Contract Law 101 – The Essential Elements

The Essential Elements of a Contract are the elements of a contract that are so fundamental, that if any of them are substantially missing, the document may not be a contract at all.

Are you someone that is looking to engage in or create a contract, but don’t really know what to include or what should be included?

If so, you may be feeling a little overwhelmed or stressed that you might miss an important contractual element. Contracts are serious documents.

If you are thinking of signing a contract, it is important that you are educated and able to successfully analyse the contract to make sure that it is up to standard.

Even if you have a lawyer do this for you, you are the person signing at the end of the day and are the only person that is fully aware of what it is that you need from it. This is why it is important to have knowledge of your own so that you are an active part of the contract that you are signing!

This is especially important if you are the party that is creating the contract, as it is your responsibility to ensure that everything is included.

This article the commercial litigation lawyers at Stonegate Legal will discuss the basics of contracts and contract law and what the standard contract should include so that you are aware of what you are signing or creating and what it should include.

What is a Contract?

The first and most important step in understanding what you should include in a contract is understanding what a contract is. A contract, in its simplest form, is an agreement made between two or more individuals or groups.

It follows certain terms and conditions that are required to be met in order for the contract to be legally binding. All participants in the contract, whether it be between businesses or individuals, are referred to as parties.

A contract will generally involve an exchange of some kind. This will generally be some kind of goods or services in exchange for monetary payment.

Many consider a contract to be a document, but this is not always the case. Many contracts are formalised on paper or are signed by the parties in some other way. This document can act as a way of making the agreement concrete or enforceable by law, reminding the parties of the terms of the contract, and can make sure the agreement is easily accessible and revisable.

However, there are other ways that a contract may be formed. The parties may simply have a conversation and come to a verbal agreement, meaning it has been said but not written. For example, if you agree to mow a neighbour’s lawn for $10, chances are that you are not going to present them with a written contract and will instead just go off of a verbal agreement.

Contracts of this sort are harder to prove if they are not followed through with, however, which is why matters involving larger amounts of money are generally written in some way.

What is an Offer?

The first step that must be taken during the formation of a contract is an offer which must be made by one party to another. To make an offer is the first step in making a deal, where the parties enter a mutually beneficial exchange of goods, services, or assets generally for payment or something in trade.

An example of an offer may be presenting a specific amount of money in exchange for an item or product. The party that presents the offer is known as the offeror and the party that receives the offer is known as the offeree.

When one thinks of an offer, one may think of an official meeting or a contract. These are common ways that an offer will be made, especially those regarding large amounts of money or official matters. There are, however, several ways that an offer can be made.

For example, when shopping, you make an offer when you bring the product to the counter and offer your money for it! However an offer is made, it is important that it is clear and communicated between parties to avoid issues further on in the formation process.

When discussing making an offer regarding forming a contract, it is important to acknowledge the principle of invitation to treat.

An invitation to treat is simply described as an offer to make an offer. A price tag on a product is considered an invitation to treat, as it provides an opportunity for a consumer to offer something in exchange for the item. There is no attempt to make a legally binding agreement, a key element of forming a contract that will be discussed further, and it does not constitute an offer unless acted upon by another party.

The lines are occasionally blurred between the two, an issue that the following precedent aims to resolve.

Case Study – Carlill v Carbolic Smoke Ball Co

Carlill v Carbolic Smoke Ball Co is a key case when discussing making an offer or an invitation to treat. In this matter, Carbolic Smoke Ball Co released an advertisement, offering £100 to any party that contracted the flu after using the product they offer, the Carbolic Smoke Ball, which they claimed to be a cure for influenza.

Carlill purchased and used the smoke ball and subsequently contracted the flu. She wrote to the company requesting the money discussed in the advertisement and was unsuccessful in claiming it. Upon bringing the company to court, they claimed that they had made an invitation to treat and, due to the lack of contact made regarding an offer by Carlill, they were not required to pay.

The court decided that the company had made an offer, not an invitation to treat, that could be accepted universally, provided the terms of the advertisement were fulfilled. This case established a precedent in contractual law that advertisements containing terms that, when fulfilled, state a reward are unilateral offers that can be accepted by any party, provided the advertisement doesn’t specify.

What is an Acceptance?

Once the offer is made, the next step is for it to be accepted. This agreement must be without variation and final in order to move forward with the contract formation process.

Acceptance will generally occur when it is verbally communicated by the offeree to the offeror that they accept the terms of the offer and are willing to take it. However, this is not the only way that an offer can be accepted!

An offer can also be accepted implicitly. This will occur, for example, when one party delivers a product and the other pays for it. Although there may not have been an explicit conversation, or any conversation at all, between the parties, it is implied that both parties have accepted the terms of the contract through their actions, rather than their words.

When an offer is made, the offeree has several options regarding how they will respond to the offer once it is made. They may:

1. Accept the offer: Wholly agree to the terms of the offer.
2. Make a counteroffer: Alter the terms of the offer, which must then be accepted by the initial offeror. This process is sometimes referred to as negotiation.
3. Reject the offer: Wholly refuse the terms of the offer.
4. Discuss the offer further to help come to a conclusion: Neither deny, agree to, or offer a counteroffer to the initial offer, but instead engage in further conversation to better understand the offer.

