Part 1: How do contracts work?

Summarise with: ChatGPT Claude Perplexity Microsoft Copilot

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Table of Contents

• What is a contract?
• Offer
• Acceptance
• Consideration
• Conclusion

Welcome to our series on contracts, where we will discuss a range of different issues relating the law of contracts and their practical application in various day-to-day commercial settings. Some of what this article will canvass includes the different elements needed to make a complete and enforceable contract, what to do if a dispute arises and how to spot unfair contract terms without having any real background knowledge of the law. These are just some of the tools that you will need both in your private life or as a business owner to help you understand the operation and utility of contracts.

What is a contract?

A contract is a legally binding agreement between multiple parties. For a contract to be legally enforceable, it must satisfy several criteria. In other words, the agreement must have certain characteristics to constitute an enforceable contract. The following elements must be present in an agreement for it to be considered a contract:

• Offer;
• Acceptance; and
• Consideration.

In simple terms, a party cannot enter into a contract without first having accepted an offer that has been made by another party, or, alternatively, without making an offer that is both capable of acceptance, and accepted by another party.

Offer

For an offer to form part of a binding contract, the intention of the party making the offer must be unambiguous. It must also communicate what the offer is in exchange for. When a party makes an offer to another party, the offer will sometimes have conditions attached to it that specify how the offer can be accepted and within what time period it can still be lawfully accepted.

It is important to understand that sometimes what looks to be an offer is sometimes just an offer to begin negotiations. This offer to discuss the possibility of an offer is sometimes referred to as an ‘offer to treat’. In these circumstances, the party making the offer is merely expressing a desire to talk business, as opposed to an intention to be legally bound. One such example of an offer to treat is when you walk into a store and the goods have signage that reads ‘For Sale’. While this looks like an offer to sell the products, it is usually only an offer to treat.

Acceptance

If the party making the offer has also specified the mode and time for acceptance of that offer, these conditions must be adhered to for the offer to be lawfully accepted. This means that the acceptance of the offer might be express or implied in the conduct of the party trying to accept the offer, depending on how the offer was made in the first place.

For acceptance of an offer to be binding on the parties, the party accepting the offer cannot give conditional acceptance. In other words, the acceptance must not have any strings attached, as a counter-offer would, under the law, most likely operate as a rejection of the offer. Once this happens, the offer is no longer capable of being accepted. In addition, an offer can expire or be withdrawn, at which point it is no longer capable of being accepted.

Consideration

Just to be clear, consideration does not refer to the period of time you take to think about whether or not to accept an offer. In the law of contracts, consideration refers to the benefit you get, or the loss you suffer, under the terms of a contract. For example, it is what you pay the other party to promise to perform the contractual obligations. It is worth noting that a promise you make to someone off the cuff, i.e. not in deed form, will not usually lead to the creation of any contractual rights.

To show that there has been consideration, parties will usually show this by exchanging money, goods or services. You might sell a service for which you are paid a sum. Or you might exchange a good for a good. Either way, the consideration is the quid pro quo so to speak. However, swapping promises to do or not do something has been considered sufficient to form a binding contract. Just because no goods, services or money have been exchanged will not necessarily mean that no contract exists.

Another important thing to remember when contracting with another party is that the courts will not usually intervene if one party has not received a fair deal. In other words, it is not for the courts to comment on the adequacy of the consideration. You might have offered $1 to your neighbour to wash your entire garage of 15 cars, which he accepted. In this scenario the courts are more likely than not to enforce the contract.

Conclusion

Stay tuned for part 2 on contracts and how they operate. If you find yourself in a contractual conundrum, or wish to draft/review the terms of any contract, contact LegalVision on 1300 544 755. You can speak with one of our legally trained Client Care team who will put you in touch with the most suitable lawyer.