Do we have an Agreement? Understanding Contract Law

Introduction

A contract is a legally binding agreement between one or more parties, that outlines the terms and conditions of a transaction.

If properly formed, a contract and its terms can be enforced by a court on the parties.

However, not every document that is called or that appears to be a contract can be deemed as enforceable.

Instead, the enforceability of a contract depends on several different factors including the intention of the parties, the terms and the legal capacity of those involved.

It is worth noting that in Australia, a contract does not have to be in writing to be valid and enforceable, it can be entered into verbally. Although it is always best practice to enter into a written agreement.

To assist with determining whether a contract is in place, there are four essential elements to consider: offer, acceptance. Consideration and intention. This article will explore each of these elements.

Offer and Acceptance

An offer is a proposal made by one party to enter into a contract with another party. The offer must be clear and unambiguous, and it must be communicated to the other party.

An acceptance is the unconditional agreement of the other party to the terms of the offer made. Acceptance can be given in writing, verbally, or by conduct that implies acceptance.

Once an offer is made, the other party must accept it without any changes. If any alterations are made to the offer, it becomes a counteroffer rather than acceptance.

Where there is ambiguity regarding offer and acceptance, the courts will assess the conduct of the parties on an objective basis, and their words, actions and previous conduct may be relevant factors in assessing whether an agreement has been reached.

Consideration

Consideration is something of value that is exchanged between the parties. It can take many forms, including money, goods, or services.

Consideration must have a legally recognisable value and must be adequately identified. However, while it must have some value, courts take the view that it is the parties to a contract who should determine the adequacy of consideration.

An important exception to the requirement for consideration to be present in an agreement is a contract in the form of a deed. In these circumstances, consideration is not required.

Intention to be Legally Bound

An agreement may be unenforceable if it is determined that the parties did not intend to be legally bound.

The parties must have a mutual intention to enter into an agreement and must intend to be legally bound at the time they form the contract.

The intention to create a legal agreement is assessed objectively, having regard to the surrounding circumstances and a party cannot escape liability for a contract merely by claiming that they did not intend to be bound.

When commercial agreements are entered, the intention of the parties to be legally bound is generally assumed.

However for social or domestic agreements, common law has traditionally provided a rebuttable presumption that the parties did not intend to be legally bound unless there was clear evidence to the contrary.

Nowadays, each case will need to be determined on its facts and with reference to previous case law.

Enforceability of Contracts

In Australia, contracts are generally enforceable if they meet the above criteria for formation.

However, there are certain situations where a contract that meets this criteria is still unenforceable or void. For instance, a contract may be void if it is based on misrepresentation.

This can occur when one party made a false statement that induced the other party to enter into the contract in the first place. Duress is another factor that can void a contract. This might happen if one party was forced to enter into the contract under duress or undue influence.

A contract may also be found to be void if it involves illegal or immoral activities.

In addition to the above, a contract may not be enforced if one or both parties lacked the necessary legal capacity to enter into it. For example, minors, intoxicated persons, and mentally ill persons may lack the capacity to enter into a contract.

Breach of Contract

A valid contract is binding on both parties, but if one of the parties breaches the contract in an important way, the other party may be entitled to terminate the contract and not fulfil their part of the bargain.

However, it is very important to receive legal advice before terminating a contract on the basis of the other parties’ breach. If it turns out that the first party was in fact not in breach, the person purporting to terminate on the basis of the breach will be in the wrong.

If one party breaches a contract, the other party may seek remedies for the breach. The main remedies available for breach of contract are “damages”, being monetary compensation awarded to the innocent party for losses suffered, and/or “specific performance”, which is when a court order requires the party in breach to perform the contract.

The court may also make orders including “rescission”, which is where the contract is cancelled and the parties restored to their original position, or an “injunction”, which the court issues to restrain one party from acting in a way that breaches the contract.

Conclusion

Individuals and businesses enter into contracts everyday both in writing and verbally. It is important that when entering into a contract, that the essential elements explored above are present to ensure the contract is valid as only a valid contract be enforced by a court.

If you intend to enter into a transaction with another party, we recommend that your agreement be in writing and prepared or reviewed by an experienced lawyer to ensure that it is valid and enforceable

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