Managers, engineers and project staff make contracts every day, often without thinking of them as contracts. A quote accepted by email, a purchase order issued against a supplier’s proposal, an instruction on site to “go ahead with the extra work”, a supplier’s terms printed on the back of a delivery docket, a promise not to enforce a deadline. Each of these may create, change or fail to change legal obligations, and the difference often only matters when something goes wrong.
Most contract disputes in business are not about obscure legal points. They come from basic questions: Was there a contract at all? What exactly were its terms? Was a variation agreed, and at what price? Did the person who said yes have authority? Whose terms applied? Can a party rely on its exclusion clause? People who understand the basics make fewer mistakes, recognise when to get advice and keep better records.
This article explains, in general terms, how contracts are formed under Australian law, what makes promises binding, how terms are identified and classified, who can enforce a contract, how parties change through novation and assignment, and how exclusion and limitation clauses work. It is general information for business people, not legal advice. Contract law is complex, and specific situations, especially disputes, need advice from a qualified lawyer.
What a contract needs
Under Australian law, which in this area is largely based on the common law, a binding contract generally requires:
- Agreement: an offer by one party and acceptance of that offer by the other.
- Consideration: each party gives something of value in exchange for the other’s promise.
- Intention to create legal relations: the parties intend the agreement to be legally binding.
- Certainty: the essential terms are clear enough to be enforced.
- Capacity: the parties are legally able to contract.
Most business contracts do not need to be in writing or signed to be binding, although some kinds, such as certain land transactions and guarantees, have formal requirements. Contracts can be formed by email and other electronic communications. A clear written contract is still far easier to prove and interpret than an oral one.
Offer and acceptance
An offer is a clear statement of willingness to be bound on specific terms if the other party accepts. A quote may be an offer, or it may be only an invitation to treat, an invitation for the other party to make an offer, depending on its wording and context. Advertisements and price lists are usually invitations to treat.
Acceptance must match the offer. A response that changes the terms is not acceptance but a counter-offer, which rejects the original offer. This matters in the familiar exchange of standard forms: a supplier quotes on its terms, the buyer issues a purchase order on its own terms, the supplier delivers. Whose terms govern depends on the sequence and conduct, and the answer is often uncertain. The safest course is to agree expressly which terms apply before work starts.
Acceptance can be by conduct, such as starting work or accepting delivery, where that shows agreement to the offer.
Consideration
Consideration is the price paid for a promise: money, goods, services, a promise in return, or giving up a right. It need not be a fair price, but it must have some value in law, and it must be given in exchange for the promise.
Two practical points arise often:
- Past consideration is generally not good consideration. Doing something first and receiving a promise of payment later may not create a binding obligation unless the work was requested on the understanding that it would be paid for.
- Variations need consideration too. A promise to pay more for the same work, or to accept less than what is owed, may not be binding without something in return, although courts have recognised exceptions, for example where the promising party receives a practical benefit. Well-drafted contracts include variation clauses that set out how changes are agreed and priced, which avoids most of these questions.
Promissory estoppel
Sometimes a promise that lacks consideration can still have legal effect. Under the doctrine of promissory estoppel, where one party makes a clear promise, the other relies on it to their detriment, and it would be unconscionable for the promisor to go back on it, a court may prevent the promisor from doing so. The High Court of Australia’s decision in Waltons Stores (Interstate) Ltd v Maher is the leading example. The practical lesson for business is that assurances made in negotiations, such as “don’t worry, the contract will be signed”, can have consequences.
Intention to create legal relations
In commercial dealings, the law generally presumes the parties intend to be legally bound. Statements such as “subject to contract” or “subject to formal agreement” can show that the parties do not yet intend to be bound until a formal document is signed, although the effect depends on the words and the conduct. Letters of intent and heads of agreement are a frequent source of disputes: be clear whether they are binding, and in which respects.
The contents of a contract
The obligations in a contract come from several sources:
- Express terms: those stated in the written contract, documents incorporated by reference, emails and oral agreements.
- Terms implied in fact: terms a court finds the parties must have intended, because they are necessary for the contract to work and obvious.
- Terms implied by law: terms that apply to certain kinds of contracts, such as employment contracts.
- Terms implied by statute: such as the consumer guarantees under the Australian Consumer Law.
- Terms implied by custom or course of dealing: established practice in a trade or between the parties.
Where a contract is fully written, the parol evidence rule generally prevents evidence of earlier negotiations being used to add to or contradict the written terms, with exceptions. Entire agreement clauses reinforce this. Promises made in negotiations that matter should therefore be written into the contract.
Conditions, warranties and other terms
Terms differ in importance. A condition is a term so essential that breach allows the other party to terminate the contract and claim damages. A warranty, in this legal sense, is a less important term whose breach allows damages but not termination. Many terms are intermediate or innominate: the remedy depends on how serious the breach and its consequences are. Contracts often state expressly which terms are essential and what rights each breach gives. The when a contract is broken article covers responding to breaches.
Who can enforce a contract
Under the doctrine of privity, generally only the parties to a contract can enforce it or be bound by it. A head contractor’s client usually cannot sue a subcontractor directly under the subcontract, and a subcontractor usually cannot claim payment from the client. There are exceptions, including under some statutes and for certain insurance contracts, and parties may have rights in negligence or under collateral contracts.
A collateral contract is a separate contract, alongside the main one, usually formed where one party makes a promise to induce the other to enter the main contract. Warranties given directly by manufacturers to end customers are a common example.
Privity explains why projects use collateral warranties and deeds of direct agreement, which give clients or financiers direct rights against designers and subcontractors, and why security of payment rights flow through the contractual chain.
