What is a contract and why it matters in your case


Excerpt from LawHandbook.org     Full article details

1. 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to be effective, the person who has proposed the offer must communicate to the other party that the offer has been withdrawn.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 offer or: 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 (Cth) schedule 2 Australian Consumer Law (“ACL”); for example, invitations or offers to purchase cannot be misleading or deceptive (see Chapter 12.2: Consumer Guarantees).

2. 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 traveling 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 recognize 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.

3. 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.

4. 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. Food for thought
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