Elements Necessary for a Contract
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 seldom be stated explicitly but will usually be inferred from the circumstances in which the agreement was made.
Intention is simply not an issue in any consumer contract or in any of the ordinary contracts that people make in their lives such as entering into a lease, buying a ticket for a sports event or for travel, selling or buying goods through the internet or a purchase or sale of a car.
Intention can be an issue when domestic or friendly arrangements are made where it may be arguable that they were not intended to be a legally binding contract.
For example, a house-sharing arrangement amongst friends may raise this issue. It is usually best to agree on whether such an arrangement is intended to be a contract or just a friendly understanding.
Who are the parties?
It is important, firstly, to make the point that the parties to a contract are the only parties that can benefit from it or are bound by it. It is usually straightforward to identify which parties are parties to a contract but this is not always absolutely clear.
The parties must be recognised legal entities
A party to a contract must be:
- An individual; or
- A corporation; or
- A government.
Offer and Acceptance
A contract is formed when the parties are taken to have agreed. It is the moment of agreement that prior negotiations, preliminary exchange of ideas or proposals, bargaining, discussions become a legally binding contract.
This is usually demonstrated 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 (such as the offer of a reward). 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 offers to sell B a Holden panel van for $1,000, ‘as is’. If B decides to buy the Holden panel van, but insists on a roadworthy certificate from the NRMA being provided, then B is not accepting A’s offer. Rather, B is making a counter offer. It is then up to A to accept or reject the counter offer.
A person can withdraw an offer which has been proposed prior to that offer being 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, A may arrange to let B know by lunchtime whether A agrees to B’s counter offer. If, while waiting for a reply, B decides not to buy the Holden panel van and tells A of this change of mind, then there can be no binding contract because B’s (counter) offer has been withdrawn.
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 he or she has not expressly rejected it.
The most obvious way of committing to a contract is by signing.
The law reflects the popular understanding about the significance of signature.
If someone signs a contract without reading it, then that person is bound and it is no argument to say that he or she did not realise that the contract contained some clause that is not to their liking.
Conversely, signature is not necessary for commitment to a contract even though there is a document that has a place to sign.
Acceptance by conduct has been mentioned above and it is quite possible for a person who did not sign a contract (which was supposed to be signed) to be bound by it if he or she has indicated by conduct that the deal is going ahead.
Not all written contracts are supposed to be signed. An example is an airline ticket or a public car park docket.
The terms may be on a ticket or may be displayed on a sign or wall. The law takes a somewhat pragmatic approach to the question whether the customer has accepted the terms.
The customer is taken to have agreed so long as the customer had an opportunity to read the terms and did not object to them. This rule means that the terms must be available for scrutiny before the contract is made.
The rule takes little account of the fact that no one actually reads the terms or would have almost no time to read them if he or she tried to. Some allowance is taken of this if an exclusion clause is in a ticket.
Legislative modifications to rules of offer and acceptance
Some legislative modifications to the rules of offer and acceptance have been made to protect consumers.
For example some legislation allows a consumer who has accepted an offer (and thus made a binding contract) to nevertheless pull out of the contract (called a ‘cooling-off period’).
An example is under the Australian Consumer Law (ACL) provisions applying to unsolicited consumer agreements.
As already noted, it is possible for an offer to be accepted by the conduct of the party to whom it was made. Unscrupulous companies used to take advantage of this by sending unsolicited goods by mail and then, if the goods were used or not rejected, this was taken to be acceptance.
This problem is taken care of by Section 41 of the ACL which provides that the goods become the property of the recipient free of any obligation to pay three months after they have been received.
This period can be shortened to 1 month if the recipient sends a notice o the company which sent the goods that complies with Section 41(5). The company is also permitted to take back the goods before the expiry of the period.
Consideration is the ‘price’ paid for the promise or promises of the other party. Fundamentally, consideration requires that the agreement that has been reached constitutes an exchange between the parties.
The price must be something of value, although it need not be money. As just noted, it usually is the counter-promise or promises provided by the other party.
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.
In most contracts consideration is not an issue because there is always an exchange contemplated by the agreement.
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 another way to make a legally binding obligation: documents under seal (called ‘deeds’) do not require consideration for there to be a binding promise. However, deeds are used primarily in business and so are not discussed further in this chapter.