Changing the parties: novation and assignment
Assignment transfers the benefit of a contract, such as the right to receive payment, to someone else. The burden, the obligations, cannot be transferred by assignment alone.
Novation replaces one party with another, extinguishing the old contract and creating a new one on the same terms with the new party. It requires the agreement of all three parties: the outgoing party, the incoming party and the party who stays. Novation is common in design and construct projects, where a client’s designer is novated to the contractor, and when businesses are sold or restructured. Check carefully what liabilities transfer and from when.
Exclusion and limitation clauses
Exclusion clauses remove or limit liability that would otherwise exist. They include caps on total liability, exclusions of consequential or indirect loss, time limits for claims, and allocations of particular risks. They are among the most important clauses in commercial contracts, because they decide who carries the loss when things go wrong.
Incorporation
An exclusion clause applies only if it forms part of the contract:
- By signature: a signed document generally binds the signer to its terms, whether or not they were read, unless there is misrepresentation or another vitiating factor.
- By reasonable notice: unsigned terms apply if reasonable notice of them was given before or at the time the contract was made. Terms first presented after the contract was formed, such as on a delivery docket or invoice, usually come too late.
- By course of dealing: consistent previous dealings on the same terms may incorporate them.
Construction
Courts interpret exclusion clauses according to their natural and ordinary meaning, read in the context of the whole contract and its commercial purpose. Ambiguity is generally resolved against the party relying on the clause. Clear drafting is essential: vague exclusions may not cover the loss that occurs.
Statutory limits
The Australian Consumer Law limits exclusions. Consumer guarantees cannot be excluded, although liability can sometimes be limited for goods and services not of a kind ordinarily acquired for personal use. The unfair contract terms regime applies to standard form consumer contracts and standard form small business contracts; unfair terms are void, and using or relying on them can attract significant penalties. Businesses using standard terms with small business customers or suppliers should review them.
Practical habits for business
- Agree terms before work starts, and state which documents form the contract and in what order of priority.
- Put important promises in writing, including those made in negotiations.
- Use clear variation procedures: describe the change, agree price and time, and record approval by someone with authority.
- Know who has authority to make and vary contracts on behalf of the business, and tell the other party.
- Present your terms early, not on invoices or delivery dockets.
- Read the other party’s terms, especially liability caps, exclusions, indemnities and time limits for claims.
- Keep records of offers, acceptances, variations and key communications.
- Get advice on significant, unusual or disputed contracts.
The thinking clearly about a contract problem article offers a structured way to approach contract issues when they arise.
A worked example
This is an illustrative example. A fabrication business is working as a subcontractor on a commercial building. The head contractor’s site manager phones and asks it to fabricate extra steel brackets that were missing from the drawings, saying “go ahead, we’ll sort out the price later”. The fabricator does the work and invoices $38,000. The head contractor refuses to pay, saying the work was never properly approved and the price was never agreed. Meanwhile, the fabricator’s own steel supplier delivers material with a docket stating that it excludes all liability for late delivery, after the order had been placed and accepted.
Issues. The subcontract has a variation clause requiring written directions from the contract administrator, not the site manager. The fabricator did the work at the head contractor’s request, which may support a claim for a reasonable price even without an agreed figure, but the failure to follow the variation procedure and the question of the site manager’s authority weaken its position. The steel supplier’s exclusion on the delivery docket was presented after the contract was formed, so it was probably not incorporated.
Outcome. After legal advice and negotiation, the parties settle the bracket claim at about $31,000. The fabricator changes its practices: no variation work starts without a written direction from an authorised person stating the scope, with price and time either agreed or to be assessed under the contract; its standard terms are sent with every quote and accepted before orders proceed; and staff are trained to recognise when a conversation is changing the contract.
Applying this in an Australian business
- Recognise when you are making or changing a contract.
- Be clear whose terms apply before work starts.
- Record variations properly, with authority, price and time.
- Write negotiated promises into the contract.
- Understand privity and use collateral warranties where direct rights are needed.
- Treat novation as a three-party agreement with clear liability transfer.
- Draft and review exclusion clauses carefully, and present terms early.
- Check standard terms against unfair contract terms laws.
Where contract formation goes wrong
- Work starting before terms are agreed.
- Battles of the forms left unresolved.
- Oral variations with no price or authority.
- “Subject to contract” deals treated inconsistently.
- Exclusions on invoices and delivery dockets, presented too late.
- Novations that leave liability unclear.
- Assuming the client can be pursued under a subcontract.
Questions to ask about any agreement
- Is there a contract yet, and which documents form it?
- What has each party given in exchange for the other’s promises?
- Who has authority to agree changes?
- Whose terms apply, and were they provided in time?
- Who can enforce these obligations, and against whom?
- What do the exclusion and limitation clauses actually cover?
Bringing it together
Contracts are formed by offer and acceptance, supported by consideration and an intention to be bound, with terms certain enough to enforce. Their content includes express terms and terms implied by fact, law, statute and custom, and terms differ in importance. Only parties can generally enforce them, novation needs everyone’s consent, and exclusion clauses work only if incorporated in time and clearly drafted, within statutory limits. Businesses that agree terms before work starts, record variations with authority, price and time, and keep good records avoid most contract disputes and are better placed when advice is needed.
Source: KEVOS editorial notes, drawing on earlier KEVOS procurement and contract management study material on contract formation, consideration and promissory estoppel, intention to create legal relations, the contents of a contract, privity, collateral contracts and novation, and exclusion clauses, together with general knowledge of Australian contract law. The worked example is illustrative. This article is general information, not legal advice.
