Contract Essentials
A contract is made up of an agreement that is legally binding between two or more parties which is able to be enforced through the courts. In order for a contract to be binding, there are four main elements that must be present: offer, acceptance, intention to enter legal relations, and consideration.
Under a binding contract, you have the right to remedies if the other party or parties do not fulfill their contractual obligations.
Four contractual elements
Offer/acceptance
Parties must have come to an agreement before a legally binding contract can be entered. Such an agreement consists of an offer being clearly made by one party, and then being willingly accepted by another party or parties. Such an offer often comes with a set of conditions or terms which must be honoured if the receiver is to obtain the benefit of that offer. In order to be legally binding, an offer must be precise and clear, and its terms and intentions must be known by the receiving party.
Intention to create a legal relationship
As contracts are legally enforceable, both parties must be certain about their intention to create binding relations. A contract can only be enforced if its terms demonstrate that both parties have clearly agreed upon all terms required to perform the contract.
Consideration
After and offer has been made and accepted, and the parties have manifested an intention to enter binding legal relations, a contract then requires the payment of ‘consideration’ in order to be made binding. For the purposes of contract law, consideration refers to a price or cost paid for the promise or offer made by the offeror. Consideration must be paid by the person to whom a promise has been made, and that consideration must be sufficient relative to the value of that promise.
Key issues
- A contract’s acceptance must be clearly communicated in order for that contract to be effective. If not expressly stated, acceptance can be implied through conduct.
- The benefits of a contract may only be enforced by its parties. Likewise, the burdens of a contract may only be subjected to its parties.
- Although there are legal requirements for some types of contract to be issued in writing, the absence of a written contract in that situation does not always make the contract void and unenforceable.
Key considerations for contracts
Written contracts
Contracts do not need to be written in order to be enforceable. There are two types of contracts which are generally legally required to be evidenced in writing; contracts for the sale or purchase of land/property, and also contracts of guarantee.
Termination of offer
Upon making an offer, the offeror is able to formally withdraw that offer before it is accepted. If that offer has been accepted, and consideration paid, the offer cannot be withdrawn. Offers can also be terminated following changes in circumstance, lapse of time, the inability of the offeree to perform an essential condition, or if one of the parties dies.
General termination of contracts, four main methods:
- Performed termination – occurs when the contract has been completed;
- Agreed termination – both parties agree to terminated;
- Legal discharge – occurs through frustration, illegality etc;
- Breach discharge – wounded party to a breached contract elects to discharge the contract.
Vitiating factors
Vitiating factors are the elements of a contract that are vital to its formation and existence. They can occur before a contract is formalised. Vitiating factors may provide a remedy to the injured party should a contract be breached.
Performance
If a contract does not have a fixed order, each party agrees to do everything required of them to allow the other party or parties to fully benefit from the contract. This depends on the nature of the actions and relationship involved;
The standard of performance depends on four factors:
- Order of performance
- The time of performance
- Entire performance
- Strict and exact performance.
Misrepresentation
In contract law, misrepresentation refers to a false statement or statements made which convinces one party to enter into a contract with the party who made the false statement/s.
Frequently asked questions
What is mere puff?
If one party makes an exaggerated statement that is so outrageous that no reasonable person would take it seriously, that statement is a mere puff. It does not constitute a legal offer or representation.
What is the postal acceptance rule?
This exists as an exception to the rule, as in some situations acceptances is expected to be delivered by post. In these cases, acceptance can be considered effective upon postage.
What is estoppel?
This refers to where non-contractual representations and promises have been relied upon during the formation of a contract and it would be unjust to depart from such assumptions.
What is repudiation?
This is when a party is unable or unwilling to perform their contractual obligations.
What is undue influence?
In situations where there is not threat, but more subtle influence exists; a contract can be made void due to undue influence. This can come through the abuse of a powerful position, for example.
If you require advice on your legal position in relation to your contract query, don’t hesitate to contact us to speak to one of our contract lawyers in Melbourne on (03) 9832 0608 or by email at contact@lgmadvisors.com.au.