When the words in a contract have more than one meaning they are cut from the contract?

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.

​A binding contract can be verbal, in writing or electronic. You can only cancel a contract in certain situations.

You enter into 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:

1. You make an offer: ‘I'd like to buy this jersey.'
2. The seller accepts the offer: ‘That'll be $59.95.’
3. 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, eg 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, eg 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, eg 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, eg Facebook (f-commerce). They are all legally binding as long as they are validly made.

Online safety laws and rules

Quotes and estimates are statements about the price of the product of service, with rules for both you and the provider. Read about your rights and responsibilities:

Quotes and estimates

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

See our definitions for common terms and phrases used in contracts and sales agreements:

Definitions for contracts and sales agreements

Taking out a loan or buying on credit?

Credit contracts: Plain English definitions

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.

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, eg 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, eg 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, eg 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.

Fair Trading Act

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.

Take special care when buying from a truck shop or mobile trader — the Commerce Commission has found many include unfair terms in their contracts.

Truck shops

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 have to 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, eg 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, eg for Phone and broadband, Home renovations and repairs, Borrowing money in our Help by product and service section.

Help by product and service

If the problem is with the products or services supplied in the contract, contact the retailer, manufacturer or service provider.

Refund, replacement, repair

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

Generally, once you make a contract or accept a quote, you can’t change or cancel it without the other side agreeing (if you do, it's called breach of contract).

You can only break a contract or agreement if either:

• there is a termination clause with the right to cancel in certain circumstances
• there is a variation clause — but sometimes only the supplier has the right to vary the contract
• it's a contract with a cooling off period during which you can change your mind, eg a layby, or an uninvited direct sale like a door-to-door sale
• one of the circumstances below applies.

Find out more about cancelling because of:

Transferring ownership of a contract

If you have signed a contract for a subscription service for a fixed period of time, eg gym membership, you might be able to transfer the contract to another person, if the terms of the contract allow for transfer. You might have to pay a transfer fee. The person receiving the transfer must agree to meet the contract terms.

If none of these circumstances apply, you might still be able to change or cancel the contract if the other party agrees. You may have to pay a cancellation fee.

Change of mind

Laybys and buy now, pay later

Telemarketing and door-to-door sales

Isaac's story — Contract by minors

Isaac signs up with his local gym. He is 15 years old and working part-time. It's a fixed-term contract for two years. After six months, Isaac wants to cancel his membership as he is no longer working and can’t afford the weekly payments. His right to cancel depends on if the gym can prove that the contract was fair and reasonable, as he is a minor and the contract is otherwise not enforceable.

Joe's story — Incapacity

Joe has a mental disability and lives at home with a caregiver. A door-to-door salesman sells Joe an expensive house alarm while his caregiver is out. Joe is a bit confused about the sale and when his caregiver returns home she is not happy as they don’t need the alarm. Joe has the right to cancel the contract within the first five days of receiving the contract. The contract may also be unenforceable unless Joe fully understood his decision to buy the alarm.

Examples of common problems

Example — Contract by minors

Ali signs up with his local gym. He is 15 years old and working part-time. It's a fixed-term contract for two years. After six months, Ali wants to cancel his membership as he is no longer working and can’t afford the weekly payments. His right to cancel depends on if the gym can prove that the contract was fair and reasonable, as he is a minor and the contract is otherwise not enforceable.

Example — Illegal contracts

A contract to supply a pet shop with tuatara is not enforceable as it is illegal under the Endangered Species Act to trade in endangered species.

Example — Incapacity

Joe has a mental disability and lives at home with a caregiver. A door-to-door salesman sells Joe an expensive house alarm while his caregiver is out. Joe is a bit confused about the sale and when his caregiver returns home she is not happy as they don’t need the alarm. Joe has the right to cancel the contract within the first five days of receiving the contract. The contract may also be unenforceable unless Joe fully understood his decision to buy the alarm.

Example — Duress and undue influence

Bo needs to get some money to buy a car to get to work as her last one died. Bo goes to a loan shark, who says she needs a guarantor. On his advice, Bo pressures her 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.

Example — 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.

Example — Misrepresentation by a business

Before purchasing some hops, Joe, a farmer, asks the seller if a certain ingredient has been used in cultivating the hops. He makes it clear that if it has, he is not interested in buying. The seller assures Joe that the certain ingredient was not used. However, Joe later discovers that the ingredient was used. Joe can cancel the contract as the requirement that the certain ingredient not be included in the grain was a serious misrepresentation under the Contract and Commercial Law Act.

Example — 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 have to 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.

Example — 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.

Example — Cancellation fee as a penalty

Margaret 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.

When the words in a contract have more than one meaning they are interpreted against the party who drafted the contract?

What are the 3 elements of a contract?

What are the 4 elements of a valid contract?

Which are the following is a void agreement?