Elements of a contract

What is a contract?

A contract is a legally binding agreement or promise. Most contracts are bilateral, which means that they usually involve two parties making executory promises. However, contracts can also be made between more than two parties. Generally, only the parties to a contract are legally bound by and entitled to enforce the contract, but there are exceptions under the Property Law Act 1974 (Qld) that entitle certain third parties to sue if the contract benefits them.

Elements of a contract

There are several elements required to be considered when determining whether a contract both exists and is enforceable. You should consider:

1. Is there an “offer”?
2. Has there been an “acceptance” of the offer?
3. Did the parties “intend to create legal relations”?
4. Is there “consideration”?
5. Are the terms formulated with sufficient “certainty”?
6. Did the parties have “capacity” to enter into the contract? and
7. Does the agreement need to be in “writing”? (applicable for only some contracts)

If any of these elements do not exist, you will usually not have a contract (or at least, not an enforceable contract), with the notable exception of contracts in writing, which applies only to certain types of contracts. Note that an offer and acceptance together is known as an “agreement” but just because the parties have formed an agreement, it does not necessarily mean that the parties have created a valid and enforceable contract.

Note that agreements that fail an element in contract law may be enforceable another way, but it may become harder for a person to claim damages.

For example, in equity (which is the body of law that specifically addresses general principles of justice and fairness), a person may still be able to sue if the promise was significant enough to cause the promisee to act on it to their detriment. However, if no contract exists, a plaintiff would have to have a number of additional hurdles in order to successfully claim damages.

Offer

In any valid and enforceable contract, one party needs to make an offer to another party. An example of an offer would be a person stating, “I will buy this book for $2” at a garage sale. This is a very simple example; some offers can consist of terms spanning from weeks or even months of negotiations and may consist of both verbal and written terms.

There are certain statements that are not considered offers. Most advertisements will not usually be considered offers. This includes advertisement in catalogues or classifieds, advertisements for properties for sale or rent, and even a statement in a supermarket that avocado is for sale for $1. Instead, these advertisements are called “invitations” or “invitations to treat”.

This is necessary, particularly in circumstances where a person may not want to sell something to another person, despite having advertised an item for sale. For example, if a puppy was for sale for $600 and someone wanted to buy the puppy for $600, the seller still has the right to refuse to sell the puppy to that person (for instance, if they think the person would be an unsuitable owner).

In that scenario:

• The puppy for sale at $600 = the invitation to treat;
• The person (buyer) stating they want to pay $600 for the puppy = the offer;
• The person (seller) refusing the offer of $600 for the puppy = no enforceable contract exists.

There are other statements which are called “puffery” (exaggerated commendations), such as, “We have the best pasta in Australia – if you buy it you will never want to eat at any other restaurant ever again!”.  This does not constitute an offer.

Acceptance

For a valid and enforceable contract to exist the offer must also be accepted.

To accept an offer:

1. You must know that you are responding to the terms of the offer (make sure you don’t accidentally accept the wrong offer – did you see all the terms before you accepted?);
2. You must accept the terms of the offer (accepting the offer with even a slight change may be considered a counter-offer); and
3. The acceptance must be communicated to the person who made the offer (you have to tell the other person that you accept their offer).

Contracts can sometimes have terms that dictate how a contract can be accepted. For example, a contract may say that you can accept the agreement in writing, verbally or by doing a certain thing.

Intention to create legal relations

There must be a common intention of the parties that there will be legal consequences that could flow from the agreement for it to be considered a contract.

This is not, however, about what you thought, but rather, what the circumstances suggest. Are you in a contract with your 10-year old son for him to do his homework (children can enter certain binding contracts), or are you in a contract with a large company for the acquisition of a computer server? The former is more likely to fail in relation to the parties having an intention to create legal relations.

Intention to create legal relations applies only to a small number of contracts, but it can get complicated when it does apply. Intention to create legal relations will most likely be in dispute when there is an agreement involving:

• the government;
• certain voluntary or not-for-profit associations (hobby groups, churches, political parties etc.);
• certain agreements (letters of intent, understandings, and subject to contract clauses);
• family members (husband and wife, children/siblings)
• individuals in a relationship;
• separated or divorced individuals;
• friends; and
• commercial agreements that have a strong friend or family connection.

Consideration

For a valid and enforceable contract to exist, the agreement must consist of consideration or “quid pro quo” (something for something).  If Fred offers Jane $5 and Jane accepts, that is not a valid contract unless Fred is getting something for the $5 (this might be a gift but not a contract).

Although consideration is usually at or around market value, there is also a concept known as “nominal consideration” or consideration far below the real value or cost. This is often seen in contracts where something valuable will be exchanged for $1.  If Fred offers Jane $5 for a single piece of paper, then that would almost always create a contract despite a single piece of paper usually being worth about 1 cent. Equity (fairness principles) might assist Fred in some circumstances.

Consideration is particularly in issue when there are multiple contracts, because subsequent contracts may provide a benefit for only one party. This often occurs when one party tries to bind the other party to terms that were not in the original contract with no additional benefit.

Certainty

A contract will only be enforceable if the agreement has enough “certainty” and terms have been agreed to enable the parties to carry out the contract.

There are two main competing considerations that the court will usually have:

1. Courts want to enforce contracts whenever possible so there is a way for parties to consensually agree to enter into a legal relationship to which they will be bound; but
2. The courts do not want to enforce contractual terms that are vague.

Certainty is most commonly in dispute in newly formed agreements, or where the parties are disputing about what their rights or responsibilities are.

Capacity

Children enter into contracts all of the time, but the types of contracts, and the enforcement against children is restricted. Take for example, a 10-year-old going into a major supermarket and buying a chocolate for $1. Just like an adult, there is an invitation to treat. The child takes the chocolate bar to the counter, impliedly makes an offer to buy the chocolate bar for $1 and the supermarket accepts. This is because children can enter into contracts for necessary goods and services, employment and apprenticeships. Children can also “ratify” contracts that would usually be voided at law once they become an adult.

Some other categories of persons that may have certain contracts voided include:

• mentally disabled people;
• intoxicated people; and
• bankrupt people.

There are also rare cases where corporations, unincorporated associations and government do not have the capacity to enter into a contract. For example, when a company enters into a contract without authority, but this will not necessarily void the contract, and the circumstances must be considered.

In writing

There are several types of contracts that need to be in writing, including contracts for:

• motor vehicle contracts when sold by a motor dealer;
• contracts appointing your real estate agent;
• the sale and purchase of land (for example, you cannot agree to sell your house verbally);
• lay-by agreements;
• guarantees;
• door-to-door sales and telephone marketing over $100 (or no specified value); and
• most building contracts.

There are numerous other types of contracts dictated by legislation that must be in writing. If the agreement needs to be in writing then often it will not be an enforceable contract, though equity (fairness principles) may apply.

For when you need help

If you are involved in a contract dispute, one of our experienced team of solicitors will be happy to help you. Contact Gibbs Wright Litigation Lawyers today for a confidential initial consultation to explore your options and legal rights.