Contract Law 101
Contract law governs the agreements we make every day, from simple purchases to complex business deals. It determines which promises the courts will enforce and which ones remain merely social obligations. Here's what you need to know about how contracts work in Australia.
The Five Essential Elements
For any agreement to become a legally binding contract, five elements must be present:
- Offer
- Acceptance
- Consideration
- Intention to create legal relations
- Certainty
Without all five, you have an arrangement that might be morally binding, but won't be enforced by the courts.
Offer: The Starting Point
An offer is a clear indication that someone is willing to be bound by specific terms if the other party agrees. The test is objective - would a reasonable person understand this as a serious proposal capable of immediate acceptance?
What Isn't an Offer
The law distinguishes between actual offers and "invitations to treat" - essentially invitations for others to make offers:
Advertisements are typically invitations to treat. When a shop advertises "laptops $500", they're inviting customers to offer to buy at that price. This protects retailers from being contractually bound to supply unlimited quantities.
Displays in shops follow the same principle. The price tag isn't an offer - you make the offer when you take goods to the counter, which the shopkeeper can theoretically refuse.
Auctions involve the auctioneer inviting bids (offers) from the audience. Each bid is an offer that the auctioneer can accept by bringing down the hammer.
The Exception: Unilateral Contracts
Sometimes advertisements can be offers, particularly for unilateral contracts where acceptance occurs through performing an act. The classic case is Carlill v Carbolic Smoke Ball Co (1893), where a company promised £100 to anyone who caught influenza after using their product as directed. The court found this was a genuine offer to the world at large, partly because the company had deposited money in the bank to show good faith.
How Offers End
Offers don't remain open indefinitely. They terminate through:
- Acceptance (forming a contract)
- Rejection or counter-offer
- Revocation by the offeror (before acceptance)
- Lapse of time
- Death of the offeror (if known to the offeree)
- Failure of a condition
Acceptance: Agreement Reached
Acceptance must exactly match the offer - what lawyers call the "mirror image rule". Any variation creates a counter-offer instead, which the original offeror can accept or reject.
Key Requirements
Knowledge
You can't accept an offer you don't know exists. In R v Clarke, a man provided information that qualified for a reward, but he'd forgotten about the reward when he acted. The court held there was no contract because he wasn't responding to the offer.
Communication
Generally, acceptance must be communicated to the offeror. Silence doesn't constitute acceptance - someone can't impose a contract on you by saying "if I don't hear from you, I'll assume you agree."
Modern Communication Methods
The "postal rule" is an historical quirk where acceptance by post occurs when the letter is posted, not when received. This only applies to postal mail.
For electronic communications (email, text, fax), acceptance occurs when the message is received by the offeror's information system, following the Electronic Transactions Act.
Consideration: The Price of a Promise
Consideration is what each party gives in exchange for what they receive. It transforms a bare promise into a binding contract. The law requires consideration to be "sufficient" (of some value in the eyes of the law) but not "adequate" (a fair price).
Valid Consideration Includes:
- Money, goods, or services
- Promises to do something
- Accepting a lesser sum with additional terms
What Doesn't Count as Consideration:
Past consideration
Something already done can't be consideration for a new promise. If someone says "thanks for helping me move last week, I'll pay you $100", that promise isn't enforceable because the act was already complete.
Existing duties
Promising to do something you're already legally obligated to do isn't good consideration. This prevents people from exploiting their position by threatening not to perform unless paid extra.
Illusory promises
A promise that leaves complete discretion to the promisor ("I'll pay if I feel like it") isn't real consideration.
The Modern Approach
Courts have recently recognised "practical benefits" as consideration in some cases. In Williams v Roffey Bros, contractors promised extra payment to ensure a subcontractor finished on time. Although the subcontractor was already obligated to complete the work, the court found consideration in the practical benefit of avoiding penalty clauses.
Intention: Taking It Seriously
Courts must determine whether the parties intended to create legal relations. This is assessed objectively - what would a reasonable person conclude from the circumstances?
The Traditional Presumptions
Commercial agreements are presumed to be legally binding. Business dealings carry an assumption that parties intend legal consequences.
Social and domestic agreements are presumed not to be legally binding. Arrangements between friends and family are usually considered outside the realm of legal enforcement.
These are only starting presumptions. The court examines all circumstances, as shown in Ermogenous v Greek Orthodox Community, where the High Court emphasised looking at:
- The terms used
- The parties' relationship
- The subject matter
- The surrounding circumstances
Certainty: Clear Enough to Enforce
A contract must be complete and certain enough for a court to understand and enforce the parties' obligations.
Common Problems
Missing essential terms
If price, quantity, or other crucial terms are absent and can't be determined, there's no contract.
Agreements to agree
Leaving terms "to be agreed" generally fails. Courts won't force parties to negotiate.
Vague terms
Terms like "reasonable price" might work if there's an objective way to determine what's reasonable in the industry.
Saving Uncertain Agreements
Courts may:
- Sever uncertain parts if the remainder can stand alone
- Imply terms from statutory provisions or trade customs
- Consider past dealings between the parties
- Look at performance to clarify intentions
Practical Implications
Understanding contract formation helps in daily life and business:
- Know when you're bound and when you're not
- Recognise why written contracts provide clarity
- Understand why precision in commercial dealings matters
- Avoid inadvertently creating obligations
Contract law developed to facilitate commerce by making promises enforceable. It provides the framework that allows strangers to deal with confidence, knowing their agreements have legal backing. While the rules might seem technical, they serve the practical purpose of creating predictability in commercial life.
Whether you're buying coffee or negotiating a major deal, these same principles apply. The difference lies only in complexity and documentation, not in the fundamental requirements that transform an agreement into a legally binding contract.