What is Consideration in a Contract?

Once an agreement has been made regarding the formation of a contract, it is time to move on to the next step, consideration. Consideration is the value in exchange for a promise made by another party.

Butterworths Concise Australian Legal Dictionary defines consideration as:

The price, detriment, or forbearance given as value for a promise

Also defined as:

Expressed in terms of benefit and detriment, a valuable consideration may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or some responsibility given suffered or undertaken by the other.

Also defined as:

A contract is generally binding if the promise is supported by consideration

So, consideration is essentially the value exchanged between the parties to a contract.

An example of consideration is when someone pays for an item in a shop in exchange for the promise of wholly owning that item. Consideration may be doing something, like fulfilling a promise or taking an action that was agreed upon. This may be performing agreed-upon work or making a payment.

Here is a list of things other than money that can be used as consideration in a contract:

1. Goods: Any type of physical property, such as a car, house, or piece of jewellery.
2. Services: Any type of work or labour performed, such as painting a house, fixing a car, or providing legal advice.
3. Promises: A promise to do something in the future, such as to pay money, deliver goods, or perform services.
4. Forbearance: Giving up a legal right or claim, such as agreeing not to sue someone.
5. Transfers of property: Giving up ownership of something, such as a car, house, or intellectual property.

Here are some examples of how these types of consideration can be used in contracts:

1. A contract for the sale of a house, where the buyer agrees to transfer money to the seller in exchange for the seller transferring ownership of the house.
2. A contract for the provision of legal services, where the client agrees to pay the lawyer a fee in exchange for the lawyer representing them in court.
3. A contract for the construction of a new building, where the owner agrees to pay the contractor a sum of money in exchange for the contractor building the building according to the agreed-upon specifications.
4. A contract to modify an existing employment contract, where the employee agrees to work longer hours in exchange for the employer agreeing to give them a raise.

It is important to note that consideration must be something of value to both parties to the contract. For example, a promise to do something that you are already legally obligated to do is not valid consideration.

Additionally, consideration must be something that is actually bargained for. For example, if you promise to give someone a gift, that is not valid consideration for a contract.

Consideration is considered to be a price that is paid. However, price is used in more of a broad sense than may be thought. Price is determined in a contract under the benefit/detriment rule.

This means that one party experiences some kind of ‘detriment’, monetary or otherwise, in exchange for the benefit from the contract that they will receive. However, the price of the contract is not considered by the court, as long as it is present, as different agreements will vary on prices. It can be anything that is stipulated by both parties in the agreement.

The consideration must not be illegal or otherwise unlawful. It must also be plausible, possible, and reasonable to be carried out.

The consideration must also have been established before an action in the agreement is carried out. For example, if someone mows a lawn and afterwards the owner offers them $10 for their time, they will have no legal right to the $10.

Intention to Create Legal Relations

Another essential element in the formation of an enforceable contract is the intention to create legal relations. In order for a contract to be valid, there must be an intention to create legal relations with the contract by all parties.

This means that each party involved in the contract is accepting the terms and providing consideration with the intention for the contract to be enforceable by the law. It is not necessary for this intention to always be openly and directly stated but is generally implied by the actions and conduct of the parties.

If any party that is involved in the contract expresses that the contract will not affect the legal relations of the parties or will not have legal standing otherwise, a valid contract may not be created. However, if one party has withheld that they do not wish to be legally bound, and it would be reasonably observed by their conduct that they do, then the contract will be valid and considered legally binding.

There are several types of intentions to create legal relations that will each be considered differently by a court, including:

1. Commercial Relations
2. Domestic Relations

Commercial Relations

Commercial relations, relating to sales between two separate parties, is generally presumed to have been legally binding unless otherwise rebutted.

Domestic Relations

Some domestic relations, or relations between some family members, are generally not presumed to be legally binding unless explicitly specified. For example, loaning a family member, such as one’s child, will be considered in court to be a gift unless there is explicit evidence that suggests otherwise. This principle is referred to as the presumption of advancement.

The main case in Australia in relation to “intention to create legal relations” in contract law is Ermogenous v Greek Orthodox Community of SA Inc [2002] 209 CLR 95.

In this case, the High Court of Australia held that the intention to create legal relations is a subjective question. This means that the court will look at the actual intentions of the parties to the contract, rather than making any presumptions about their intentions.

The court also held that the intention to create legal relations is not necessarily presumed in all cases. For example, the court may find that there is no intention to create legal relations in cases involving family or social agreements.

The Ermogenous case has been followed in subsequent cases, and it is now the leading authority on the intention to create legal relations in Australian contract law.

Here are some examples of situations where the courts have found that there was no intention to create legal relations:

1. An agreement between friends to go on holiday together.
2. An agreement between husband and wife to share household chores.
3. An agreement between parents and children to help out around the house in exchange for pocket money.

In these cases, the courts have found that the parties were not intending to create a legally binding contract, but rather were simply making social or domestic arrangements.

