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• What is a contract?
• What is a consumer contract?
• When is a contract made?
• Unfair contract terms

What is a contract?

People enter into contracts every day, for example buying a ticket on a bus, purchasing a house or motor vehicle, or engaging a tradesperson to carry out repairs.

A contract is an agreement that is legally binding. Usually it consists of an exchange of promises to act in a particular way, provide a particular item or pay a specified sum of money. It is commonly thought that there can be no binding contract unless it is put in writing. This is not true as a verbal contract may also be binding.

When you enter into a contract you must satisfy your obligations. If either party fails to, then they may be in breach of contract and a court may insist that the breach be rectified or the innocent party be paid compensation for losses sustained.

What is a consumer contract?

Under the Australian Consumer Law, a ‘consumer contract' is a contract for:

• the supply of goods or services or
• the sale or grant of an interest in land
• to an individual who acquires it wholly or predominantly for personal, domestic or household use or consumption.

The unfair contract terms laws do not apply to a contract to supply goods or services or financial products or services from one business to another for business use.

When is a contract made?

Before an arrangement can be called a contract, you must be able to identify three basic elements.

Agreement:

Before a contract can be formed there must be an agreement between the parties to undertake certain obligations.

An agreement exists only if there has been a definite offer by one person to undertake a commitment, and an unconditional acceptance of that offer by the other.

Consideration:

Before there can be a contract there must be a bargain (ie an agreement for exchange). Both parties must agree to give something up to the other for consideration to apply.

Intention to enter into legal relations:

For there to be a legally enforceable contract, the parties must have intended to enter into a legally binding agreement. This intention is seldom stated, but is usually inferred from circumstances surrounding the agreement.

When entering into a contract, remember:

• if it is a written contract, make sure you read and understand it and, if necessary, get independent legal advice before you sign
• to obtain a copy of your contract at the time of signing and keep it in a safe place
• all contracts (even those called 'standard') can be altered by you and the trader, subject to mutual agreement.
  

Unfair contract terms

The Australian Consumer Law provides that unfair terms in consumer contracts are void. A ‘consumer contract' is a standard-form agreement for the supply of goods or services which is wholly or predominantly for personal, domestic or household use or consumption.

A term is ‘unfair' when it:

• causes a significant imbalance in the parties' rights and obligations arising under the contract; and
• is not reasonably necessary to protect the legitimate interests of the supplier; and
• causes financial or non-financial detriment to a party.

A court must have regard to the transparency of the term and the contract as a whole in determining whether a term is ‘unfair'.

Terms which relate to the main subject matter and upfront price of the contract are not able to be challenged under these provisions. However, payments made under a contract which are contingent on the occurrence or non-occurrence of an event are examinable under the unfair contract terms provisions.

The unfair contract terms provisions are also included in a new Part 2, Division 2, Subdivision BA of the Australian Securities and Investments Commission Act, with respect to financial products and services.


The Australian Consumer Law provisions apply to all other consumer contracts, except for:

• certain shipping contracts; and
• the constitutions of companies and managed investment schemes.

As a consequence of the operation of section 15 of the Insurance Contracts Act 1984, the provisions do not apply to insurance contracts regulated by that Act. The Government is examining whether this exclusion should continue.

The unfair contract terms provisions are supported by consistent national guidelines on their enforcement, developed by the national, State and Territory consumer agencies (available at www.accc.gov.au). The Australian Securities and Investments Commission have also issued specific guidance on unfair contract terms and exit fees for residential loans, available at www.asic.gov.au.

Related information

• A guide to the unfair contract terms law (1.8 MB PDF file)

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