the essential elements of a valid contract, including offer, acceptance, consideration, intention and capacity

What this dot point is asking

QCAA wants you to know what turns an everyday agreement into a legally enforceable contract: the essential elements that must all be present, and the common-law cases that define them. Contract law is mostly common law in Australia rather than codified. Expect a 3-5 mark short response in IA2.

The answer

The five essential elements

For a legally binding contract to exist, five elements must be present.

1. Offer

A clear proposal made by one party (the offeror) to another (the offeree), capable of being accepted. An offer must be distinguished from an invitation to treat, which is merely an invitation for others to make offers. Goods displayed in a shop window or on a shelf are an invitation to treat, not an offer (Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401). Advertisements are usually invitations to treat, but can be offers where they promise something specific in return for an act (Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256).

2. Acceptance

Unqualified agreement to all the terms of the offer. Acceptance must be communicated to the offeror and must mirror the offer. A response that changes the terms is a counter-offer, which destroys the original offer (Hyde v Wrench (1840) 49 ER 132). The postal acceptance rule can apply where post is a reasonable means of acceptance.

3. Consideration

Something of value exchanged by each party (the "price" of the promise). Consideration must be sufficient but need not be adequate (the courts do not assess whether the bargain was a good one). Past consideration is generally not valid consideration.

4. Intention to create legal relations

The parties must intend the agreement to be legally binding. There is a rebuttable presumption that commercial agreements are intended to be binding, and a rebuttable presumption that purely social or domestic agreements are not (Balfour v Balfour [1919] 2 KB 571).

5. Capacity

The parties must have legal capacity to contract. Certain categories of person have limited capacity, including minors, people who lack mental capacity, and intoxicated persons. Contracts with minors are generally voidable, except for contracts for necessaries.

Genuine consent

Even where the five elements are present, a contract may be challenged where consent was not genuine, for example because of misrepresentation, mistake, duress, or undue influence. The Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth)) also prohibits misleading or deceptive conduct (s 18) and unconscionable conduct, which can affect the enforceability of consumer contracts.

Legality

The purpose of the contract must be lawful. A contract to do something illegal or contrary to public policy is unenforceable.

Express and implied terms

The terms of a contract may be express (stated by the parties) or implied (read in by law, custom or to give the contract business efficacy). Terms are also classified as conditions (essential terms), warranties (minor terms), or intermediate terms, which affects the remedies available for breach.

Discharge and breach

A contract may be discharged by performance, agreement, frustration, or breach. A breach occurs where a party fails to perform an obligation. The innocent party may sue for damages, and where a condition is breached, may also terminate the contract.

Examples in context

Example 1. A car sale advertised online. A seller lists a used car for sale on an online marketplace. The listing is an invitation to treat. A buyer who offers the asking price is making the offer; the contract is formed only when the seller accepts. If the seller responds by asking for a higher price, that is a counter-offer, and the original offer is gone unless renewed.

Example 2. A family promise that is not binding. A parent promises to pay an adult child an allowance while the child studies. When the parent stops paying, the child cannot sue for breach of contract, because the agreement is presumed to be a domestic arrangement with no intention to create legal relations (Balfour v Balfour [1919] 2 KB 571), and there is no contrary evidence to rebut the presumption.

Try this

Q1. List the five essential elements of a valid contract. [5 marks]

• Cue. Offer; acceptance; consideration; intention to create legal relations; capacity.

Q2. Distinguish between an offer and an invitation to treat, using a case to support your answer. [3 marks]

• Cue. An offer can be accepted to form a contract; an invitation to treat merely invites offers. A shop display is an invitation to treat (Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401).

Q3. Explain how the presumption about intention to create legal relations differs between commercial and domestic agreements. [4 marks]

• Cue. Commercial agreements are presumed binding; social and domestic agreements are presumed not binding (Balfour v Balfour [1919] 2 KB 571). Both presumptions are rebuttable by evidence.