However, it is important to note that the intention to create legal relations is a question of fact in each case. This means that the courts will look at all of the circumstances of the case, including the words and conduct of the parties, to determine whether or not they intended to create a legally binding contract.

Capacity to Contract

Another key element of forming a valid contract is that all parties must have the legal capacity to enter into a legal agreement such as a contract.

Legal capacity is described as the ability to make a legally binding agreement, sue another person, and generally make decisions regarding the law in other senses. In the world of contracting, the ability to make a legally binding agreement is the most applicable, although all may be relevant, depending on the agreement.

The main case in Australia in relation to “capacity” in contract law is Blomley v Ryan (1954) 99 CLR 362.  In this case, the High Court of Australia held that a person has capacity to contract if they understand the nature of the contract and the consequences of entering into it. The court also held that it is the burden of the party seeking to avoid the contract to prove that the other party lacked capacity.

The Blomley case has been followed in subsequent cases, and it is now the leading authority on capacity in Australian contract law.  Here are some examples of people who may lack capacity to contract:

1. Minors (people under the age of 18).
2. People with mental illness.
3. People who are intoxicated or under the influence of drugs.
4. People who are unconscious.
5. People who are an undischarged bankrupt.

If a person lacks capacity to contract, any contract they enter into is voidable. This means that the other party to the contract can choose to either uphold the contract or avoid it.

To prove that a person lacked capacity to contract, the other party to the contract must show that the person did not understand the nature of the contract or the consequences of entering into it. This can be done by providing evidence of the person’s mental state at the time the contract was formed.

If the court finds that a person lacked capacity to contract, the contract will be voidable. This means that the other party to the contract can choose to either uphold the contract or avoid it. If the other party chooses to avoid the contract, they must return any goods or money they have received under the contract.

When regarding children, or those under the age of 18, they do not have the capacity to enter into a contract without parental guidance and permission in many circumstances. While under 18, their parents or carers are responsible for their well-being, both in the long and short term and will enter into contracts regarding education and other facets of life in their place.

There are some circumstances where they will have the ability to understand the consequences of their actions and will, therefore, be allowed to enter into legally binding agreements on their own.

When discussing adults and their capacity to enter into a legally binding agreement, it will depend on the legal circumstances of the person. Those with a mental illness or an intellectual disability may have an affected ability to consider the consequences of a contract and will, therefore, be deemed without legal capacity in several circumstances.

Other Elements of a Contract

Now that you know what a contract is, and the essential elements of a contract, it is time to consider what a contract should include. There are several other elements that you should be sure to include in a contract when you form one.  These elements include:

1. Compliance with any legal formalities.
2. Correct identification of the parties to the contract.
3. Meeting of the minds.
4. The ability to follow through with the contract.
5. The legality of the contract.

We will explain these in a little more detail below.

Compliance with any Legal Formalities

Usually, you don’t need to write a contract down for it to be binding – it can be something you’ve agreed upon by just talking. But if things go wrong, proving what was agreed upon without a written note can be difficult. This is what we usually understand about making contracts.

However, there are some special types of agreements that must be written down and signed to avoid fraud and protect people. One of these old rules, coming from the UK in 1677, called the “Statute of Frauds,” tells us that certain contracts, especially ones about selling land, need to be written down to be legally binding.  For example:

1. Contracts for Buying or Selling Land: Agreements to buy, sell, or otherwise deal with land usually must be written and signed.
2. Guarantee Contracts: When someone promises to cover another person’s debt if they can’t pay it, that promise often needs to be in writing.
3. Consumer Credit Contracts: Agreements that involve providing credit to consumers usually have specific formal requirements to protect the consumer.
4. Leases: In many jurisdictions, if you’re renting something (like a house or apartment) for over a year, the lease agreement should be in writing.
5. Marriage Contracts: Prenuptial agreements and other contracts related to marriage often have to be written and signed.
6. Settlement Agreements: Agreements that resolve disputes (like settling Court litigation) might have to be documented formally.

Different places might have different rules about contracts. For instance, in Tasmania and Western Australia, there are rules that say if you’re buying something that’s worth a lot of money, you need to have a written note about the deal, otherwise it might not be considered solid.

And what if the contract isn’t written down when it should be? Well, the deal isn’t completely void – it’s not like it never happened. But it is a lot more difficult to be enforced in court, which means if someone doesn’t keep their promise, you can’t use that contract to make them.

In some cases, if you’ve partially kept your side of a promise and spent money because of it, courts might help you out even if the contract wasn’t written, using something called “part performance.” But this depends a lot on what you’ve done and whether it clearly relates to the promise that was made.

So, in summary, while many deals or contracts can just be spoken, some need to be written down to be enforced, and even within that, different places might have different requirements about what needs to be written and when.  As a general rule, get a contract in writing.

Correct Identification of the Parties to the Contract

Correct identification of the parties is an important element of any legal or financial matter. It is the process of ensuring that identities are known to all parties and are discussed in the contract.

