Contract Formation

Question 1

What is a contract?

Answer 1

A legal enforceable agreement between two or more persons. These persons are called the ‘parties’ to the contract

Question 2

Why are contracts important?

Answer 2

• Allow parties to make legally enforceable commitments to each other.
• Allows businesses to plan (forward planning)

Question 3

Is every agreement a contract?

Answer 3

• Not every agreement that is entered into is a contract, even if the parties have capacity to acquire legal rights and obligations.
• Many agreements are considered not to be legally binding, such as social agreements between friends or domestic agreements between family members.
• Such agreements are not enforceable at law and you cannot bring an action in court for damages if they are not carried out.

Question 4

How are contracts made?

Answer 4

A pre-contractual phase or process takes place before a contract is made. We can call this the ‘negotiation’ phase, during which the parties exchange information and explore the possibilities to see if they can reach an agreement to which they are prepared to bind themselves.

Question 5

What are the essential requirements of contract formation?

Answer 5

1. It can be inferred that the parties intend to be legally bound.
2. There is either formal execution of the agreement in a deed, or, as an alternative, the exchange of ‘something of value’ when the contract is made, generally called ‘consideration’.
3. There is a sufficient degree of agreement on the terms of the contract.

Question 6

What is the objective approach?

Answer 6

e.g. ‘What conclusions would a reasonable person be able or likely to draw from the observable facts of the case?’

Would a parties behaviour indicate to a reasonable person that the party intended to be legally bound? Not - whether the parties actually intended their agreement to be binding.

Thus, a party may be bound by a contract based on their words and actions, even if they did not subjectively intend to commit to the contract.

Question 7

Who has the capacity to contract?

Answer 7

Adult persons who are of sound mind and artificial persons such as corporations have full contractual capacity.

• Corporations Act 2001 (Cth) S124 provides this
• Government bodies may also have the capacity to enter into contracts
• Persons with a mental disability are bound by agreements unless at the time the agreement was reached, their disability prevented them from understanding what they were doing

Question 8

When will a contract with a minor be binding?

Answer 8

If ‘necessities’ are sold and delivered to a minor, they will be bound to pay a reasonable price for what was received (food, clothes, equipment, accommodation, medical services and even transport).

A minor also has the capacity to be bound by a contract for employment, an apprenticeship, training or education, as long as the agreement is, on balance, for the minor’s benefit. If not, the agreement will not be enforceable.

Also, when a minor enters into a contract that gives them an interest in property of a permanent nature or which involves a continuing obligation, the contract can be avoided if the minor so chooses, at any time before reaching the age of 18 or within a reasonable time after. If not, they are considered to have decided to continue with it and it becomes a permanently enforceable agreement.

Question 9

Other circumstances involving limited capacity to contract?

Answer 9

1. A person who is insolvent (bankrupt) has a restricted capacity to enter into contracts.
2. A person under the influence of intoxicating drugs may also be so unaware of what they are doing that they cannot bind themselves contractually.

Question 10

What are executory/bilateral contracts?

Answer 10

one in which the performance remains to be completed by both parties after acceptance of the offer.

After formation, both parties have outstanding obligations
e.g. A makes a promise to B in exchange for B making a promise to A

Question 11

What are unilateral contracts?

Answer 11

one in which only one party’s performance remains to be completed after acceptance of the offer

A makes promise to B in exchange for B performing some act

Question 12

What is conditional agreement?

Answer 12

If the parties want to they can delay the final creation of a contract, for example, until some event has taken place such as the signing of a formal written agreement. However, care must be taken to ascertain exactly what the parties intended. The surrounding facts may indicate an intention to avoid being legally bound at all until formalities are completed.

In other circumstances, the facts may show that only performance of their agreement is intended to be delayed, in which case the agreement becomes legally binding even before it is formalised.

Question 13

What are the formation requirements?

Answer 13

Agreement
Certainty
Consideration/Deed
Intention

Question 14

Explain the formation requirement - agreement.

Answer 14

Test for this by identifying an offer made that was accepted.

Question 15

What must an offer be?

Answer 15

• Promissory i.e. must involve an undertaking to do or refrain from doing something, Illusory promises cannot be enforced
• Sufficiently certain
• Intended to result in a contract if accepted.

Question 16

What is an invitation to treat?

Answer 16

advertising goods or displaying them for sale usually involves an invitation to treat. This invites other to make offers to the person advertising for the goods or displaying the goods for sale. This amounts to invitation to treat not offer to sell.

Advertising Goods: language in advertisement determines whether it involved invitation to treat or contractual offer.

Question 17

What are the terms of acceptance?

Answer 17

• must evidence unqualified assent to terms of offer
• must not be subject to condition
• must occur while offer is still in existence
• must comply with requirements specified by terms of offer

Question 18

What can an offeror do?

Answer 18

An offeror can state that the offer expires at a particular time

When no such period has been set, the offer will expire after the passing of a reasonable period of time.

An offeror is entitled to withdraw to offer at any time before the offer has been accepted unless he has made a contractual commitment to keep offer open for time. A promise to keep offer open is only enforceable where the promisee has provided consideration to promisor.

Question 19

What are the rules of acceptance when being communicated via post, fax, email or unilateral contracts?

Answer 19

Post - offer will be treated as accepted as soon as acceptance is posted. (An offeror is free to state that acceptance by post is not acceptable)
Fax/Telex - considered instantaneous and acceptance is effective when the fax is received at the offererors end.
Email - Legislation defines time of receipt and place of receipt. It depends on whether the person receiving the communication designated an information system (for example, by providing an email address) for the purposes of communications. If so, the receipt takes place when the communication reaches that system. If not, the receipt takes place only when the communication comes to the attention of the addressee.

Question 20

Explain the formation requirement - certainty.

Answer 20

• A contract must be expressed in sufficiently clear and precise terms.
• Where language used by parties has one or more possible meanings, certainty requirement is met. Courts decide what meaning to give to words when interpreting. Uncertainty only raises a formation problem if language is meaningless.

Question 21

Explain the formation requirement - consideration/deed.

Answer 21

Unless agreement is recorded in a deed (signed, witnessed by person not party), a promise must be supported by consideration in order to be enforceable (informal agreement need exchange).

Doctrine of consideration requires element of exchange between parties.

Consideration requirement means that one-sided promises are generally unenforceable.

Question 22

What is the adequacy of consideration?

Answer 22

Party may provide consideration by promising to do an act or refrain from doing an act (bilateral), or by doing an act or refraining from doing an act (unilateral).
Consideration must be sufficient but need not be adequate. Peppercorn principle. It is for parties to determine bargain

Question 23

What is past consideration?

Answer 23

Past consideration is not good consideration. This rule is most often invoked where, after the contract has come into existence, one of the parties makes an additional promise which the other seeks to enforce

Question 24

Explain the formation requirement - intention.

Answer 24

• Parties are free to expressly indicate whether they intend their agreement to have contractual force.
• However in many instances this issue needs to be resolved by making inferences about the parties’ intention from their conduct, their relationship to one another and the subject matter of the agreement.

1. Traditionally, the courts made presumptions about intention based on the relationship between the parties e.g. marriage cases
2. Traditionally the courts assumed that agreements reached in a business or commercial context were intended to be binding.

Question 25

What is the privity of contract?

Answer 25

The doctrine of privity determines who is entitled to enforce a contract. The common law position is that only parties to the contract are bound by, and entitled to enforce, the rights and obligations that the contract imposes.

A person who wishes to enforce a contract must establish that he or she: is a party to the contract (doctrine of privity – see Coulls, Price v Easton); and provided consideration under that contract (doctrine of consideration).