Four Essential Elements of a Contract
An agreement must contain four essential ingredients to be
regarded as a contract. If any one of them is missing, the agreement will not be
legally binding.
Offer
There must be a definite, clearly stated offer to do something. Examples of offers
can be a quotation by sub-contractor to the main contractor and an offer to lease.
An offer is different from an invitation to treat. An invitation to treat is not an offer
but an invitation to other persons to make an offer, or an offer to consider offers. An
agreement is not created if there is an acceptance of the invitation to treat.
An invitation to treat is part of the preliminaries of negotiation, whereas an offer is
legally binding once accepted, subject to compliance with the terms of the offer.
Examples of invitations to treat are advertisements, price lists, circulars and
catalogues.
An offer does not include ball park estimates, requests for proposals, expressions of
interest, or letters of intent.
An offer will lapse when the time for acceptance expires, if the offer is withdrawn
before it is accepted, or after a reasonable time in the circumstances (generally the
greater the value of the contract, the longer the life of the offer).
Acceptance
Only what is offered can be accepted. This means that the offer must be accepted
exactly as offered without conditions. If any new terms are suggested this is
regarded as a counter offer which can be accepted or rejected.
There can be many offers and counter offers before there is an agreement. It is not
important who makes the final offer, it is the acceptance of that offer that brings the
negotiations to an end by establishing the terms and conditions of the contract.
Acceptance can be given verbally, in writing, or inferred by action which clearly
indicates acceptance (performance of the contract). In any case, the acceptance
must conform with the method prescribed by the offerer for it to be effective.
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Intention of legal consequences
A contract requires that the parties intend to enter into a legally binding agreement.
That is, the parties entering into the contract must intend to create legal relations
and must understand that the agreement can be enforced by law.
The intention to create legal relations is presumed, so the contract doesn't have to
expressly state that you understand and intend legal consequences to follow.
If the parties to a contract decide not to be legally bound, this must be clearly
stated in the contract for it not to be legally enforceable.
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Consideration
In order for a contract to be binding it must be supported by valuable consideration.
That is to say, one party promises to do something in return for a promise from the
other party to provide a benefit of value (the consideration)
Consideration is what each party gives to the other as the agreed price for the
other's promises. Usually the consideration is the payment of money but it need not
be; it can be anything of value including the promise not to do something, or to
refrain from exercising some right.
The payment doesn't need to be a fair payment. The courts will not intervene where
one party has made a hard bargain unless fraud, duress or unconscionable conduct
is involved.
Offer and acceptance
A contract is formed when an offer by one party is accepted by the other party.
An offer must be distinguished from mere willingness to deal or negotiate. For example, X offers
to make and sell to Y calendars featuring Australian paintings. Before any agreement is reached
on size, quality, style or price, Y decides not to continue. At this stage, there is no legally binding
contract between X and Y because there is no definite offer for Y to accept until the essential
terms of the bargain have been decided.
An offer need not be made to a specific person. It may be made to a person, a class of people, or
to the whole world.
An offer is a definite promise to be bound, provided the terms of the offer are accepted. This
means that there must be acceptance of precisely what has been offered. For example, a used car
dealer offers to sell B a Holden panel van for $1,000, without a roadworthy certificate. If B
decides to buy the Holden panel van, but insists on a roadworthy certificate being provided, then
B is not accepting the used car dealer's offer. Rather, B is making a counter offer. It is then up to
the used car dealer to accept or reject the counter offer.
A person can withdraw the offer that has been proposed before that offer is accepted. For
withdrawal to be effective, the person who has proposed the offer must communicate to the other
party that the offer has been withdrawn. To continue the example above, the used car dealer may
say to B that he'll check with his supervisor and maybe a roadworthy certificate can be provided.
If, while waiting for a reply, B decides he does not want to buy the Holden panel van and he tells
the used car dealer of his change of mind, then there is no binding contract.
Acceptance occurs when the party answering the offer agrees to the offer by way of a statement
or an act. Acceptance must be unequivocal and communicated to the offeror: the law will not
deem a person to have accepted an offer merely because they have not expressly rejected it.
Some modifications to the rules of offer and acceptance have been made to protect consumers by
sections 18 and 41 of the Competition and Consumer Act 2010 Schedule 2 Australian Consumer
Law (ACL); for example, invitations or offers to purchase cannot be misleading or deceptive
(see: Chapter 12*2 Consumer Guarantees).
Intention to create legal relations
A contract does not exist simply because there is an agreement between people. The parties to the
agreement must intend to enter into a legally binding agreement. This will rarely be stated
explicitly but will usually be able to be inferred from the circumstances in which the agreement
was made. For example, offering a friend a ride in your car is not usually intended to create a
legally binding relation. You may, however, have agreed with your friend to share the costs of
travelling to work on a regular basis and agree that each Friday your friend will pay you $20 for
the running costs of the car. Here, the law is more likely to recognise that a contract was entered
into.
Commercially based agreements will be seen as including a rebuttable intention to create a
legally binding agreement. However, the law presumes that domestic or social agreements are
not intended to create legal relations. For example, an arrangement between siblings will not be
presumed to be a legally binding contract. A person who wants to enforce a domestic or social
agreement will need to prove that the parties did intend to create a legally binding agreement.
Consideration
Consideration is the price paid for the promise of the other party. The price must be something of
value, although it need not be money. Consideration may be some right, interest or benefit going
to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken
by the other party.
So long as consideration exists, the court will not question its adequacy, provided that it is of
some value. For example, the promise to pay a peppercorn in return for the lease of a house
would be good consideration. Of course, the consideration must not be illegal or impossible to
perform.
There is an exception to the rule: documents under seal (deeds) do not require consideration for
there to be a binding contract. However, since few contracts between people are made in this
way, it is not discussed further in this chapter.
Legal capacity
Not all people are completely free to enter into a valid contract. The contracts of the groups of
people listed below involve problematic consent, and are dealt with separately, as follows:
people who have a mental impairment;
young people (minors);
bankrupts;
corporations (people acting on behalf of a company); and
prisoners.