As we have spoken about, a contract is between two or more parties. The parties will both be looking for something from the contract, meaning that it is mutually beneficial in some way. For example, when you engage in a contract in which you pay someone to build your house, they receive money, and you receive the house.

However, this would not work, of course, if the parties do not know each other or what they are doing for the other. This is where identification comes in.

As an individual, you should include your full name, contact details, full address, and trading number.

As a business, you should include the full legal name of the business, address, and other details used to identify you.

If a dispute arises, this information can be used to find the other party and discuss or take them to court if it comes to that.

Here are some other tips for correctly identifying the parties to a contract:

1. Be aware of the potential for fraud. For example, someone may try to impersonate a real person or company in order to enter into a contract. If you are unsure about the identity of the other party to the contract, you can ask them to provide identification.
2. If it is a company, do a company search. If it is a business, then do an ABN search.
3. If the parties to the contract are acting through agents, make sure that the agents have authority to enter into the contract on behalf of their principals.
4. Make sure that the parties to the contract are clearly identified in the contract itself.

Meeting of the Minds

Meeting of the minds is a legal term used in contract law to describe the mutual understanding and agreement between two or more parties to the terms of a contract. It is a subjective test, meaning that the court will look at the actual intentions of the parties, rather than making any presumptions about their intentions.

In order for a contract to be valid, there must be a meeting of the minds on all of the essential elements of the contract, including the offer, acceptance, consideration, capacity, and legality. If there is no meeting of the minds on any of these elements, the contract may be void or unenforceable.

An example of a case where there would be no meeting of the minds is if one of the parties to the contract is mistaken about the terms of the contract. For example, if a buyer mistakes the identity of the seller, or if a buyer mistakes the quantity of goods being sold, there would be no meeting of the minds on the essential elements of the contract.

If there is any doubt about whether or not there has been a meeting of the minds, it is important to seek legal advice. A lawyer can help you to draft a contract that clearly sets out the terms of the agreement and to ensure that all of the parties understand and agree to those terms.

Ability to Follow Through

Another important element of a contract that must be met in order for the contract to ensure that there is no breach, is the ability to follow through. To be involved in a contract, you must have the physical, financial, and mental capacity to follow through with it. This will be assessed once it is found that both parties have a mutual understanding of the contract and what it entails in the meeting of the minds.

If a party lacks the ability to follow through on their contractual obligations, they may be in breach of contract. This can give the other party to the contract the right to terminate the contract and seek damages.

There are a number of factors that can affect a party’s ability to follow through on their contractual obligations, including:

1. Financial resources: Does the party have the necessary financial resources to complete the contract?
2. Skills and expertise: Does the party have the necessary skills and expertise to complete the contract?
3. Material resources: Does the party have the necessary material resources (e.g., equipment, materials, labour) to complete the contract?
4. Government permits and approvals: Does the party have the necessary government permits and approvals to complete the contract?
5. Unforeseen events: Can the party reasonably be expected to follow through on their contractual obligations in the event of unforeseen events (e.g., natural disasters, strikes, etc.)?

It is important to note that the ability to follow through is not always a black-and-white issue. In some cases, a party may be able to follow through on their contractual obligations, but it may take them longer than originally anticipated. In other cases, a party may have the ability to follow through on their contractual obligations, but they may be unwilling to do so for financial or other reasons.

If you are concerned about a party’s ability to follow through on their contractual obligations, you should take steps to protect yourself. This may include:

1. Conducting due diligence on the other party: This may involve reviewing their financial records, speaking with their references, and visiting their place of business.
2. Obtaining a performance bond: This is a type of insurance that guarantees that the other party will perform their contractual obligations.
3. Including a termination clause in the contract: This will give you the right to terminate the contract if the other party breaches their obligations.

If you are unsure about whether or not a party has the ability to follow through on their contractual obligations, you should seek legal advice. A lawyer can help you to assess the risks involved and to take steps to protect yourself.

Legality of the Contract

Another important element of a contract that must be met is legality.

Illegality within contract law relate to agreements involving criminal actions, activities forbidden by statute, or behaviours opposing public policy. There are varying degrees and scenarios involving illegality, some being straightforward (e.g., contracts involving harm to others) and others more nuanced (e.g., contracts involving minor legal transgressions like speeding). Despite the growth of laws and regulations, minor offenses usually do not make contracts unenforceable.

There are various types of Illegality in a contract, including:

1. Common Law Illegality
2. Statutory Illegality

Common Law Illegality

Involves a wider scope of activities, including contracts that may be prejudicial to justice, encourage corruption, adversely affect marital status, promote sexual immorality, or impose restraint of trade.

The designation of these contracts and defining what is ‘contrary to public policy’ is influenced by jurisdiction-specific morality. For instance, cases like A v Hayden (1984) and Wilkinson v Osborne [1915] provide insights into common law illegality related to administration of justice and corruption, respectively.

Statutory Illegality

Encompasses contracts prohibited or made void by specific statutes, such as those directly forbidden, aimed at illegal purposes, performed illegally, or those with certain unfair terms.

Consequences and Exceptions

Contracts tainted with illegality are typically deemed void or unenforceable, contingent on the illegality’s nature and the relevant statutory provisions.

