cause a contract to be void.

In the case of individuals within companies, contractual capacity intends to protect them from anything that they may not completely understand due to measurable factors such as:

• Age. The company must not involve minors who are under the age of 18 to partake in any activity stated in the contract. Under common law, any contract signed by a minor is voidable (Clarke, 2010). Under the legislation, any contract signed by a minor can be allowed provide that any element stated in the contract is not harsh or oppressive.
• Competency. An individual who is unable to understand the full extent of a contract due to mental disorder can void a contract, given that the contractor has knowledge o the individual’s mental disability (Clarke, 2010). Their capacity must be ‘brought into question’ and they must understand the broad nature of their part of the contract when explained to them (Craddoc Murray Neumann Lawyers, 2014)
• Financial status. If an individual entering a contract is bankrupt, the contractor may disclaim contractual obligations due to the nature of their financial status
• Intoxication. An individual who is under the influence of alcohol or drugs may suffer from lack of capacity to enter a contract. They may withdraw from a contract if they can prove that they were suffering from such a disability or if the other party was aware of it (Clarke, 2010)

What happens

Common law recognises the assumption that a contracting party is entering a contract with full capacity and treats contracts as binding unless voided. If it is found that there is a legal issue after entering the contract, it will be the job of the party alleging incapacity to prove incapacity (Craddock Murray Neumann Lawyers, 2014). If you think that you have entered into a contract, but have not physically signed anything, it is assumed that you have not accepted the offer. It can also be the case that the contract is not validly executed. However, doing work may be an indirect indication that you have accepted the contract.

Ultimately, it is under the court’s rule to decide whether or not the contract has been enforced given how much work is done prior to accepting the contract. As a result, the court will make the contract between the two parties void and the company can get out of the contract without penalty (Murray, 2019). The other party may rescind the contract and all of its terms and conditions. The court will attempt to restore the parties to their original positions before the contract was entered. This means returning money and products made within the contractual agreement.

Variations

If a variation is identified, the company must recognise that the variation is allowed under the main contract through specific details and clauses aligned with the scope of the contract. They must also understand the principal’s legal policy and statute about contract variations. Furthermore, the proposed variation must consider key issues that it may bring to the main contract. Some factors include:

• Variation must be allowable under contract
• Ensure impacts such as risk, budget and scope are assessed
• Ensure stakeholders are alerted about the change in scope
• Seeking further advice and legal boundaries about the proposed variation

The proposed variation must be appropriately documented and formally approved before finally executing the contract. This process is incorporated into the original contract.

In the case where there is the addition of a third-party and the terms of the variation are incompatible with the contract’s clauses, a collateral contract is created. When a collateral contract is created, their terms may conflict with the original contract terms. As a result, the intentions of the collateral contract may replace one or more of the main contract’s objectives if certain conditions are met. Furthermore, a third-party enters the agreement to guarantee that ‘both parties will enter and uphold the original contract’ (Upcounsel, 2019).

Oral Contracts

Oral contracts are used for simple transactions with evidence that such an agreement is in place. They do not require much detail compared to written contracts. The elements of an oral contract must align with that of a written contract. For example, a principal contractor contracts with another contractor, who hires a sub-contractor to carry out building works. If the contractor suddenly liquidates their assets and fails to pay considerations to the subcontractor, the principal contractor may set up an oral agreement with the subcontractor to finish completing the building works and pay them considerations for any unpaid work (Adams & Partners Lawyers, 2019).

In that situation, a written contract is not used since there is already a legal connection established between the three contractors. As a result, the principal contractor can create an oral contract with the sub-contractor given the contractor’s inability to provide considerations to the sub-contractor. The consideration clause is the condition that is defined in the written contract, which is established between the contractor and the sub-contractor.

There is also part oral and part written contracts. While oral contracts can be difficult to prove into existence when demonstrating it in court, it is important for the party to enforce it in the case where the other party decide not to ‘uphold its obligations’ (Hartley, 2016). A separate, written contract based on the oral contract is not necessarily needed to prove its existence. It can be proved through other means such as emails, texts, phone calls, photographs etc. These forms of evidence are more reliable compared to a formally written contract as it does not deal with claims and alibis (Hartley, 2016).

Considerations

Besides monetary remuneration and conducting work to complete a project in the construction industry, considerations can be anything specified by the promisor. It can be a promise to perform an act, or a promise ‘not to do something you have the right to do’ (Trent Cotney, 2019). It can also be ‘some type of right, benefit or profit’ being gained by the promisee (Bathersby, 2019). Each party must give up something in order to gain something.

One example of a non-monetary consideration is establishing future business with the contractor if the principal is content with their performance. Not only does this benefit the contractor for future projects, but it also satisfies the client and helps develops a healthy professional relationship with the principal. Another example of a non-monetary gain is a promise of benefits towards the contractors during the process of the job such as including benefits on the site of the job. As a result of these benefits, the principal may reduce the amount of money being paid to the contractor as there is legally sufficient value within the exchange of consideration.

Employee

The main distinguishing factor between an employee of a contractor and a subcontractor is the aspect of employment control over the employee. For the employee, this includes the work being done and how it is executed. A subcontractor is only responsible for the final result of the work being produced. They are not under the control of the employer in any way. Another distinguishing factor is the method of remuneration. An employee of a contractor works for a salary or wage while a subcontractor is paid based on the completion of an assignment or units of work. Other elements of an employee relationship with a contractor include (Employsure, 2019):

• The employee using tools and equipment owned by the principal
• The employee using materials supplied by the principal
• Benefits such as overtime, sick leave, annual leave pay, superannuation and public holidays
• Work hours are set or flexible under certain conditions
• Requiring consent to reassign work to another individual
• Deductions from employee’s pay for tax purposes
• Working exclusively for principal contractor

Elements of a subcontractor include:

• Supplying own tools, equipment and material for the assignment
• Providing details on the assignment being done
• Scope of work
• Duration of work
• Health, safety, environmental and security risks
• No benefits from a principal contractor such as annual leave pay or superannuation
• No consent from a principal contractor to reassign work based on the job
• Providing services to multiple clients