People often enter into legally binding contracts more frequently than they may realise. These contracts do not need to be formal or in writing, but may involve a company agreeing to receive payment in exchange for something of value, such as goods or services. The following article sets out the basics of a contract and how one may be created.

What is a Contract?

A contract is a legally binding agreement or set of promises between two or more parties that the law will enforce. There are four main elements in a contract: 

  1. offer;
  2. acceptance;
  3. an intention to create a binding relationship; and 
  4. consideration.

If you have a legally binding contract, you will have rights if the other party to the contract does not keep its promise. Only persons who are parties to a contract may enforce benefits or be subject to obligations and burdens arising under it.

Elements of a Contract

Offer and Acceptance

Before parties enter into a binding legal contract, there must be an agreement. The party making the offer (the offerer) must communicate that offer to the party accepting the offer (the offeree). The offeree then needs to accept the terms of that offer in circumstances where the parties intended to create legal relations. 

Offers are often confused with intentions to negotiate. A proper offer needs clear and precise terms and an intention for it to be an offer.

For the acceptance of that offer to be effective, the offeree must communicate their acceptance. It can be accepted through conduct.

The offeror can revoke an offer any time before acceptance. If the offeree has already paid, the offer cannot be revoked. An offer can also be terminated by:

  • changes of circumstances;
  • lapse of time; or
  • the failure of an essential condition, such as the death of one of the parties.

Intention to Create Binding Relations

The parties to a contract must demonstrate an intention to be bound to the terms of the contract. A court will only enforce a contract if the:

  • terms of the agreement are sufficiently certain; and
  • parties have agreed on all the terms necessary to carry out the contract (completeness).

Consideration

A valid contract requires the presence of ‘consideration’. Consideration simply means ‘value’. Consideration is an act which involves passing value between the parties to the contract.

The most common form of consideration is paying money in exchange for goods or services. 

However, consideration does not always need to be in the form of money. It may be something else of value, such as an object or a service.

Key Considerations For Contracts

Contracts Can Be in Writing or Verbal

A contract does not need to be in writing to be enforceable – it can be a verbal contract. However, there are two main types of contracts that do need to be in writing; 

  • those for the sale or disposition of an interest in land; and 
  • contracts of guarantee.

It can be difficult to prove the existence of verbal contracts and prove what terms the parties agreed to. Without a contract in writing, it is often one party’s word against the other. 

We recommend avoiding verbal agreements and always ensuring terms of the contract are in writing.

Vitiating Factors

Vitiating factors are the elements of a contract that are vital to its formation and existence. These elements make a contract void or voidable. They may include: 

  • a mistake;
  • duress;
  • misrepresentation;
  • undue influence; or
  • illegality.

These occur before the contract is formalised and can provide a remedy to the innocent party.

Misrepresentation

Misrepresentation is a false statement or false information that induces one party to enter into a contract with another. To obtain relief, one party must show that:

  • the other party misled them; and
  • they relied upon that false information when entering into the contract.

If that party suffers a loss as a result of this misrepresentation, they can claim compensation for that loss.

Performance

Performance is doing whatever action the contract requires. Each party to the contract is legally bound to perform the promises agreed to in the contract in accordance with its terms. For performance to be effective, it must be completed in the exact way set out in the contract. When performance is complete by both parties, the parties are discharged from further performance under the contract, and the contract is terminated.

Breach of Contract

A breach of contract occurs when a party to a valid contract has failed to fulfil its promises in accordance with the provisions of the agreement. Below are three main ways a party might be liable for a breach of contract.

1. Actual Breach

This might be where the parties agreed that the contract is to be performed by a certain time, any failure to completely perform the contract at the agreed time will constitute an actual breach. An actual breach gives the non-breaching party the right to terminate the contract.

2. Anticipatory Breach

This is when one party indicates unwillingness or inability to perform their obligations under the contract. This may occur if the breaching party explicitly provides notice to the other party that they will not fulfil their obligations under the contract. Once the non-breaching party is notified, this gives them the right to termination.

3. Minor Breach

This is when a party fails to perform some part of their obligation. The entire contract, in this case, has not been breached. In this situation, the non-breaching party may only be able to pursue a legal remedy if they can prove the breach resulted in financial loss. 

Key Takeaways

To be legally binding, contracts must have:

  • an offer;
  • acceptance;
  • an intention to be bound; and 
  • consideration.

Contracts may be in writing or verbal, but it is best to avoid verbal agreements as it is difficult to prove their existence. Before agreeing to an offer, you should ensure you understand the terms of that agreement. Once you have entered into a contract, it can be very difficult to get out of it without breaching the contract, which will often involve you having to pay some sort of compensation to the other party. If you have any questions about entering into a contract, contact LegalVision’s contract lawyers on 1300 544 755.

Frequently Asked Questions

What is a Contract?

A contract is a legally binding document that sets out an agreement or set of promises between two or more parties. Contracts are legally enforceable, which mean you can take action against a party that fails to fulfil its obligations.

What Are the Basic Principles of a Contract?

There are four main elements of a contract, including offer, acceptance, intention to create a binding legal relationship and consideration.

Can a Verbal Contract be Enforced?

Verbal contracts are enforceable, as long as they comprise the fundamental elements of a contract. However, it is a good idea to clarify your contract in writing so that there is no confusion as to what rights and obligations are imposed on each party. Further, there are two main types of contracts that must be in writing, including those for the sale or disposition of an interest in land and contracts of guarantee.

What is a Contract Breach?

A party will be in breach of contract if they fail to fulfil their promises in accordance with the agreement. There are three main types of breach, including actual breach, anticipatory breach and minor breach.

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