Exceptions and alternates, like severing the illegal terms to enforce the rest of the agreement, exist, especially when a party might be unaware of the illegality.

Moreover, a contract may be considered unenforceable instead of void in cases where illegality is incidental, permitting the transfer of proprietary interests despite the unlawful behaviour.

Terms of a Contract

Contracts are important documents. Not only do they formalise agreements, but they lay out the rights and responsibilities of each party so that the agreement can be continually followed and be effective for all parties.

If you are to be involved in a contract or are looking to learn more about it for any reason, a key element that must be understood is the terms of a contract.

What are the Terms of a Contract?

When considering a contract and how it can be followed, the key element one will observe is the terms of the agreement that are set out in the agreement.

A term on a contract is any provision or part that forms the overall agreement in the agreement. It is a word or phrase that, when provided the context of the contract, applies to an official agreement, and influences the actions of either or both parties.

They establish the rights and responsibilities of each party in an agreement so that the exchange can be officially decided upon and continually followed. They are crucial to a functioning and valid contract, so the terms must be adequately discussed and clearly established.

Types of Terms in a Contract

When considering the terms of a contract, there are several different types that will have a different influence on the agreement and the parties involved.

There are three key types of terms of a contract, which are:

1. Conditions
2. Warranties
3. Intermediate terms

We will explain these in more detail below.

Conditions (Essential Terms)

The first type of term that may be included in a contract is a condition. A condition is an essential requirement that one or all of the parties must abide by. If the essential condition is not met or is breached, by one of the parties, all other parties will generally be allowed to terminate the agreement entirely.

When considering whether a term is a condition, an essential term, or not has been cited by the High Court in Associated Newspapers Ltd v Bancks [1951] HCA 24 from Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, which formed the test of essentiality. It states:

The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor . . . If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may, in general, treat himself as discharged upon any breach of the promise, however slight.

Warranties

Another type of term that may be included in a contract is a warranty. A warranty is a promise made about the quality, performance, or condition of a product or object, generally over a specified period.

If a warranty is not met, contrary to a condition, the parties will often not be permitted to terminate the contract but will instead be allowed to claim damages for this breach.

Warranties can be express or implied.

Express warranties are clearly stated in the agreement, either verbally or in writing. For example, a car dealer might offer an express warranty that a car is free from defects for one year.

Implied warranties are not explicitly stated in the agreement but are implied by law. For example, there is an implied warranty that goods sold by a merchant are fit for the ordinary purposes for which they are used.

Warranties are important because they give buyers peace of mind knowing that the goods or services they are purchasing are of a certain quality. If a warranty is breached, the buyer may be entitled to remedies such as repair, replacement, or refund.

Here are some examples of warranties in contract law:

1. A car dealer might warrant that a car is free from defects for one year.
2. A builder might warrant that a new home will be free from defects in workmanship and materials for five years.
3. A manufacturer of a new appliance might warrant that the appliance will be free from defects in materials and workmanship for two years.
4. A seller of a used car might warrant that the car is free from any liens or encumbrances.
5. A service provider might warrant that their services will be performed in a timely and professional manner.

Intermediate (innominate) Term

If a term on a contract cannot be considered to be a condition or a warranty, it will be referred to as an intermediate term. In the case of an intermediate breach, the permitted penalty or course of action taken by the injured party will generally depend.

The effect of a breach of an intermediate term depends on the seriousness of the breach. If the breach is serious enough to deprive the innocent party of the substantial benefit of the contract, then the innocent party has the right to terminate the agreement. Otherwise, the innocent party is only entitled to damages for the breach.

Whether or not a breach of an intermediate term is serious enough to allow the innocent party to terminate the contract is a question of fact that will be decided by the court on a case-by-case basis. The court will consider all of the circumstances of the case, including the nature of the contract, the importance of the term that was breached, and the impact of the breach on the innocent party.

Here are some examples of intermediate terms:

1. A delivery date for goods may be an intermediate term in a contract for the sale of goods. If the goods are delivered late, the innocent party may be entitled to damages, but they may not be able to terminate the contract unless the delay is so serious that it deprives them of the substantial benefit of the contract.
2. A quality standard for goods may be an intermediate term in a contract for the sale of goods. If the goods do not meet the quality standard, the innocent party may be entitled to damages, but they may not be able to terminate the contract unless the defect is so serious that it deprives them of the substantial benefit of the contract.
3. A performance standard for services may be an intermediate term in a contract for the provision of services. If the services do not meet the performance standard, the innocent party may be entitled to damages, but they may not be able to terminate the contract unless the defect is so serious that it deprives them of the substantial benefit of the contract.

Classification of Terms

When considering the terms of a contract, they may be classified into two key categories; express terms and implied terms. Both have a key role in the formation and fulfilment of a contract, so it is important that there is an understanding of both.

Express Terms

Express terms are the terms that the parties have actively articulated and recorded prior to the conclusion of the formation process. These are the terms that are most often thought of when discussing the terms of a contract.

