A contract is a legally binding promise or agreement between two or more parties. It doesn't have to be in writing. If one person does not carry out the terms of the contract, they may have 'breached' the contract. The other person could choose to make a claim for money or a debt arising out of the breach.
A contract can be enforced by one person if the other person does not do what they promised.
Some common examples of where a contract is entered into include where you:
- purchase goods, such as a car
- purchase a service, such as a mobile phone, internet, building or insurance service
- sell second hand goods, such as furniture
- start a new job
- store your goods with a storage business.
A contract can be a verbal or written agreement. There are some contracts that must be in writing by law, for example a contract to buy or sell land.
For a contract to be a valid contract there must be:
- offer and acceptance
- consideration
- legal capacity.
An 'offer and acceptance' is when one person or company makes an offer to do something and the other person accepts the offer.
Sometimes the person may choose to negotiate the offer before accepting. This is called a 'counter-offer'. If the person or company that made the original offer accepts the counter-offer, there is an agreement.
The person or company making the offer can revoke (withdraw) the offer before it is accepted by the other person as long as this is communicated in writing or verbally.
Consideration is the price paid to the other person to perform the contract. It usually involves payment of money but can also be a benefit, right or interest given to the other person.
A person has legal capacity to enter into a valid contract if they are over 18 years of age.
If you are under 18 years of age, you are a 'minor'. If you signed a contract as a minor, it can still be valid if the contract was made for your benefit and if you knew that you were entering into a legally binding agreement. In some situations you may repudiate (end) the contract by written notice to the other party before you turn 18 years of age.
A person must also have the ability to understand the nature of the contract. A contract may be set aside if you suffer from a mental or intellectual disability which affects your ability to make informed decisions. If you want to end a contract due to lack of mental capacity, you will need to show medical evidence that your capacity was impaired due to your disability when you entered into the contract.
Before you sign or agree to a contract, you should:
- read the contract carefully and
- make sure you understand it.
Do not sign a contract before you have read it carefully and understood what it means. Take a copy of the contract home so you can go through the terms and conditions of the contract in your own time. It is very important that you understand the contract to avoid a dispute later on.
You can try to negotiate any amendments (changes) to the contract with the other person before signing it. If agreed, make sure that you both sign next to the amendment to confirm any change to the contract.
Do not sign a contract with blank spaces. Make sure all the blank spaces have been filled in or crossed out so additional information cannot be added after signing the contract.
Always keep a photocopy of the contract you signed for your own records.
Once a contract is signed, it can be very difficult to terminate (end) it and if you don't do what the contract says, the other party may make a claim against you for breaching the contract.
Some contracts can be complicated. If you do not understand the contract, you should get legal advice.
If a party does not do what they promised to do, this is called 'breaching' the contract. Where there is a breach of the terms and conditions of the contract, a party can try to recover any losses they had because of the breach. In some cases a party can cancel the contract because of the breach. You should get legal advice.
If you purchased goods or services from a business, the Australian Consumer Law (ACL) applies. It is against the law for a business to make false or misleading promises about the supply, quality, nature or performance of goods or services. For more information about consumer rights, see Guarantees, contracts and warranties in the NSW Fair Trading website.
Financial services are covered by credit laws not the ACL. For more information, see Loans and credit cards.
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Time Limit
The time limit to start a claim to recover money is within six years from when the debt became owed, when it was last acknowledged or when the last payment was made.
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