What is a contract?

A contract is an agreement between two or more parties. A legally binding contract is a voluntary agreement reached between the parties that is enforceable in law. Contracts are a huge part of everyday life for most people, for instance:

  • When an individual goes to the supermarket to buy their groceries, they enter into a contract with the supermarket ie. payment of money in exchange for food and drink.
  • When you go to the coffee shop, you contract to exchange money for a beverage or food.
  • Employees enter into a contract to perform their work in exchange for a monthly or weekly salary.
  • When someone buys a theatre ticket, there is a contract between the theatre-goer and the ticket supplier or theatre.
  • A business enters into commercial contracts with their suppliers for goods in exchange for money to enable them to fulfil customer orders.

Contract law is the body of law that applies to the rights and obligations of the contractual parties under a contract. It governs the relationship, validity and interpretation of an agreement between two or more persons (individuals, companies or other organisations) regarding the sale of goods, the provision of services or exchange of interests or ownership.

How is a contract made?

The formation of a contract begins with an ‘offer’. This may be, for instance, an offer of money in exchange for goods, or an offer of services in exchange for other services, or even the promise of a future payment of money or something else in exchange for a service. It is an expression of a willingness to agree terms between the parties. An offer allows the other party to accept the offer, providing the basis of the formal agreement; or the other party can refuse the offer and make a ‘counter offer’.

Such an offer must be communicated to the other party. Someone will not be treated in law as having accepted an offer if they have not had actual or constructive knowledge of it.

What is required for a legally binding contract?

A valid contract requires the presence of three elements:

  • an agreement;
  • an intention to create legal relations: this is an intention to form a legally binding relationship, and;
  • consideration: ie. payment.

Contracts do not have to be in writing to be legally enforceable, with one important exception: a contract for the sale (or other disposition) of land or property must be in writing and contain all the terms agreed, otherwise it is not enforceable.

When does a contract become effective?

Typically, a contract comes into existence when it is made – that is, when there has been acceptance of an offer, and consideration (payment) has passed from one party to the other. In the case of a conditional contract, the contract becomes enforceable when the condition is met (or when otherwise agreed).

The acceptance of an offer can be made by words or by conduct. Acceptance occurs when the offeree’s words or conduct objectively infer that the offeree agrees to the offeror’s terms.

Certainty of terms

An enforceable contract requires certainty as to its terms. It must be clearly apparent to the parties what the terms of the contract are. If a fundamental term is not settled between the parties then the agreement may not amount to a contract in law.

If the terms require further agreement between the parties because they are uncertain, then the contract may be deemed unenforceable.

If there is no consensus ad idem (agreement on identical terms) between the parties then there is no contract as such for the court to interpret. It is not the role of the court to create the terms of the contract and thus impose a contract upon the parties.

In some circumstances, the courts will imply or infer a term into a contract, particularly in circumstances where the parties have actively relied on the agreement by performance of obligations under its terms. However, the approach of the courts is to only infer a term into the contract where, for instance, it is necessary for business efficacy. It will not re-write a bad bargain – even where the contract is disastrous for one of the parties.

Illegal and voidable contracts

When a contract is illegal it cannot be enforced by a court or tribunal. A contract that exists for an illegal purpose is void and will not be enforced by the courts. So a contract to launder money, to supply illegal drugs or to achieve a civil (or criminal) wrong will be illegal and unenforceable. Assets transferred under an illegal contract cannot normally be recovered.

However, the courts will differentiate between situations where the actual purpose of the contract is illegal, and circumstances where the law has been inadvertently infringed during performance of the contract by one of the parties. The innocent party may have a legal remedy in such cases.

Mistakes and misrepresentations may make a contract ‘voidable’. There is a difference between a ‘void’ contract and a ‘voidable’ contract. A contract is void where it cannot be enforced by law because it is, for instance, illegal or because one of the parties was drunk at the time it was entered into.

Voidable contracts are contracts that can be legally terminated. For instance, a minor can enter into a contract but can ‘avoid’ the contract before turning 18, and the other party cannot enforce the terms against him or her. Other scenarios that could make a contract voidable include fraud or undue influence, or a failure to disclose a material fact.

Contract law is complex. If you have a specific legal problem in relation to a contract for goods of services, it is recommended you seek the assistance of a specialist solicitor.

About the Author

Nicola Laver LLB

Nicola is a dual qualified journalist and non-practising solicitor. She is a legal journalist, editor and author with more than 20 years' experience writing about the law.

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