There are several ways that an express term can be identified from a contract. The most common and obvious way is from the contract itself, where express terms are often recorded or written.

They may also be included in several less apparent manners, such as through:

1. Pre-Contractual Statements: These are statements, verbal or otherwise, that have been made before the signing or creation of the contract but may have been a key influencing factor in the agreement made. For example, say that a party was selling a car that they claimed to be new. Upon the sale of the car, the buyer discovered that it had been used and was, therefore, not a new car. This may be considered to be a misrepresentation by the court and lead to the termination of the contract in some circumstances.
2. Terms Displayed: Terms displayed are terms that may have not been directly discussed by the parties but were included in displays such as advertisements or tickets. For these to be considered express terms on a contract, however, they must have been displayed prior to the signing of the contract.

Implied Terms

Implied terms or implied terms are the terms that were not directly articulated by the parties but are otherwise implied. There are four manners in which a term can be implied in a contract.

Implied In Fact

Terms that are implied by fact are terms that the court decides to include to ensure that a contract reflects the true intentions of the parties involved. They are often the terms that parties do not even consider expressing explicitly as they are expected to be included by common sense.

For example, if you purchase a food item from a shop, it should go without saying that the item is edible. In order for a term to be implied by fact, it must be reasonable and not benefit one party and burden another.

It must also not contradict any other terms in the contract. If you purchase a car and it is expressed that the car does not work and needs to be repaired, it cannot be implied in fact that the car should have worked.

Implied By Law

Terms that are implied by law are those that legislation or law state must be fulfilled. It does not have to be explicitly stated in a contract that the law will be followed, as this is expected of the reasonable person.

An example of a type of contract where terms may be implied by law are service contract. If a party hires another to complete a service, it is implied by law that they must not act negligently and complete their service with due care and skill.

Implied By Custom

Terms that are implied by custom are terms that other contracts in the same industry or context can be presumed to include.

They are considered to be under the standard practice of their industry. To prove that a term is implied by custom, one must provide evidence that the custom exists in the industry.

Implied As a result of Past Dealing

Terms that are implied as a result of past dealing are terms that are assumed due to similar contracts formed between the same parties in a reasonable space of time.

The dealings between the parties must be regular and have included the terms in the past contracts.

Common Contract Terms

In order to understand what the terms of a contract are and how they may be included in a contract, it can be useful to see how they may be used and the terms that are commonly included in contracts. Some terms that are often seen in contracts include:

Confidentiality

Confidentiality is a common term that may be included in a contract. When any two parties enter into an agreement, it is not rare that a confidential agreement that is not to be shared will be exchanged. Confidentiality terms are terms that prevent a party from sharing private or sensitive information about the other party/parties with others. These terms are especially relevant in business contracts, as stakes are particularly high regarding reputation.

Termination

Another common term that is often included in contract agreements is termination. Termination terms lay out the circumstances in which all parties will be permitted to terminate the contract. There are some circumstances, especially in business, when it can be more financially beneficial for the contract to cease to continue.

Force Majeure

Another common term that is often included in contract agreements is force majeure or greater force. Force majeure terms are in place to prevent parties from damages from forces out of the control of the contract or the parties. This may refer to natural disasters or, as increasingly relevant in the modern day, global pandemics, such as COVID-19.

Dispute & Breach

Another common term that is often included in contract agreements is dispute agreements. Dispute terms aim to prevent issues or confusion from arising if a dispute is to take place between the parties for any reason. They will usually lay out how the parties are to act and how the process of dispute resolution will run.

Read our article on Breach of Contract – Breach of Contract in Australia 

Damages

Another common term that is often included in contract agreements is damages regarding breaches. Terms relating to damages lay out the compensation or damages that will be received by the victim party if a breach of contract occurs.

Contract Law 101 – FAQ

Contracts, governed by their terms, establish a clear roadmap by detailing obligations, rights, and expectations. Unpacking these pivotal aspects can certainly bring forth numerous questions about conditions, warranties, intermediate terms, express terms, implied terms, and common contract terms like confidentiality, termination, force majeure, and more.

In these Frequently Asked Questions (FAQs), we dive into these intricate details, aiming to provide a clearer understanding of the myriad components embedded within contractual terms and their substantial impacts on agreements.

What are the basics of Australian contract law?

Australian contract law is largely based on the common law principles derived from the UK legal system, ensuring that agreements are fairly upheld and any breaches appropriately addressed. The fundamental elements include an offer, acceptance, intention to create legal relations, consideration, legal capacity, and legality of purpose. The law oversees how contracts are formed, executed, and how breaches are handled, ensuring that parties can legally transact and any disputes can be lawfully resolved.

Is a signed contract legally binding Australia?

Yes, a signed contract is generally legally binding in Australia, provided it meets the essential elements of a valid contract: offer and acceptance, intention to create legal relations, and consideration. Both parties must comprehend the terms and voluntarily agree to them. However, certain circumstances, such as duress, undue influence, or misrepresentation, can invalidate a contract.

How do you prove a breach of contract in Australia?

