A binding contract can be verbal, in writing or electronic. You can only cancel a contract in certain situations.
You enter a contract every time you buy, hire or lease products or services — or click on an 'I agree' or 'I accept' button online.
Making a contract involves three basic steps:
- You make an offer: ‘I'd like to buy this jersey.'
- The seller accepts the offer: ‘That'll be $59.95.’
- You both exchange something of value, called ‘consideration’. The seller agrees to sell the jersey. The buyer agrees to pay the price of the jersey.
The contract is formed when you tell the seller you accept the offer. You must also both intend to make a legally binding contract.
Types of contracts
Contracts can be in writing, verbal or electronic.
Written contracts
Standard form contracts
A standard form contract is an agreement in which the terms haven't been negotiated, e.g. the agreement is offered on a take it or leave it basis. The terms can be in a separate document, or on the back of things like tickets, quotes, terms of trade or invoices.
Standard form contracts are common, e.g. rental car agreements, gym memberships, TV subscriptions, gas and electricity contracts, finance agreements and retirement home contracts.
Negotiated contracts
Negotiated contracts involve you and the seller negotiating terms before agreeing to the contract, e.g. if you buy a car but make the purchase conditional on mechanical checks. They are less common for consumer products and services than standard form contracts.
Verbal contracts
A verbal contract is binding as soon as you accept an offer from a seller, or as soon as a seller accepts your offer.
Electronic contracts
Electronic contracts are made by email and online forms (e-commerce) and social media, e.g. Facebook (f-commerce). They are all legally binding as long as they are validly made.
Vanessa's story — Cancellation fee as a penalty
Vanessa books a service for her car with the local garage. On the booking form it states that if she cancels on the day of the booking, she’ll be charged a $250 cancellation fee. Unless the garage can justify this cancellation fee as a reasonable estimate of the loss it would suffer for that cancellation, it is not enforceable as a penalty.
Definitions for common terms and phrases
Taking out a loan or buying on credit?
Oriwa's story — Standard form contracts
When Oriwa signs up for a new broadband package with a phone and internet company, she’ll receive a standard set of terms and conditions. Apart from choosing the level of data she’d like to receive; she probably can’t negotiate any of the other terms. This is a standard form contract.
Before you agree to a contract
Before you agree to or sign a contract, take time to understand it. Read all the terms, including the fine print.
To minimise your risk:
- Ask questions and get advice if there is anything you are unsure about or don’t understand.
- Negotiate or shop around if the contract doesn’t suit your needs.
- Ask the seller to explain the contract.
- Make sure verbal promises or claims are attached in writing to the contract.
- Don’t be pressured into signing on the spot.
- Never sign a blank contract or allow details to be filled out later by a salesperson.
- Check any figures or other information added to the contract are correct.
- Get a copy of any contract you sign.
- Check for penalty fees that may be charged if you cancel or want to change the terms of the contract.
Paying a deposit
Paying a deposit gives security that the contract will go ahead. After the contract is completed, you will pay the balance — the rest of the total cost.
You can discuss and agree with the seller:
- if a deposit is to be paid
- how much the deposit will be
- in what circumstances the deposit will be refunded.
If the seller requires a deposit:
- Ask if the deposit will be refundable and make this a term of the contract.
- Only pay a deposit of 10% or less, unless you order purpose-built products, e.g. kitchen joinery, when a larger deposit may be reasonable.
- Get a receipt showing the amount paid, the balance owing, and if the deposit is refundable.
Generally, a deposit is not refundable. There are three exceptions:
- The supplier fails to meet their side of the contract, e.g. they can’t supply the products you ordered.
- Both parties agree that the deposit is refundable in full or in part.
- You cancel products bought on layby.
Kiri's story — Serious breach and cancellation for consumer services
Kiri asks a roofer to replace her roof and supply the materials. The new roof leaks badly after a week of heavy rain and Kiri is told the work will have to be completely redone. Kiri cancels the contract as this is a serious breach of contract and does not pay the roofer for his services. She will still have to pay the roofer for the materials supplied as they are not faulty.
