The elements of a contract

Contributed by Ian Macdonald and Su Mahalingham and current to 1 September 2005

AGREEMENT BETWEEN THE PARTIES

A person cannot enter into a contract unless that person has either accepted an offer made to him or her or has made an offer to another person who has accepted that offer.

Offer

A contractual offer must communicate the offeror’s intention, upon acceptance, to be contractually bound and what the offeror requires from the offeree in exchange for what is offered. An offer may contain conditions as to the way in which the offer might be accepted or for how long the offer is open and is capable of acceptance.

Sometimes what might appear to be an offer is not; it is merely a statement indicating a preparedness to accept an offer. Expressions of interest are not binding. In such cases the so-called offeror does not intend to be bound but merely expresses a willingness to transact business. Most advertisements are not offers but invitations to treat. Goods displayed on supermarket shelves, for example, are invitations to treat and the offer is made by the customer at the checkout counter for acceptance by the shopkeeper.

Acceptance

The offer must be accepted and usually that acceptance must be communicated to the person who made the offer.

Acceptance may be express or implied from the acceptor’s conduct. Acceptance must be unconditional and so anything less, including a counter-offer, operates as a rejection of the offer, rendering the offer incapable of being accepted. Further, acceptance must occur before the offer lapses or is withdrawn by the offeror.

INTENTION TO CREATE LEGAL RELATIONS

A contract does not exist simply because there is an agreement between people. To be enforceable, it must be shown that the parties had the intention to enter a legally binding commitment. This will seldom be stated explicitly but will usually be inferred from the nature of the transaction and the circumstances in which the agreement is made.

Generally, with respect to agreements that relate to family, social or domestic relationships, the courts will presume that there is no intention to create a legally binding agreement. In commercial situations, however, courts will presume that contractual relations were intended. These presumptions can be challenged.

Each agreement will be different, and whether an intention to create legal relations exists or not is a matter that can only be determined by looking at the facts of each situation. The courts determine the question of intention objectively, such that the parties’ conduct rather than their actual ntention is considered.

CONSIDERATION

A contract is a bargain as distinct from a gift. This means that each party must give something of value to the other. Consideration in contract law refers to the benefit obtained or detriment suffered under a contract. It is the price that a contracting party pays for the contract.

The simplest example of consideration is the exchange of money for goods or services. The law also recognises that the exchange of promises to do or refrain from doing some act may be sufficient consideration for contractual purposes. Accordingly, the fact that no money has changed hands or no services have been provided is not necessarily a basis for denying the existence of a contract.

There is no requirement that the value (or consideration) be even. The court will not involve itself with enquiries as to the relative benefits. That is, the courts will normally let parties be bound by their contracted dealings even if the thing contracted for is exchanged for something of less than comparable value. Accordingly, a contract will still be formed evenif a party to a contract has not received “value for money”.

So long as there is mutuality of advantage sought and gained, that is sufficient.

LEGAL CAPACITY

Some people’s capacity to enter into legally binding contracts is limited by law.

People under 18

People under 18 are minors. Minors do not have the same full contracting power that adults do. They can still make contracts but there are special rules. In general, for a contract to be binding, the minor will have to affirm the contract after turning 18. This means that the minor agrees to be bound by the contract.

A minor can make a binding contract for goods or services “necessary” to their usual way of life. These “necessaries” will include items such as food, clothing or education and are not limited to items essential for survival.

Mentally incapacitated people

Normally, a mentally incapacitated person can still make a binding contract. However, they can apply to the court to undo the contract on the basis that when it was made they were suffering from some mental incapacity. The court may undo the contract, if it thinks that the person really was unable to understand the nature of the contract when they made it and also that the other person knew this or should have realised it. If there was no other way the other person should or could have known about the incapacity, the contract is unlikely to be undone.

Even if the person has an incapacity, if they were not affected by it at the time of making the contract they will be bound, regardless of whether the other party knew about the incapacity. Furthermore, if the contact was made at a time when the person was affected by the incapacity, if they have had the benefit of the goods or services, they can still be required to pay a reasonable price for them, if they were “necessaries”, that is, things reasonably necessary or appropriate to their way of life at the time.

CONSENT

In some situations the common law will not allow a contract to be upheld because there was a lack of free will and proper understanding of what each of the parties is doing. A legally binding contract requires genuine consent.

Mistake

Generally a person must fulfil their obligations under a contract even if they made a mistake. For a mistake to make a contract non-binding it must go to the very basis of the agreement.

Misrepresentations

The common law doctrine of misrepresentation applies to statements that induce a person to enter into a contract. The common law doctrine of misrepresentation has been largely replaced as far as consumer contracts are affected by the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (WA).

Duress

Duress applies in the extreme situation where someone signs a contract against their will in response to actual or threatened violence or imprisonment. Duress includes threats or violence directed at family members, near relatives or close associates.

Undue Influence

Undue influence is exercised by taking unfair advantage of the weakness of the other party to the extent that it cannot be said that the party intended voluntarily to enter into the contract. It is applied when the parties are in a relationship where one party may be able to exercise considerable influence over the other party.

Unconscionable Conduct

According to the Commercial Bank of Australia v Amadio [1983] HCA 14; (1983) 151 CLR 447, unconscionable conduct occurs where one party is at a “special disadvantage”, the stronger party knew about it or ought to have known about it and the stronger party’s attempt to enforce the contract “is not consistent with good conscience” given the circumstances. The disadvantage must be special, not just the disadvantage of unequal bargaining power. It must seriously affect the person’s ability to look after their own interests.

The doctrine has been extended in the case of consumer contracts by legislation prohibiting unconscionable conduct.

LEGALITY OF THE AGREEMENT

If a contract is to do something illegal then the contract will not be legally binding or enforceable. Contracts can be illegal because their purpose is illegal or socially undesirable and against public morals (such as a contract to pay a bribe to a public official).