In Australian law, to prove a breach of contract, one typically needs to establish that:

1. A valid, binding contract existed.
2. The claiming party fulfilled their obligations.
3. The alleged party failed to fulfill their contractual obligations (breach).
4. The breach caused damage or loss to the claiming party.
5. Evidence, such as the contract itself, communication records, or witness testimonies, are usually leveraged to substantiate these points in court.

What is the most common breach of contract?

The most common breach of contract globally, not just in Australia, often involves:

1. Non-payment: One party does not pay a debt as agreed.
2. Late delivery: Goods or services are not delivered within the agreed timeframe.
3. Substandard quality: Goods or services provided are not of the agreed quality or standard.
4. Non-delivery: Goods or services are not delivered at all.
5. Misrepresentation: Providing false information to secure agreement.

Each type of breach can have varying legal consequences depending on jurisdiction and the specifics of the contract itself.

What constitutes a contract?

A contract is fundamentally an agreement between two or more parties (individuals or entities) that outlines certain terms and conditions to be met. It typically involves an exchange, such as goods or services for monetary payment. Contracts may be verbal or written, although written contracts are advisable for clarity and legal enforceability.

Why is understanding the elements of a contract important?

Understanding the essential elements is crucial to ensure that the contract is legally valid and binds all parties to the agreed-upon terms. It’s also vital for safeguarding one’s interests, responsibilities, and ensuring that the agreement is fair and equitable.

What are the primary stages in forming a contract?

The key stages include:

1. Offer: One party presents terms for an agreement.
2. Acceptance: The other party agrees to the stated terms without variation.
3. Consideration: Something of value is exchanged between the parties.

How does an offer differ from an invitation to treat?

An offer represents a clear intention to be bound by terms upon acceptance. In contrast, an invitation to treat invites others to make offers but does not itself constitute an offer. Examples include product price tags or advertisements which invite consumers to make a purchase offer.

What is “consideration” in the context of a contract?

Consideration refers to something of value exchanged between the parties, such as money, goods, services, promises, or any act of forbearance. It must be present and agreed upon for a contract to be legally binding. The item of value must be lawful, plausible, and established before actions in the agreement are executed.

What forms of consideration are valid in a contract?

Consideration can take various forms, including money, goods, services, promises, transfers of property, and forbearance. It’s essentially a mutual exchange where both parties give and receive something of acknowledged value.

How can an offer be accepted in a contract?

An offer can be accepted either explicitly through verbal or written communication or implicitly through actions that indicate agreement to the terms (e.g., delivering a product and paying for it). The acceptance must be unambiguous, final, and without variation from the initial offer.

Can a contract be valid if it’s not written?

Yes, verbal contracts can be valid, although they are often harder to enforce legally due to the lack of physical evidence. For clarity and legal protection, especially in agreements involving substantial exchanges, a written contract is highly recommended.

How does a counteroffer work in a contractual agreement?

A counteroffer involves the offeree making alterations to the initial offer’s terms. The original offeror must then accept these modified terms for a contract to be formed. This back-and-forth can also be seen as a negotiation process between the two parties.

Are there any circumstances where consideration is not required for a contract to be valid?

Typically, consideration is an essential element. However, in some jurisdictions or specific contract types (like deeds or unilateral contracts), consideration might not be strictly necessary. Always consult with a legal professional to understand local laws and exceptions.

What does “intention to create legal relations” mean in contract law?

“Intention to create legal relations” refers to the commitment of all parties involved in a contract to be legally bound by its terms. For a contract to be valid, every party must show, through actions or implied conduct, that they agree to the terms and intend for the contract to be enforceable by law. This intention is often analyzed subjectively by courts, considering the actual intentions and conduct of the parties involved.

How is “intention to create legal relations” treated differently in commercial and domestic relations?

In commercial relations, there is generally a presumption that the parties intend to create legal relations unless proven otherwise. These are usually interactions between separate entities, like sales or business deals. On the other hand, in domestic relations, which involve agreements among family members, there is often a presumption against an intention to create legal relations unless explicitly stated. For instance, loans among family members might be considered gifts unless there’s clear evidence showing an intention for it to be a loan.

What is the significance of the Ermogenous case in Australian contract law?

The Ermogenous v Greek Orthodox Community of SA Inc case is pivotal in Australian contract law as it clarified that the intention to create legal relations is a subjective matter. It emphasized that courts should explore the actual intentions of the contracting parties rather than operating on presumptions about their intentions. Moreover, it established that this intention is not universally presumed and must be discerned from the actions, words, and overall context of the agreement.

What does “capacity to contract” entail and why is it vital in contract law?

“Capacity to contract” refers to an individual’s legal and mental ability to enter into a contract, understanding its nature and consequences. This concept is crucial because if a party lacks the capacity to comprehend the agreement, it may be deemed voidable, safeguarding those unable to fully understand or consent to the agreement. The person must understand the contract’s nature and the repercussions of entering into it, and this applies to various scenarios including dealings with minors, mentally impaired individuals, or people under substance influence.

How are minors and adults with mental impairments treated concerning their capacity to contract?

