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Legal contracts are a central building block of Australia’s legal system, and many people enter into contracts every day without knowing it. From hiring a babysitter to buying a coffee to shopping at a supermarket, we enter into contracts all the time. So what is a contract, and how is it formed? This article will explain the basic elements which form a contract and make it valid and binding.
Offer and Acceptance
A contract is essentially an understanding between people. One party offers to provide or do something for the other party, and in return, the other party accepts the offer and may also agree to provide or do something as well.
Therefore, the first key elements which must exist before a legal contract is formed are offer and acceptance. The details of the offer must be clearly set out so that both parties are fully aware of the subject of the contract. For instance, a sale of asset agreement should include information relating to:
- the item being sold;
- the price at which it is being sold; and
- when and where the item’s title is being transferred.
There must also be agreement as to the terms of the contract. The offeree needs to accept the terms provided by the offerer. A party can communicate this acceptance in a number of ways. A party can accept an offer by:
- signing a document;
- verbally agreeing to be bound by the agreement; or
- through conducting oneself in a way that implies agreement.
The second key element which must exist is consideration. Essentially, there must be a form of value that passes between the parties involved in the contract. Generally, consideration will be monetary, but it can also be:
- an object;
- a service;
- the acceptance of some kind of liability; or
- an undertaking not to perform a certain action.
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Intention to Create Legal Relations
A legal contract is not created unless the two parties clearly demonstrate that they intend on creating legal relations. With a standard express written contract, the intention of both parties to be bound by the agreement is evident through their respective signatures. With oral or implied contracts, such intentions are sometimes less clear, as these contracts usually rely on good faith.
Formation of a Contract
A legal contract does not need to be in writing. It is possible for you to form a contract verbally. However, it is best not to rely on verbal agreements as they can sometimes be unclear, and it is more difficult to prove their existence should the agreement ever come into dispute. It is far safer to document any agreement you make with a counterparty if you intend the agreement to be legally binding.
Sometimes, a contract may also be implied. This is an agreement that has not been written down or verbally stated. A common example of this would be dining at a restaurant. There is no written contract in place stating that you must pay for the meal that you order. Rather, it is implied and assumed that you must pay for the meal provided.
Not all agreements that satisfy the elements above will form legally enforceable contracts. Contracts can be considered invalid if they are formed under certain circumstances or with certain people. For example, if a contract entices someone to perform an illegal act or a party entered into the agreement under duress or due to misleading, deceptive or unconscionable conduct, the contract will be invalid.
A contract can also be invalid if one or both parties do not have the capacity to enter into a legal contract. A court must deem both parties as legally competent to create a legal contract. For instance, an individual who is a minor cannot enter into a legal contract as they do not have the legal capacity to do so.
Examples of contracts include a sale of business agreement, confidentiality agreement and loan agreement. For a contract to be formed, it must have these elements:
- intention to create a legal contract
However, some contracts, even if they satisfy all the above elements, still do not form a legally binding contract. Examples include illegal contracts, contracts with minors or contracts entered into due to undue influence or deceptive conduct. Further, a contract may be contrary to Australian Consumer Law if it is ‘unfair’. The Australian Securities and Investments Commission (ASIC) provides a great deal of information on unfair contract terms. For assistance with understanding contracts or whether you have a legally binding agreement, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
Frequently Asked Questions
A contract is a legally binding agreement wherein promises have been made between two or more competent parties, and a form of value has been provided as a result of that agreement.
If a contract satisfies all the elements outlined in this article, the contract may be legally enforceable. This means that the wronged party or parties can take action against the party that has failed to perform its obligations.
No. Although a written agreement is usually the clearest and most indisputable form of contract, contracts can also be implied or formed verbally.
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