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.
For more information on:
- When does a contract become effective?
- Certainty of terms
- Illegal and voidable contracts