Minors, typically under the age of 18, and adults with mental impairments may have limited or no capacity to contract depending on the jurisdiction and specific circumstances. For minors, contracts are often voidable and may require parental consent or oversight. For adults with mental impairments, their capacity to understand the agreement and its consequences is crucial. If they lack this understanding, they might not have the legal capacity to contract, making any agreements they enter into voidable, depending on proof of their mental state at the time of contract formation.

What is the importance of compliance with legal formalities in contracts?

Compliance with legal formalities, such as having a written and signed document, is crucial in contracts to ensure that they are binding and enforceable. While verbal agreements can be valid, written contracts are easier to prove in court, particularly concerning agreements related to land sales, guarantees, consumer credit, leases, marriage, and settlements. Specific types of contracts are mandated to be in written form by law, like those covered under the “Statute of Frauds.”

Why is the correct identification of the parties critical in a contract?

Proper identification of the parties in a contract ensures that all entities entering the agreement are accurately known and verifiable. This involves providing clear and precise details such as full names, addresses, and contact details for individuals, and legal business names, addresses, and trading numbers for businesses. Correct identification is vital for enforcing the agreement, resolving disputes, and taking legal actions when necessary, ensuring that all obligations are met by the intended parties.

What does “meeting of the minds” mean in the context of contracts?

“Meeting of the minds,” or “mutual assent,” refers to the agreement and shared understanding among all parties involved concerning the terms and elements of the contract, including offer, acceptance, and consideration. It implies that all parties have a unified intention and understanding regarding the contract’s obligations and outcomes. If any party is mistaken about crucial contract aspects, there may not be a genuine meeting of the minds, possibly making the agreement void or unenforceable.

How does the ability to follow through affect the validity of a contract?

The ability to follow through implies that all parties entering into a contract must possess the physical, financial, and mental capacities to fulfill the outlined obligations. Assessing the ability to perform obligations, like having financial resources, skills, expertise, material resources, and obtaining relevant permits, is essential to avoid breaches. If a party cannot fulfill their contractual duties, it may lead to contract termination and potential legal action for damages.

How does legality impact the enforceability of a contract?

For a contract to be enforceable, it must be legal, meaning that it should not involve any activities or terms that are illegal, against public policy, or forbidden by statute. Contracts involving common law or statutory illegality, such as agreements that induce corruption, adversely affect marital status, or impose restraint of trade, are typically considered void or unenforceable. However, exceptions exist, like when illegal terms can be severed from the agreement, or when one party is unaware of the illegality.

What is a contract term?

A contract term is a provision or part that forms the overall agreement in a contract. It establishes the rights and responsibilities of each party involved in the agreement, influencing their actions and ensuring that the agreement is followed effectively.

What are the key types of terms in a contract?

The key types of terms in a contract are:

1. Conditions: Essential terms that, if breached, may allow for the contract to be terminated.
2. Warranties: Promises regarding the quality, performance, or condition of a product or service.
3. Intermediate terms: Terms that are neither conditions nor warranties, and their breach allows different remedies based on the seriousness of the breach.

What is the difference between express and implied terms in a contract?

Express terms are explicitly articulated and recorded by the parties during the agreement formation. Implied terms, on the other hand, are not expressly stated but are assumed to be included, either by fact, law, custom, or past dealing, to uphold the true intentions of the parties or adhere to established practices or legal requirements.

What is a confidentiality term in a contract?

A confidentiality term in a contract prohibits parties from sharing private or sensitive information about each other with external entities. This is commonly used to protect the privacy and proprietary information of the involved parties.

How does a warranty term work in a contract?

A warranty term in a contract provides assurances about the quality, performance, or condition of a product or service, often for a specified period. If a warranty is breached, remedies such as repair, replacement, or damages might be available to the aggrieved party, though termination of the contract is usually not an option.

What is meant by the termination term in a contract?

A termination term specifies the conditions under which the parties may end the contract. It outlines what constitutes a breach and what does not, what the penalties for breach will be, and in what scenarios the agreement can be ended without penalty.

What does force majeure mean in the context of contract terms?

Force majeure refers to unforeseeable and unavoidable events, such as natural disasters or global pandemics, that prevent parties from fulfilling their contractual obligations. Contract terms related to force majeure specify that parties are exempt from liabilities for damages in such scenarios.

How do implied terms by custom work in an agreement?

Terms that are implied by custom refer to those that are commonly accepted in a particular industry or context even if they are not explicitly stated in the agreement. They are assumed to be part of the agreement due to being a standard practice in the relevant industry.

What is an intermediate term in a contract, and how is a breach of it handled?

An intermediate term is neither a condition nor a warranty. The actions and remedies available in the case of its breach depend on the seriousness of the breach. If the breach is severe enough to deprive the innocent party of a substantial benefit, they might be entitled to terminate the agreement, otherwise, they may seek damages.

How are dispute and breach terms used in an agreement?

Dispute and breach terms in a contract outline how parties should proceed in the event of disagreements or violations of the agreement. They provide a framework for resolving disputes and may specify penalties or remedies in the case of breaches, ensuring that all parties have a clear understanding of the consequences and recourse available.