Contract Law

Australian contract law is based on legislatively modified English common law, rather than a civil code. The basic principle is freedom of contract, in which parties free to bargain as they chose within legislated parameters.

Last updated: October 2018

While parties have a general freedom to choose the terms, format and content of their bargain, the following should be noted:

Contracts do not have to be evidenced in writing save for certain types of transactions such as dealings involving interests in land
Contracts can be written, created by conduct, implied from circumstances, arise by operation of legislation, orally created or a combination of the preceding modes of creation
Contract operation and enforcement is generally facilitated by having a document signed by all parties evidencing the bargain.

Parties and identification of parties

In Australia a key contract law concept is that the contract is the meeting of minds of the parties so that an accord is created between those parties. This means that only a party to a contract is bound by it and acquires rights - this is the privity of contract rule. Certain limited exceptions do exist for the privity of contract rule.

There are limited exceptions to the privity rule. For this reason, it is important that contracts accurately identify all relevant parties whether a person, corporation or entity created by statute.

Direct legislative intervention

Legislation such as the national Competition and Consumer Act can override contracts in whole or part, restrict their operation or insert some mandatory terms.

Legislation impacting contractual freedoms is operational at national level from the Commonwealth Government of Australia, at each of the state and territory levels of government and at a local or municipal government level. While national laws apply consistently across Australia, legislation from other levels of government are not uniform.

Restrictions on restraints of trade

Any restriction on the ability of a party to a contract (or deed) to deal with third parties, including being employed by them, may constitute exclusive dealing. This is conduct regulated by the antitrust provisions of the Competition and Consumer Act.

Alternatively, such a restriction may represent a restraint of trade under common law. It may be void and unenforceable by a court if the conduct being restrained, the relevant time period or the area over which the restraint operates is unnecessarily broad. In New South Wales only, the Restraints of Trade Act 1976 (NSW) permits the state’s Supreme Court to limit the operation of a restraint to the extent that the court considers reasonable.

Limitations and exclusions of liability

The parties to a contract are free to limit or exclude liability for breaches of contract, or in other circumstances, subject to the operation of the Competition and Consumer Act and sale of goods and fair trading legislation in Australia’s states and territories. However, the party relying on an exclusion or limitation of liability clause must convince the court that the relevant clause, properly construed, is as that party contends.

Indirect legislative impact

Some legislation also has an indirect impact on contractual freedoms. An example of this is the operation of laws in relation to securities on personal property.

Personal property includes all property that is not land, or certain rights granted by federal or state governments (for example, a mining licence). If a security interest is created over any assets that are ‘personal property’ then the Personal Property Securities Act 2009 (Cth) will apply. The interest should be registered on the Personal Property Securities Register within the applicable time period to preserve the interest of the security holder.

The Personal Property Securities Act covers a broad range of security interests. These include traditional forms of security created under transactions such as retention of title provisions within a contract of sale, hire purchase agreements and certain leasing arrangements. Registration of these security interests is governed by the Personal Property Securities Act, the Corporations Act and other legislation.

Other legislation has an indirect impact by requiring certain notices and warnings to be given or clauses inserted. This includes privacy legislation operating at national and state or territory levels.

Common law restrictions on contracts

In addition to legislative issues, the common law imposes some limits of contractual freedom. Under the general law of contract, parties may agree in advance to a sum of liquidated damages, or a calculation method, that will be paid in the event of a breach. This is useful where monetary damages are difficult to calculate, and the parties wish to avoid the cost of dispute resolution or litigation.

Such an agreement must represent a genuine attempt to estimate the likely damages that may be suffered. However, the provision may be regarded as a mere penalty and not enforced by a court if it is excessive, imposed by one party merely as a threat to enforce compliance, or specified to arise in circumstances that are vague or may be triggered arbitrarily.

Extra judicial resolution of disputes

While disputes between parties to contracts are determined in courts, Australia has many practices to facilitate resolution without court intervention. It is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Accordingly, the award of an arbitrator (which can usually give any legal, equitable or statutory remedies) will be recognised and enforced in the Federal Court or any of Australia’s state or territory courts.

Additionally, Australia has many alternate dispute resolution processes to facilitate non-judicial contract dispute resolution.

International contracts for the sale of goods

Australia is a signatory to the Vienna Convention on Contracts for the International Sale of Goods. This provides uniform rules for the formation and performance of contracts for the international sale of goods. It also sets up a framework of rules that specify the obligations of parties.

The parties to a contract for the international sale of goods may select the laws of one of the parties’ home jurisdictions as the governing law of their contract. If they do not do so, then the Convention will apply.