Things to watch out for
Unfair contract terms
Sometimes standard form contracts contain unfair contract terms (UCT). Unfair contract terms are terms that are unbalanced, that aren’t necessary to protect legitimate business interests, and will cause detriment if they’re relied upon. Possible unfair terms include those that:
- allow only the seller to avoid or limit meeting their side of the contract
- limit your ability to enforce your legal rights, e.g. claim for breach of contract
- allow the supplier to vary the products or services provided under the contract without your agreement.
If you think a term in a standard form contract is unfair, you can apply to the Commerce Commission under the Fair Trading Act to have it reviewed.
This law doesn't apply to contracts made before 17 March 2015. Before that date there is no specific law that covered standard form contracts.
Penalty clauses
Any term of a standard form contract that says you must pay an excessive amount for a breach of contract (an amount that is much more than the loss that the supplier would suffer) is a penalty. Penalty clauses are not enforceable under contract law and are also unfair contract terms under the FTA.
Fetu's story — Breach of contract
Fetu contracts with a builder to build a garage on his property and they agree the work is to start in two weeks. The builder contacts Fetu two days before the start date to say they must complete several other contracts first and there will be a two-week delay. Fetu may be able to cancel the contract if this deadline is important to him as a serious breach under the Consumer Guarantees Act.
Your rights
You have various rights if there is a problem with any products or services:
- Statutory rights under consumer laws such as the Consumer Guarantees Act, the Fair Trading Act, and the Credit Contracts and Consumer Finance Act.
- Contractual rights under your contract with the seller.
- Common law rules of contract made by the courts.
When a contract is legally binding
A contract is legally enforceable if you both intended to make the contract and agree about what is in the contract.
You must be legally capable, also called capacity. People not legally capable of making contracts are:
- minors — people under 18, unless they’re married, or unless the other party to the contract can show the contract is fair and reasonable
- people of unsound mind, including drunk people
- people for whom the Family Court has made a property order or personal order that provides that someone else is managing their property.
The contract is not legally binding if there was:
- duress — when serious threats or pressure are used to force someone to accept a contract
- unconscionable conduct — when someone knowingly takes advantage of special circumstances, e.g. sickness, age, physical or mental incapacity, illiteracy, intoxication
- undue influence — when someone gets an unfair or improper advantage by abusing their power over a vulnerable person. For example, that person is young and impressionable, elderly, has some form of physical or mental incapacity, or is in a close relationship of confidence and trust.
Most consumer contracts do not have to be in writing to be legally binding. However, some consumer contracts must be in writing:
- consumer credit contracts
- door-to-door and layby sales contracts
- extended warranty contracts.
Electronic contracts are legally binding contracts.
Bo's story — Duress and undue influence
Bo needs to get some money to buy a car to get to work as his last one died. Bo goes to a loan shark, who says he needs a guarantor. On his advice, Bo pressures his grandmother and threatens to cut her off from her grandchildren unless she acts as a loan guarantor. The grandmother reluctantly signs the guarantee as she doesn’t want to miss out on seeing her grandchildren. Later, when the loan shark tries to enforce the guarantee against the grandmother, she may be able to claim undue influence and duress to cancel the guarantee.
If things go wrong
You have different options if you have a problem with a contract, depending on the terms of the contract, your situation and the different laws that apply.
We have industry-specific information on contracts, e.g. for Phone and broadband, home renovations and repairs, Borrowing money in our Help by product and service section.
If the problem is with the products or services supplied in the contract, contact the retailer, manufacturer, or service provider.
Greg's story — Added extras
While a company is at Greg’s home installing a security system, they also sell his elderly mother a personal alarm. The sale of the personal alarm is an uninvited direct sale, so Greg can cancel within five working days and receive a full refund.
Cancelling a contract
Once you sign a contract, the conditions around cancellation including any fees and charges will depend on the terms and conditions of the contract.
To cancel a contract, take the following steps:
- Make sure you send the cancellation notice within the time allowed.
- Always cancel in writing.
- Send your cancellation notice.
- Keep a copy of your cancellation notice as reference.
Find out more about cancelling because of: