Updated as at 28/8/2001.
1. What is a contract?
A contract is a legally binding agreement between two or more people or organisations.
The terms of a contract may be expressed in writing or orally, implied by conduct, industry custom, and law or by a combination of these things.
2. Elements of an enforceable contract
A binding contract is usually formed when all of the below are satisfied:
(a) One party makes an offer setting out the terms of the proposed contract to another party or parties. The terms must be sufficiently certain.
(b) An unequivocal acceptance of the offer is communicated to the party who made the offer.
(c) In common law countries (Australia, the US, Canada, the UK and other countries whose law originated from the UK), the contract must be supported by consideration. Consideration is best described as a ‘promise for a promise’. Consideration will be presumed to exist if certain formal requirements are followed (for example where a contract is executed as a deed).
(d) The parties to the transaction must have intended to create legal relations. Common law courts will not force people into a contract if they did not intend to be legally bound. The following rebuttable presumptions exist in this regard:
*if the parties are in a commercial (but not domestic) environment, the parties are presumed to intend to create legal relations;
*if the parties are in a domestic environment (eg family members or neighbours), the presumption is that the parties did not intend to create legal relations.
(e) All parties to the transaction must have the legal capacity to effect the transaction.
3. Standard terms of a contract
Subject to exceptions (for example, consumer transactions), the parties are free to choose the terms of their contract. An online contract should at least contain the following terms:
* a clear identification of the parties to the transaction;
* the subject matter of the transaction, including a description of any goods or services to be supplied;
* the price, delivery and payment terms;
* warranties, liability, insurance, intellectual property and dispute resolution;
* how orders are to be placed and accepted including use of electronic agents;
* record keeping, audit trails and evidence;
* security, format and authentication of messages;
* when and where messages are sent and received;
* responsibility for lost, incomplete or garbled messages; and
* the law governing the transaction.
4. Form and execution of contract
Some contracts, for example, those involving the conveyance of land and consumer credit transactions, must be in a particular form or be signed in a certain way. Otherwise there is no general requirement under Australian law that a contract be in a particular form or be executed in a particular form.
Apart from contracts which must be completed in accordance with certain formal requirements, there is no reason in principle that contracts cannot be formed by email exchanges or "click through" agreements or executed by use of digital signatures. In each case, the question will be whether anything in the formation of the contract might leave either party at risk that the other party will later challenge the enforceability of the contract, for example on the basis that terms were not brought to their attention, or that they did not in fact participate in the formation of any contract (perhaps because another person impersonated them).
The legal status of computer-generated evidence is not the same in all jurisdictions. To reduce the risk that evidence on which a party relies to establish a contract will be rejected by a court, a jurisdiction clause in an online contract should specify a jurisdiction whose laws of evidence accept electronic evidence.
See Electronic Transactions Act Fact Sheet for relevant Australian jurisdictions.
5. Benefits of a written contract
* the risk that terms will be implied into the contract by a court is reduced;
* when signed, the parties are deemed to have read the contract and accepted the written terms, making it difficult for either party to deny the existence of the written contract except in the case of fraud, mistake, unconscionable conduct or other exceptions recognised by the law;
* when properly drafted, the parties should know with certainty their respective obligations;
* identifies the parties to the transaction and the commencement of the commercial arrangement; and
* a conventional or electronic signature on an original contract provides protection against tampering or repudiation by the signatory.
6. Contract issues in the digital environment
The parties to an electronic contract should:
*satisfy themselves about the identity and capacity of the other parties to the contract;
*determine when a binding contract is formed;
*determine the governing law of the contract;
*agree on the electronic payment system used;
*ensure information exchanges leading up to and including the formation of a contract are secure to prevent later repudiation;
*determine by appropriate terms in the contract the consequences of breach, frustration and other factors which may affect the performance of the contract; and
*store electronic data relating to or evidencing the contract in a manner that prevents alteration by any agent without detection.
7. When is an electronic contract formed?
The general law rules are that acceptance must be communicated before a contract will come into existence, and that a contract is formed in the jurisdiction where acceptance is received.
Displaying information about a product or service for sale on a website may be construed as a binding offer or a mere "invitation to treat". The courts will look at the intention of the alleged offerer, gathered from all the circumstances to determine how the display of information is characterised. If the seller’s intention shows a willingness to be contractually bound without any further negotiations, the display may be regarded as an offer. If the trader’s intention falls short of this, the display is likely to be interpreted as a mere "invitation to treat". An "invitation to treat" is an invitation to the website visitor to make an offer that the seller may accept or reject.
It may be in a trader’s interests to ensure that information displayed on a website is not characterised as a binding offer, as this will provide an opportunity to review their capacity to supply goods (or other issues, for example, any legal restrictions on entering into contracts with users from particular jurisdictions) before a binding contract is formed.
Assuming the display of information on a website is an invitation to treat, and the website visitor makes an offer in relation to the goods or services displayed and the seller communicates acceptance of that offer to the purchaser through the website, it is likely that the law may regard the contract as forming in the jurisdiction of the website visitor (that is the place where the offeror received communication of the acceptance). If the offeree uses other methods to communicate acceptance (for example by posting a letter) this may affect the place where the law regards the contract as forming.
If a jurisdiction clause is effectively incorporated into the terms and conditions of the contract of sale, this may affirm or alter this outcome if required. However in certain circumstances a court may override the effect of a jurisdiction clause.
The timing of acceptance is critical, because generally an offer may be revoked at any time before it is accepted. Commonwealth law exists and the States and Territories are in the process of bringing in similar law which will determine the time and place of the sending and receipt of electronic communications. Generally, in the absence of agreement to the contrary, an electronic communication is received when it enters an information system under the recipient’s control and is taken to be received at the recipient’s place of business having the closest relationship to the transaction. See Electronic Transactions Act Fact Sheet for more information.
Use of standard form terms and conditions is common on the Internet. Whether or not any contract formed will be subject to these terms and conditions will depend on a number of factors, including whether a reasonable attempt is made to bring the terms to the customer’s attention or the customer has a reasonable opportunity to read them. A contract will not necessarily be invalid just because standard terms and conditions have not been the subject of any negotiation.
8. Governing law of the contract
Trading over the internet may involve forming contracts with people in countries or states with different laws. The governing law of an online contract will generally be the jurisdiction where acceptance of an offer is received unless otherwise agreed by the parties in the relevant contract.
Several international conventions and treaties allow traders to select the law of a particular jurisdiction as the governing law. Generally, consumer protection laws affecting Australian consumers will not be affected by these conventions or treaties, and in many cases will apply even if contracts include express provisions attempting to modify their effect.
9. Electronic payment system
See Electronic Payment Systems Fact Sheet for more information.
10. Secure contract formation in a digital environment
See Secure Electronic Transactions Fact Sheet for more information.
11. Consequences on breach, frustration or mistake of contract
The parties should identify in the terms and conditions of the contract the circumstances in which a party will be liable for a mistake arising from physical problems with the network, programming errors or human errors. For example, a party failing to comply with agreed security procedures might be liable for errors arising from that failure. In relation to intermediary errors, the sender may agree to be liable unless the recipient ought to have been aware of the mistake. Specific codes such as in Australia, the Electronic Funds Transfer (EFT) Code of Conduct (as it will be amended) may affect the contractual position in relation to these issues.
12. Identity and capacity to contract
How can a party to a contract be sure that the other party is who they say they are? Some measures include use of Public Key Infrastructure technology or other "identifiers". It is possible for users of a computer to instruct the computer to carry out transactions automatically. For example, electronic agents may be used by a person:
* to initiate or respond on their behalf to electronic messages without review by the person;
* as an online shopping agent programmed to surf the internet and make purchases; or
* as an inventory control system programmed to place orders when stocks reach a particular level.
Although the legal status of electronic agents is uncertain on one view a computer tool programmed by or with a person’s authority to implement their intention can make and accept contractual offers on their behalf.
13. Secure storage of electronic records
See Keeping Electronic Records Fact Sheet for more information.
14. Consumer Protection
Trade practices legislation makes misleading or deceptive conduct illegal and implies warranties and conditions into any contract for the provision of goods or services in trade or commerce.
In the internet environment, examples of misleading or deceptive conduct could include situations where:
* a consumer is, or is likely to be, misled or deceived by a statement on the website; or
* it is unclear when connecting from one website to another whether the linked website is owned or operated by the operator of the former.
Online statements or implications about a product or service must be accurate and honest. Certain provisions of the trade practices legislation apply regardless of a jurisdiction clause in a contract, provided there is some connection with Australia.
Bait advertising (falsely offering discounted prices) and referral selling are prohibited.
The following non-excludable terms may be implied into a contract:
* a warranty of good title;
* compliance with description, merchantability and fitness for purpose; and
* services are rendered with due care and skill.
A term will not be enforced if it would be unconscionable to do so. A contract will not be enforced if entered into through unconscionable means or processes.
"Consumer" is defined by reference to the type or value of the goods or services acquired and may in certain cases confer consumer protections to business purchasers.
See Consumer Protection Fact Sheet for more information.
15. Contracts for the international sale of goods
The United Nations Convention on Contracts for the International Sale of Goods (Convention) may imply terms into a contract concerning the sale of goods between parties in different signatory states. The Convention does not apply to transactions concerning sale by auction, execution or by authority of law, sale of stocks, shares, investment securities, negotiable instruments, money, ships, vessels, hovercraft, aircraft or electricity.
16. Best practice
The Federal Government has developed and promoted best practice guidelines for website providers (http://www.ecommerce.treasury.gov.au ). These guidelines do not have the force of law.
Other relevant Fact Sheets:
Sources of Law
End Notes