05.Consent
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 rarely be stated explicitly but
will usually be able to be inferred from the circumstances in which the
agreement was made. For example, offering a friend a ride in your car is not
usually intended to create a legally binding relation. You may, however, have
agreed with your friend to share the costs of travelling to work on a regular
basis and agree that each Friday your friend will pay you $20 for the running
costs of the car. Here, the law is more likely to recognise that a contract was
entered into.
Commercially
based agreements will be seen as including a rebuttable intention to create a legally binding agreement.
However, the law presumes that domestic or social agreements are not intended
to create legal relations. For example, an arrangement between siblings will
not be presumed to be a legally binding contract. To defeat this presumption,
it must be shown that the parties did intend to create a
legally binding agreement.
A
contract is formed when an offer by one party is accepted by the other party.
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.
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 used car dealer offers to sell B a Holden panel van for
$1,000, without a roadworthy certificate. If B decides to buy the Holden panel
van, but insists on a roadworthy certificate being provided, then B is not
accepting the used car dealer's offer. Rather, B is making a counter offer. It
is then up to the used car dealer to accept or reject the counter offer.
A
person can withdraw the offer that has been proposed before that offer is
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, the used car dealer may say to B that he'll check
with his supervisor and maybe a roadworthy certificate can be provided. If,
while waiting for a reply, B decides he does not want to buy the Holden panel
van and he tells the used car dealer of his change of mind, then there is no
binding contract.
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 they have not expressly rejected it. Some modifications to the rules of
offer and acceptance have been made to protect consumers by sections 52 and 65
of the Trade Practices Act
1974 (Cth) ("TPA");
for example, invitations or offers to purchase cannot be misleading or
deceptive (see: Chapter 12*2
Consumer Guarantees).
Consideration
is the price paid for the promise of the other party. The price must be
something of value, although it need not be money. 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.
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 an exception to the rule: documents under seal (deeds) do not require
consideration for there to be a binding contract. However, since few contracts
between people are made in this way, it is not discussed further in this
chapter.
Not
all people are completely free to enter into a valid contract. The contracts of the groups of people listed
below involve problematic consent, and are dealt with separately, as follows:
§ people who have a mental impairment;
§ young people (minors);
§ bankrupts;
§ corporations (people acting on behalf of a company); and
§ prisoners.
Generally
speaking, people are free to enter into contracts even though they may have a
mental impairment, or are 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.
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).
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 they received under the contract; and
§ the benefit received by the other 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 an
administrator appointed by the Guardianship List of the Victorian Civil
Administration Tribunal (VCAT). For further information on the role of
an administrator, see: Chapter 16*6 Guardianship and Administration. People with disabilities who have an administrator
appointed to act on their behalf are generally not free to enter into
contracts, unless this is approved in writing by their administrator or an
order of the Guardianship List of VCAT.
A
person with an intellectual or psychiatric disability will be liable to pay
only a reasonable price for necessaries sold and delivered (s.7 Goods Act 1958 (Vic.)).
"Necessaries", and the rules applicable here, are dealt with in
"Young people", below (because the definition is the same for both
groups).
The
term young person is used here to refer to anyone under the
age of 18 years (s.3 Age of Majority Act
1977 (Vic)). Sometimes legal writing refers to minors or infant.
The
exact capacity of young people to bind themselves and be bound by
contract is limited but also unclear, because no Act of Parliament completely
covers this area of law. The Supreme Court Act
1986 (Vic) in sections 49 to 51, "Contracts of Minors",
is the most useful reference on this question.
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. 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 something very similar, if it can be shown to be of benefit
to the young person. While 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.
Two
classes of contracts are not binding on a young person, namely:
·
contracts which are not for
necessaries; and
·
contracts for the repayment of money
lent or to be lent (that is, any form of credit contract).
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 their age.
Even
after turning 18, a person cannot confirm a prior contract and then become
bound by it. Any money paid by a young person under such circumstances may be
recovered.
Bankrupt
people are not deprived of their general capacity to contract. However, there are provisions of
the Bankruptcy Act 1966(Cth) ("Bankruptcy Act") that relate to
dealings and contracts by bankrupts. For example, obtaining credit of $4,145
(indexed) or more without disclosing your bankruptcy is an offence and liable
to penalty under section 269 of the Bankruptcy Act (see: "The effect of bankruptcy on debts", in Chapter 8*3 Bankruptcy).
