Last updated 3 August 2016
For a contract to exist, all of the elements discussed below must be present.
Agreement about the essential features of a contract
An agreement exists when an offer is made by one person and accepted by the other person. An offer must be directed to a particular person. For example, A offers to sell a bike to B who accepts the offer made by A. In contrast, a shop advertising a bicycle for $100 is not making an offer, as it is not directed at a particular person. The shop will not be breaching a contract if they do not sell the bicycle for $100, although they may be breaching the misrepresentation provisions of the Competition and Consumer Act 2010 (Cth) (discussed below).
Consideration is given
Consideration means that each person promises to do something or give some value to create a binding contract. There is consideration where one person pays money and the other person provides goods or services.
If a person promises to give $1000 to another person as a gift, no contract is formed as there is no consideration.
The consideration given by each person does not have to be of equal value. If a person sells something for less than it is worth, there is still a binding contract.
An intention to create a binding agreement
In a commercial or consumer transaction, it is generally easy to establish this intention.
Contracts may not be binding if:
- a mistake was made by either or both parties
- material (critical) misrepresentations were made by either party before entering the contract
- there was undue influence (overbearing someone’s will) or duress (unfair pressure) exerted by one party over the other party
- either party did not have capacity to enter the contract because of their:
- age; only some contracts entered by children are binding (e.g. for necessities and some apprenticeship agreements)
- mental capacity; if one party did not understand the contract and the other party was aware of the lack of understanding. It is often difficult to show that the other party was aware of the lack of understanding
- the contract was unconscionable because one party took advantage of the other party’s disability
- it was for an illegal purpose
- the terms of the contract were not clear.
Specialist legal advice should be sought in these cases.
Legislation affecting enforceability of contracts does not generally apply unless the seller is selling the goods in trade or commerce.
Are written contracts required?
An oral agreement is a binding contract unless the law requires a written contract. Contracts relating to the purchase of land, credit and insurance, contracts of guarantee and door-to-door sales are a few examples of where written contracts are required before the agreements are binding.