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Elements of a Contract
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In any contract dispute, there are a number of questions to be considered and determined to establish the legal position of the parties. As a plaintiff, it is important to consider each potential issue correctly before deciding to commence legal proceedings against a defendant. If you are a defendant, it is particularly important for you to find a reason why you are not liable for the claim that the plaintiff is bringing against you. The issue of contract formation could be one of those reasons.
Contract law is extensive, with many exceptions to each rule. As such, this article may state something that does not apply to you, and it is important to receive legal advice specific to your matter.
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, however, 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:
- Is there is an ‘Offer’?
- Has there been an ‘Acceptance’ of the offer?
- Did the parties ‘Intend to Create Legal Relations’?
- Is there ‘Consideration’?
- Are the terms formulated with sufficient ‘Certainty’?
- Did the parties have ‘Capacity’ to enter into the contract? and
- Does the agreement need to be in ‘Writing’? (only applicable for 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 only applies 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. We discuss each of these elements further below.
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 fave a number of additional hurdles in order to successfully claim damages.
The elements of a contract are further explained below.
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; however, 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 is not an offer; this is mere puffery and does not constitute an offer.
For a valid and enforceable contract to exist the offer must also be accepted.
To accept an offer:
- 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?);
- You must accept the terms of the offer (accepting the offer with even a slight change may be considered a counter-offer); and
- 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 only applies 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.
In order 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).
Consideration should be taken quite literally, because the value of the thing received is rarely in question.
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, as 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.
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. The rule relating to certainty in contracts has been stated as follows:
“In order to constitute a valid contract, the parties must so express themselves that their meaning can be determined with a reasonable degree of certainty. It is plain that unless this can be done it would be impossible to hold that the contracting parties had the same intentions…”
There are two main competing considerations that the court will usually have:
- 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
- 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.
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 persons;
- Intoxicated persons; and
- Bankrupt persons.
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.
There are several types of contracts that need to be in writing, including contracts for:
- Car and other 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;
- 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.
In the case of Oshlack vs Richmond River Council, the court considered whether litigation that is in the public interest should change the rule that costs follow the event. Learn more.
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