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
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)). This is so even if there is an express prohibition contained in the company's constitution. Such
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 the capacity to enter contractual relations, but such relations 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. It has been found
that in cases where directors with express authority have acquiesced and
allowed a director with no authority to frequently enter contractual relations
on behalf of the company, that such directorshave implied authority
and therefore can contractually bind the company.
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
Corrections Victoria is required before a prisoner may sign for, deliver or
receive any document. (For further information, see:"Employment and
money" and "Communication
with prisoners", in Chapter 4*5 Prisoners.)
Entering
into a contract must involve the elements of free will and proper understanding
of what each of the parties is doing. In other words, the consent of each of the parties to a contract must be genuine.
Only where the essential element of proper consent has been given is there a
contract which is binding upon the parties. The ultimate consequences of
establishing that no proper consent was given to enter the contract are matters
dealt with when considering remedies for breach
of contract (see:Chapter 12*4 Consumer Remedies).
Proper
consent may be affected by any of the following matters:
§ mistake;
§ false statements;
§ duress; and
§ undue influence/unconscionability.
Only
a few types of mistakes will cause the contract to be non-binding on the
parties to it: they must be mistakes that go to the very basis of the
agreement. For example, where there is a contract for the sale of a car that
both parties assume to exist, although in reality it has been destroyed by
fire, this contract is non-binding on the parties. By contrast, where the
parties are only mistaken about the model of the car, then this contract would
be binding.
Another
example is when a person signs a written document mistakenly believing that it
relates to something entirely different from what in fact it does relate to, in
this case the person will not be bound by it. This means that if X is told to
sign a document which X reasonably believes to be something like a character
reference to assist Z to obtain a loan from a finance company, and the document
is later discovered to have been a guarantee of the loan contract, then the
guarantee will not be binding on X.
A
third example is when Y cannot read, due to blindness or illiteracy or other
disability. Someone else tells Y what is in the document and Y signs it. The
document Y signed is not what Y was told it was. The document Y signed would
not be binding on Y.
By
contrast, if a person who signs a document believing it to be a contract does
not read the terms and conditions that person will be bound by the contract and
will not be entitled to plead mistake.
Other
factors may also be relevant to a successful plea of mistake. For instance,
whether or not the defence of mistake will be allowed often depends on whether
an innocent third party will be adversely affected by a decision that the
contract is non-binding. Again, if the signer was careless and failed to take
reasonable precautions, the defence will not be allowed to succeed. For these
reasons, it is wise to seek legal advice about whether or not a court would
hold the contract binding on these grounds.
There
are serious false statements and minor false statements that might be made by
parties contracting with each other. Different consequences flow, depending on
the seriousness of the false statement made.
False
statements might be made where either:
§ the parties come to agree and contract because one of them
has been motivated to agree by a statement of fact (something said or written)
that is not true. Commonly, these types of statements have not actually been
included in the contract itself but were an encouragement to enter into the
contract. For this reason, they are viewed as though they were part of the
contract; and/or
§ the parties have agreed and there is a contract, but the
statements or terms in the contract exist only because one of the parties has
made a false statement.
False
statements affect the question of whether or not a contract exists. Very
serious false statements mean a court would view the contract as void (see: Glossary)
and unenforceable. The consequence is that monetary damages sufficient to place the wronged party back to their
original position must be paid.
In
other (less serious) instances, the court will find the contract valid but the wronged party will be entitled to reject the
contract or to treat it as at an end. Here, monetary damages sufficient to
place the wronged party in the position they would have been in, had the
contract been properly completed, must be paid.
Where
a false statement has put the wronged party at a disadvantage or caused some
loss, but not enough damage has been done to justify ending the contract, then
the contract will be valid and the wronged party will be bound to the contract,
but entitled to sufficient monetary damages to make up for the loss suffered as
a consequence of the false statement.
The
two most important factors considered to determine the level of seriousness at
which a false statement will be viewed are as follows.
"Conditions"
of a contract are so important that without them one or other of the parties
would not enter the contract. If a false statement amounts to a condition of
the contract, the wronged party is entitled to rescind (see: Glossary)
the contract. A court may view the condition so seriously that without it the
contract is void; that is, with the false statement taken out of the contract,
there is no contract.
