Contracts in Australia
In simple terms, contracts in Australia are agreements between two or more parties based on the acceptance of an offer. However, for a contract to be legally enforceable, a number of elements must be satisfied. This article deals with the elements of a contract in Australia.
Elements of a contract
For a contract to have been validly formed, the following must have occurred:
- There must have been a clear offer from one party (‘offeror’).
- The other party (‘offeree’) must have accepted the offer.
- Consideration must have been paid between the offeror and the offeree.
- There must be evidence of a mutual intention from all parties for the agreement to be legally enforceable.
- The terms constituting the agreement must be certain.
- Each party must have had sufficient capacity to enter the contractual agreement.
In addition to these basic requirements, certain types of contract, such as those involving any dealing with land, or contracts for employment, must meet other more specific requirements.
Example 1: In order for a contract for the sale of land to be enforceable, it must be in writing. (See, for example, the Property Law Act 1974 in Queensland).
Example 2: Contracts for employment must comply with the minimum standards contained in the National Employment Standards in accordance with s 61 of the Fair Work Act 2009 (Cth).
What is an offer?
An offer 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). It is something more than merely a declaration that the person is willing to negotiate or discuss terms, known as an ‘invitation to treat’. There must be actual terms which another may accept.
For contracts in Australia, whether a statement amounts to an offer or an invitation to treat is determined by the likely effect it will have upon the offeree.
It is possible for an offer to be made to ‘the world at large’. However, if an offer is directed to a specific person, only that person can accept the terms of the offer.
Example 3: An advertisement displaying the price of a toy does not amount to an offer as it merely represents the price the seller is willing to accept if an agreement were to be reached. It indicates a willingness to deal with someone wishes to purchase the toy. The offer only arises when a customer offers to pay a specific amount for it.
Example 4: A notice at the entrance of a carpark which exhibits the price per hour for parking accompanied by a term stating that, upon entry, the person driving a vehicle is deemed to have accepted the terms exhibited on the notice, will constitute an offer. It is not simply an invitation to deal with or enter into negotiations with the owner of the carpark, but sets out the terms of the contract and the means by which it can be accepted.
What is acceptance?
Acceptance occurs where a person agrees to the terms of the offer. This can be done by way of words or conduct, though if a particular means of acceptance is prescribed in the offer, it must comply with the stated means.
Example 5: Where an offer states that it must be accepted in writing by a certain date, these conditions must be met for the agreement to be valid. Even if the offeree called the offeror to accept prior to the date specified, the offer will not have been validly accepted as it was not made in writing.
In contracts in Australia where it is argued that acceptance was demonstrated by conduct, mere silence will be insufficient.
If no particular means by which to accept is set out in the offer, whether the offer has been validly accepted depends upon the circumstances and intention exhibited by the parties. Generally, though, in such cases, the offeree may accept through any means, such as letter, telephone, email, or text message.
As long as it has been sufficiently communicated to the offeror by the offeree, it will be a valid communication.
Specific rules of acceptance
Whether an offer has been accepted can get a little tricky depending on the terms expressed in the offer. There are specific rules that apply for different forms of acceptance.
Emails (instantaneous communication)
Generally, where acceptance is communicated by email, the offeror is said to have received the acceptance as soon as it has been received by his or her email server. It is irrelevant whether he or she has read or seen the email.
Facsimiles (instantaneous communication)
The same applies for facsimile messages – as long as it has been received by the fax server, acceptance is deemed to have been communicated.
Telephone (instantaneous communication)
Telephone conversations are more straight-forward. As soon as acceptance has been communicated by the offeree to the offeror, it will be accepted.
The Postal Acceptance Rule
Acceptance by post operates a little differently, as the communication is not instantaneous.
If the offer allowed for acceptance by post, or where letter through the post has been the main means of communication used in the formation of the contract, then acceptance is deemed to have occurred on the date the letter is sent.
Example 6: A sends a letter to B offering to sell B a bed for a certain price and with certain conditions. B sends a letter back to A communicating acceptance, but after it was sent by B and before it was received by A, A sells the bed to C. A may be considered to have breached the terms of the contract (assuming all other elements were satisfied) as agreement would have been reached at the time B posted the letter.
- the offer sets a particular date by which acceptance by letter must be received, or
- the offer is not made by letter through the post and it does not prescribe the manner of communication for acceptance,
acceptance by post will be considered to have been communicated as soon as it is received by the offeror.
What is consideration?
Put simply, consideration in relation to contracts in Australia is the price paid in exchange for a promise. Payment must be for something of value, though it need not be comparable to the value of the promise. It can be of monetary value, such as money, property, or interests in property, though even a nominal amount may be sufficient. It can also include non-monetary value, such as some form of detriment, such as a promise to act or refrain from doing something (a promise for a promise).
In bilateral contracts, consideration must flow from each party.
Example 7: A contracts with B to sell his car for $5,000. Here, the consideration provided by A is the car, or even the promise of the car, and the consideration provided by B is $5,000, or a part-payment of some kind.
Unilateral contracts are a little more rare, and occur where one person undertakes to act if another party acts or refrains from acting. In this situation the acceptance and consideration provided occur simultaneously.
Example 8: A makes an offer to the world at large through an advertisement stating that if anyone uses A’s flu-prevention product as directed but contracts the flu anyway, A will pay the person $100. Here, the consideration provided by A is the benefit of people purchasing their product, and the consideration provided by the purchaser is the inconvenience of buying and using the product (also constituting acceptance of A’s offer).
What is intention to create legal relations?
For contracts in Australia to be legally enforceable, the parties must have intended for the agreement to create a legal relationship between them. To determine whether this was the case, the courts will consider factors such as:
- 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 of the creation of the agreement.
Historically, there was a presumption that parties will not have intended to create legal relations if the agreement was made between close family members. The courts have since moved away from this presumption and now place the onus of proving such an intention on the party seeking to enforce the agreement.
What does certainty mean?
The terms and conditions of a contract must be sufficiently certain so that all parties are clear on their rights and obligations.
Example 9: A contract will be unenforceable if one of the terms states that a party will pay ‘a sum of money’ in exchange for whatever is promised. To meet the certainty requirement, an exact dollar amount must be specified.
What is capacity?
In order to enter into a binding agreement, the person contracting must have the capacity to do so. In other words, the person must be:
- Over the age of 18. Generally speaking, contracts involving a minor will be voidable. This means that they will remain valid only as long as the minor agrees. Exceptions exist where the contract is for necessities, or where it is related to employment (as long as it is not unfair). In most cases, an agreement involving a minor (including an employment contract) will only be enforceable once they turn 18 if they affirm their agreement.
- Of sound mind. If a party to a contract lacked mental capacity, or was incapable of understanding the nature of the transaction, and the other party knew, or was aware, that this was the case, the agreement will be unenforceable.
Example 10: If A was illiterate and unable to read and understand the terms of a contract they were signing, and B knew of this, the contract would not be valid.
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