What is a Contract?

Overview

A contract is a promise, or a set of promises that is legally binding on the parties involved.

Unless two parties agree with the rights and obligations imposed by a contract (the making of an agreement), a contract cannot be formed. Therefore, any starting point of a contract relies on the agreement between two parties.

Contracts do not have to be in writing save for certain types of transactions such as dealings involving interests in land. However, the operation and enforcement of a contract generally relies on a document that is signed by all parties.

Example: The Making of an Agreement: John is a plumber and Mary is a house-owner. Mary calls John to change the bathroom taps in her home. John attends Mary’s home and says that he will change the bathroom taps in Mary’s home for $500. In this scenario, until Mary agrees to pay John $500 to change her bathroom taps, there is no agreement between the parties and a contract cannot be formed.

Different forms of contracts:

written;
created by conduct;
created orally;
implied for the circumstances;
arising out of legislation; or
a combination of the above.

Common types of contracts:

The following are some of the most common types of Contracts that a person would encounter in their everyday life (not exhaustive):

Employment Contract
Business Sale and Purchase Contract
Contract for Sale of Property
Residential Lease Contract
Commercial Lease Contract
Building Contract
Commercial Contracts

Elements of a contract:

A contract contains the following important elements:

Offer

An offer is an indication of a party’s willingness to enter into a contract with another party, and a willingness to be bound by certain terms.

An offer will often outline the proposed terms of a contract that is open for acceptance or rejection by the other party. In any contract, the words ‘term’ or ‘clause’ are usually interchangeable and generally mean the same thing. It is important to note the distinction that some terms are express (in written form), while others may be implied (unwritten but may go without saying).

Example: Sale of a Residential Property: the Buyer makes an offer to the Seller to purchase by way of an offer and acceptance form (Offer Form). In this Offer Form, the buyer may list down the conditions of sale, its proposed deposit and payment method. This Offer Form is then reviewed by the Seller for acceptance/rejection. Until a Seller has responded to the Offer Form, a contract has not been formed.

Consideration

Consideration usually relates to what is being exchanged between the parties. Typically, this might include a good or service in exchange of payment.

For an agreement to be binding, the Promisee ^[1] must provide consideration (payment of some kind) for the promise they have received from the Promisor ^[2] (good or service of some kind).

Capacity to contract

For the contract to exist and be legally binding on the parties, each party must have the necessary capacity to enter into a contract.

If one of the party’s suffers from or classified under any of the following, then contracts this party enters into may not be enforceable:

Intoxication
Minors
Mental Disorders
The Crown
Bankrupts
Companies ^[3]

Acceptance

When responding to an offer, a party may reject, accept or make a counter-offer.

Some contracts clearly stipulate the preferred method of communicating their response, especially an acceptance. Where a contract is silent on the form of acceptance, the parties can rely on the mode of communication used in the negotiation, so long as the acceptance is communicated in a timely manner.

(Tip: when in doubt, produce a written form of acceptance/rejection for avoidance of any doubt and for record-keeping purposes.)

Conclusion

Once a binding contract between the parties is formed, either party is then able to enforce the contract. If the Promisor or Promisee:

does not perform their part of the promise; or
does not fulfill any of the obligations stipulated under the terms/clauses of the contract then the other party may choose to commence legal proceedings against the other party.

[1] Person giving the promise.
[2] Person providing the promise.
[3] Subject to the rules of the Corporations Act 2001 (Cth).
[4] This can relate to any terms, clause, rights or obligations under a contract.
[5] This is subject to the circumstances of each and every case. Before initiating legal proceedings, it is recommended to seek independent legal advice.
[6] Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1998) 165 CLR 107; Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.
[7] Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1998) 165 CLR 107.

Frequently Asked Questions

Can I sue someone if they do not keep their ‘promise’ ^[4] under a contract?

Generally speaking yes, ^[5] but it is important to note that in most cases, only a party to the contract can sue the other party. ^{^[6]} However, there are some exceptions where a third party can bring an action on the contract. ^{^[7]}
Suing a party under a breach of contract may be classified under Commercial Litigation.

How to terminate a contract?

If you are planning to terminate a contract ahead of its agreed end date (if any), or ahead of the completion of the promise as stipulated within the contract, you must first consider whether there is a termination term or clause.

A termination term or clause will usually set-out the following (not exhaustive):
- how the contract can be terminated;
- when it can be terminated;
- if notice is required for early termination; and
- if any penalties apply.
- If a termination term or clause is included, then you must follow these guidelines.
If a termination term or clause is not included, then you will have to negotiate the termination date with the other party either verbally or in written form. What this means is that you will need to seek the other parties’ permission to terminate the contract.

How to extend a contract?

Similar to termination of contracts, when planning to extend a contract, you must first consider whether there is an extension term or clause.

An extension term or clause will usually set-out the following (not exhaustive):
- can the contract be extended;
- how the contract can be extended;
- how long it can be extended;
- if there is a requirement to provide notice;
- if there is a requirement to enter into a supplementary contract or deed of variation to reflect the extension;
- if any penalties apply.

Disclaimer

"The content in this publication is general only and is not legal advice to be relied on. If you require specific legal advice concerning the topic of this publication, please contact our office to speak with one of our lawyers."

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