Less
important statements are called "warranties". Where the false
statement amounts to a warranty, the wronged party will only be permitted to receive sufficient
monetary damages to make up for any loss suffered; the contract will
continue to exist and the parties will continue to be bound by it.
There
are three types of false statements:
§ fraudulent misrepresentation;
§ innocent misrepresentation; and
Fraudulent misrepresentation
To
prove fraud, it is necessary to show that the person making the
statement knew it was false, had no belief in its truth, or knew it might be
false and recklessly went ahead and made it anyway, not caring whether it was
true or false. It is very difficult to prove fraud. Once proved, however, the
innocent party can rescind the contract, sue for damages for deceit, or both.
Innocent misrepresentation
An
innocent misrepresentation will be made where the false statement is made with
no intention to deceive. An innocent misrepresentation could nevertheless be a
serious false statement (being a condition of the contract), or a breach
of warranty. The level of seriousness will be determined by an
appraisal of all the circumstances of the contract. If innocent and withoutnegligence, the only available remedy is rescission (see: Glossary for meaning).
Negligent misrepresentation
A
negligent misrepresentation will arise where a party to the contract is under a
special duty
of care to the other party. This
special relationship will be held to exist where the person making the false
statement claimed to have some special skill not generally possessed by an
ordinary member of the community, and where that person was prepared to
exercise this special skill on behalf of the person to whom the false statement
was made. The wronged party must be able to show that:
§ the person making the false statement could reasonably be
expected to foresee that the false statement would be relied upon;
§ in the circumstances it was reasonable to rely on the
statement;
§ the statement was made without due care; and
§ the statement was false.
Once
again, the level of seriousness of a false statement made in these
circumstances can vary. Where there is a serious breach, the innocent party can
rescind the contract and recover damages for negligence.
Proper consent may be affected by duress. Duress is held to have
occurred where there has been actual or threatened violence either to the other
contracting party directly or to their immediate family, near relatives or
close associates. The duress may be made by someone acting under the instructions
of the party to the contract. The net effect, though, will have been that a
party has been forced into the contract by being deprived of their free will to
act.
Duress
now extends to contracts entered into as a result of threats to a party's
economic well being, that is, a threat to a person's business or trade. This
form of duress is called economic duress.
The
consequence of establishing duress is often that the contract is voidable at the election of the wronged party. Where the
wronged party elects to have the contract declared void,
monetary damages sufficient to place the wronged party in their
original position must be paid. Where the wronged party elects to continue with
the contract, monetary damages to cover any loss suffered because of the duress
must be paid.
Proper consent may be affected by undue
influence. Undue influence is exercised by
taking unfair and improper advantage of the weakness of the other party, to the
extent that it cannot be said that that party intended voluntarily to enter
into the contract.
The
main reason for the rule against the use of undue influence is to correct
abuses of trust and confidence. It is applied where the parties are in a
relationship where one party may be able to exercise considerable influence
over the other party.
There
are two categories of undue influence.
The
first is where no special relationship exists, but the stronger party will have
used some fraud or wrongful act expressly to gain an advantage from
the weaker party. The weaker party will have to prove that undue influence was
actually exerted.
The
second is where the parties are in a confidential relationship; most cases of
undue influence fall into this category. Aconfidential
relationship exists when one party's position
towards the other's involves a dependency or trust, in the form of authority or
an expectation to give fair and independent advice to the weaker party. Where a
confidential relationship is found to exist, a presumption of undue influence
will arise. It is then necessary for the stronger party to show that the
contract was not the result of any undue influence.
A
confidential relationship and the presumption of undue influence can be
established in either of two ways.
First,
the parties may be in a well recognised special relationship, for example,
solicitor and client, doctor and patient, religious or spiritual adviser and
devotee.
Second,
the confidential relationship, although not falling within any well recognised
relationship, is such that the complaining party is able to show that the other
party was in a position of influence. For example, it could be the relationship
between a bank and its customer, because of a special position of trust that
the bank had come to occupy in connection with the conduct of this customer's
affairs. (It has been stressed, however, that in ordinary circumstances no
presumption of undue influence arises out of a banker-customer relationship.)
