Contract Law
What makes a valid contract?
Contracts need certain ingredients to be legally valid and enforceable…
1) Informed agreement as to terms on both sides
2) Facts identifiable as offer and acceptance.
3) An intention on both sides to be legally bound.
4) Certainty of terms.
A contract need NOT be in writing, or signed. You only need proof of the above 4 factors. A contract can be made verbally or implied by the ongoing relationship of the parties.
Forms of Agreement
Every time you buy or sell something, this is a contract in action. If buying over the counter, by taking an item of stock to the counter, the customer is making an offer to buy, and the taking of payment is the seller’s acceptance of that offer. In Pharmaceutical Society of Great Britain v Boots Cash Chemists a pharmacy in 1950’s Britain came up with the super-radical idea of offering some of their merchandise in shelves for customers to select independently as in a normal shop, rather than everything being handled by staff over-the-counter. The Pharmaceutical Society did not like this and sued.
The court ruled that the display of goods for sale is not a contractual offer to sell, and picking an item up is not acceptance of the offer. By indicating a wish to purchase, the customer offers to buy. The sale is effected when the sales staff accept the customer’s offer to buy at the agreed price. If the display of goods was an offer to sell, then where no price is marked, a customer could force a shop to sell at a loss and sue if they refuse.
Effects of conduct
Contracts can be implied by conduct. If two parties engage in a course of conduct where they both do something for each other, a contract implied by conduct emerges from their commitments to ongoing cooperation.
Written Contracts can be altered by conduct. If a contract is written, then the strict meaning of the document takes precedence over any other factor. If it becomes customary between the parties to do things differently, evidence is required to prove that the change became customary and was agreed to by consent of both parties.
Advertising
Contracts are distinguished from what lawyers call Invitations to Treat. These include advertisements and display of goods for sale (as in Boots Cash, above).
Without this distinction, every advertisement and every display of products would constitute an offer of a contract and any action merely looking like acceptance by the customer would bind the seller and customer. The customer would be able to force a sale and would be unable to change their mind even if they realise they could not afford the purchase. Some advertisements are not strictly true, and would create massive liabilities for the seller unless they were totally honest in their marketing.
​
Freewill, informed agreement
The parties must be fully appraised of the terms, or at least have the opportunity to appraise themselves. If a party was not made aware of the terms on offer, then they cannot have agreed to the terms. This is dealt with in Oceanic Sun Line Special Shipping v Fay, where a cruise ship ticket was issued subject to terms that sole jurisdiction would be with the courts of Greece. The plaintiff was injured on board and insisted on suing in New South Wales. The terms were written on the ticket and displayed at the company office, but the passenger had no reasonable opportunity to view them first.
The court ruled that the contract was formed at the moment of issue, so the terms on the ticket, which were only viewable after the issue of the ticket, were void. It was required by the court that the company should do all it reasonably can to bring the terms to the passenger’s attention; otherwise such terms cannot be relied on by the company in its defence. However the court found the rest of the contract not on the ticket was still valid.
Standard form contracts
Standard form contracts follow the same rules as any other written contract, just as if it was fully negotiated. In practice issues sometimes arise with opaque wording and onerous terms which can compromise a claim as to free, informed agreement.
This also applies to online contracts where a click of a button substitutes as a signature. Anything electronic can be falsified easily, so as evidence of the agreement, online contracts are flimsy – beware of the offeror.
Offer and Acceptance
To prove that a contract is valid there must be facts identifiable as an offer and as the acceptance of that offer.
A mere ongoing relationship of trust and cooperation is not going to qualify as a contract. There needs to be a definite commencement to the contractual aspect to the relationship with the recognition of rights and obligations evident. This is especially important when enforcing contracts implied by conduct. The parties’ intentions must mirror each other, which is referred to as the meeting of minds.
The acceptance of a contract needs to be manifested somehow. The test of whether the offeree has accepted depends on how a reasonable bystander would judge their conduct. This is dealt with in Empirnall Holdings v Machon Paull Partners where an architectural firm hired a builder, but the architects refused to sign the written contract. The builders agreed to continue without signatures anyhow. By the time of appeal the only question left was whether there was a valid contract contained in the written but unsigned terms.
The court ruled that mere silent acceptance is insufficient to create a contract. There must be an external manifestation of assent. After a reasonable period, silence is seen as rejection. There can be no binding by default of a person by another because of the principle of freedom of contract. But under some circumstances silence can amount to acceptance. Customs of a trade, the course of dealing or the previous relationship of the parties may have this effect.
The Postal Rule
Where an offeror issues an offer to be accepted by post, the date of the acceptance is the date on which the offeree sent their acceptance. If the offeror sent a further letter revoking the offer, this is dated by when the offeree received it. The same principle will apply to modern electronic communications of all sorts.
Intention to be legally bound
The parties must mean what they are doing when entering a contract. It is one thing to intend to cooperate when and how it is suitable, but a very different thing to intend to be legally bound to the fulfilment of an agreement. For this reason courts are very reluctant to find contracts in existence between family members. The more casual, optional or unpredictable the relationship between the parties, the less likely there is a real contract. A signed document setting out terms and damages for breach helps, but even this is not all-sufficient in proving that a contract came into being. This is not to say that the written terms and signatures are disregarded, but where there is good evidence contrary to an intention to be legally bound, then evidence in favour of it is needed.
If someone is severely affected by alcohol, drugs, age, mental illness, or intellectual disability, they are considered incapable of forming an intention to be legally bound. Any contract with them is void. In these instances a holder of power of attorney, a parent or guardian, a case worker, or a trusted sibling, can be of assistance.
Consideration
Consideration, in contract law, means whatever is required by the terms of a contract to be done by either party for the other. It could be the transfer of money, goods, services, or anything with a value to it. The terms which define the main consideration, that is the basics of the two way relationship, are called the conditions or express terms of the contract. (See later).
The rule is that for a contract to be valid there must be some sort of sacrifice by one party resulting in some sort of benefit to the other. This is a two way street! When there is some ostensible benefit, this is called ‘valuable consideration.’ The term, valuable consideration, does not presuppose great value, just some value. Some old cases referred to a peppercorn as an example of valuable consideration of negligible yet relevant worth. They mean literal peppercorns, which were a form of currency in centuries past.
Certainty of terms
Agreements must be specific, quantifiable and lawful – there must be no question as to what is on offer and what is required. Courts try to keep contracts in action, but this is impossible when a contract is ill-conceived in its fundamentals. A fundamentally flawed contract is declared void. Where a contract is declared void, everything that has changed hands is to be returned.
Uncertainty of terms
Uncertainty of terms is where any terms of a contract are vague, contrary, or are omitted. Courts try to reinterpret a contract and adjust its terms to make it commercially viable. The parties' dispute may be resolved by a court identifying what will make the underlying agreement work and imposing this new interpretation on the parties as a matter of law. When this is impossible, such as if the vagueness relates to something fundamental, this is illusory consideration.
Illusory consideration
A contract is void if it is vague, or improperly conceived as to the payment (or equivalent fundamental rights) due to a party, in return for their fundamental obligations. A contract where the payment is indeterminate, or which offers something illegal, or something already owed, or which leaves consideration up to the discretion of one party, is considered to offer illusory consideration and is ruled to be void.
​
​
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Limited [1953] 1 QB 401.
Oceanic Sun Line Special Shipping Company Inc v Fay (1988) 165 CLR 197.
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523.
​