Contracts in Australia

In simple terms, a contract is an agreement between two or more parties based on offer and acceptance. A contract may be in a written form, or it may be oral. For a contract to be valid, six elements must be present. This article deals with contracts in Australia.

What are the elements of a contract?

For a contract to be valid, all of the following elements must have been fulfilled:

1. There must have been an offer from one party
2. The other party must have accepted the offer
3. Valuable consideration must have been given
4. There must have been a mutual intention from all parties to create a legally enforceable agreement
5. There must be certainty of the terms constituting the agreement
6. Each party must have had the capacity to enter a contractual agreement.

There are also additional, more specific requirements that must be met when parties enter into particular types of contracts – for example, contracts for employment must comply with the minimum standards contained in the National Employment Standards and contracts for the sale of land must be in writing.

Offer

The element of offer in a contract is ‘an expression to another of a willingness to be bound by the stated terms’ (Australian Woollen Mills v The Commonwealth (1954) 92 CLR 424).

The offer must be more than an invitation to treat, which is a declaration that the person is willing to negotiate or discuss terms with the other party. For an offer to exist, there must be actual terms offered by one party which the other party may accept or decline.

Acceptance

Contractual acceptance occurs where a party agrees to the terms of another party’s offer. Acceptance can be given in words or through conduct. However, if a particular means of acceptance is stipulated in the offer, acceptance must be given via the stated means. For example, where an offer states that it must be accepted in writing within a timeframe, this must occur for the agreement to be valid.

If no particular means of acceptance is set out in the offer, whether or not the offer has been validly accepted will be assessed based on the circumstances and the intentions exhibited by the parties. In such cases, an offeree may generally accept through any means, such as by letter, phone, email, or text message. As long as acceptance has been sufficiently communicated to the offeror, it will be valid.

Consideration

Contractual consideration is the price paid by one party in exchange for a promise given by the other party. For a contract to be valid, some form of valuable payment must be made in exchange for something of value, though the value of the consideration need not necessarily be comparable to the value of the promise.

The following are all accepted forms of consideration:

• Land
• An interest in land.
• Objects
• Cash
• Services
• Giving up an existing benefit
• Refraining from a particular activity
• Agreeing to do a particular activity

The following are not accepted forms of consideration:

• Objects or services that are unlawful
• The performance of an existing duty
• An act that has already been performed
• A gift

Example

An example of valuable consideration in a bilateral contract is as follows. A forms a contract with B to sell A’s car for $5,000. The consideration provided by A is the car, or the promise of the car, and the consideration provided by B is $5,000, or a part-payment.

Intention to create legal relations

For a contract to be legally enforceable, the parties must have intended to create a legal relationship. To determine whether this was the case, the courts will consider:

• the consideration provided in the agreement;
• the capacity of the parties to the agreement;
• the relationship of the parties;
• any conduct of the parties after the contract was made; and
• the context in which the agreement was made.

In the past, there was a presumption that where agreements were formed between close family members, there was no intention to create legal relations. These days, courts place the onus of proving an intention to create legal relations on the party that is seeking to enforce the agreement.

Certainty

The terms and conditions of a contract must be certain enough that all parties are clear on their rights and obligations under the agreement. For example, a contract will be unenforceable if one of the terms is that a party will pay ‘a sum of money’ in exchange for whatever is promised. The contractual element of certainty will only be fulfilled in a dollar amount is specified.

Capacity

For a contract to be valid, all parties must have had the capacity to enter into the contract at the time the agreement was made. In general, this means that the person must have been competent to enter into a contract.

Firstly, to be found to have been competent, a party must have been of sound mind and capable of understanding the contract. If a party lacked mental capacity or was incapable of understanding the nature of the agreement at the time it was made and the other party knew or suspected this, the contract will be unenforceable.

For example, if a person who was illiterate entered into a written contract and could not read the agreement they were signing, and the other party knew this, the contract would not be valid.

Secondly, to be found to have been competent, parties must have been over 18.. Exceptions to this rule exist where the contract was for necessities such as food or accommodation, or where it was related to employment (as long as the terms are not unfair). However, in most cases, an agreement involving a minor (including an employment contract) is only enforceable until the young person turns 18.

Thirdly, a person may be found not to have been competent if they were intoxicated by drugs or alcohol. However, in some situations, courts may uphold contracts where a party had voluntarily become intoxicated.

Contracts that are formed when one or more party did not have capacity are voidable.  A party or a court may void or rescind the contract. If a court voids the contract, it will try put the parties back in the position they were in before the contract was purportedly made.

If you require legal advice or representation in any legal matter, please contact Taylor Rose.