See for example, Commercial Bank of
Australia v Amadio (1983)
151 CLR 447 (for a summary of Amadio's case, see: "Unconscionable
conduct", in Chapter 12*3 Consumer
Protection Legislation).
The
consequence of establishing undue influence is that the contract may be
held voidable at the election of the wronged party.
For
details of complaints of undue influence in relation to some types of loan
contracts and related complaints of unjust contract, unconscionable dealings,
harsh and oppressive contracts, etc., see: "Unjust contracts, changes and charges", in Chapter 13 Credit and Finance.
Corporations
are prohibited from engaging in unconscionable
conduct in relation to the provision
of goods or services by virtue of sections 51AB and 51AC of the TPA.
Similar provisions are contained in sections 8 and 8A of the Fair Trading Act
1999 (Vic) ("FTA")
(see: "Unconscionable
conduct", in Chapter 12*3 Consumer
Protection Legislation).
From
1 July 2010 unfair terms in standard form consumer contracts will be void.
The new Australian Consumer
Law (ACL) regulating unfair
contract terms (see: Schedule 2 of the TPA,
as enacted in the Trade Practices Amendment (Australian Consumer
Law) Act (No.1) 2010 (Cth)) is similar to (but not exactly the same as)
Victorian legislation regulating unfair contract terms that had applied prior
to the new law.
A
term is unfair when it:
§ causes a significant imbalance in the parties' rights and
obligations arising under the contract; and
§ it is not reasonably necessary to protect the legitimate
interests of the supplier; and
§ it causes detriment to another party.
In
determining whether a contract term is unfair, a court must consider the
transparency of the term as well as the operation of the contract as a whole.
For example, certain highly advantageous terms might need to be counterbalanced
against other disadvantageous terms.
Certain
terms cannot be determined to be unfair, for example the price of a good or
service or the main subject.
Unfair
contract terms are discussed in more depth in Chapter 12*3 Consumer Protection
Legislation (see: "Unfair contract
terms").
Where
a contract is illegal, this may affect its enforceability. Contracts that are
illegal by statute will be regulated as to enforceability by the statute;
thus the statute will need to be read and interpreted. Contracts absolutely
prohibited by statute will be void,
whether the parties know of the illegality or not. However, where one party
performs an otherwise legal contract in a manner that breaches legislation, the
other party, if having no knowledge of the facts giving rise to the illegality,
can still enforce the contract or recover damages for breach of it. They may also recover money or other
property transferred under the contract.
Contracts
made void by statute are treated differently; while they remain valid contracts, the courts will not enforce them. Again,
the precise extent of the enforceability of, or the recovery of any money paid
under, a void contract will depend on the particular statute.
Certain
types of contracts are illegal at common
law, because they are contrary to the
public good. These include contracts:
§ which are sexually immoral;
§ which prejudice public safety, including good relations with
other states or countries;
§ which prejudice the administration of justice;
§ which tend to promote corruption in public life; and
§ to defraud the revenue.
Illegally
formed contracts are generally void and unenforceable by either party at common
law. Therefore, property or money transferred cannot be recovered.
Where
legally formed contracts are performed in an illegal manner (i.e. the illegal
conduct was not an intended or required part of the contract but merely
incidental to the way it happened to be performed) then the contract is not
void, but:
§ no remedies are available to the guilty party; and
§ the innocent party retains all rights and remedies (provided
they did not know the contract was to be performed illegally).
Certain
types of contracts are void at common law, being contrary to the public good.
These include contracts:
§ prejudicial to the status of marriage;
§ in restraint
of trade (unless the restraint is
reasonable both between the parties and in the public interest). The courts
here will look at the relative bargaining power of the parties. Restraint
imposed between equals is viewed with more favour than, for instance, a
contract between an employer and employee in unequal bargaining positions.
The
general rule is that the contract is void only so far as it is contrary to the
public good; it is not void entirely. That is, the offending part can be
removed provided that the rest of the contract continues to make sense.
However, contracts illegal at common law are not "severable"; that
is, the "illegal" parts of the contract cannot be removed or severed
from the "legal" parts.
Money
paid or property transferred under a contract that is void at common law may be
recoverable because the effect of the contract being void is that there is no
contract, so that the parties should be put back to their original position.
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