Contracts are a fundamental part of commercial life. Many people have an intuitive awareness of how contracts form, but there are some traps to be aware of. For example, people are frequently surprised when told that contracts can be verbal or that a written contract may not be a “contract” (in a legal sense) if the essential terms are too uncertain.
So, here are the key ingredients of contract formation:
- Offer/Acceptance
An offer can be defined as a promise to do something (or not to do something) on specified terms which can be accepted by another party. An acceptance is an unqualified consent to the terms of the offer. In other words, the acceptance must “mirror” the offer. If a purported acceptance contains new terms, it is a counter-offer (which extinguishes the original offer) and not an acceptance of the original offer.
- Consideration
Consideration simply means that each party gives something of value (for example, services) normally in exchange for getting something of value (for example, money).
- Certainty/completeness
The essential terms of the contract must be sufficiently certain and complete for the contract to be legally binding. The essential terms are those that go to the heart of a contract, such as the obligation to provide the contracted services, or to pay the agreed price for them.
- Intention to create legal relations
This is exactly what it sounds like, i.e. whether the parties intended to enter into a contract. The trick here, however, is that such intention is determined objectively by looking at the language of the relevant agreement and surrounding circumstances. Courts cannot, and do not, enquire into people’s minds to see what they may have subjectively intended.
While many business people are still happy to transact based on promises and handshakes, nothing beats a concise and precise written agreement, where rights and responsibilities are stated explicitly and agreed upon – even if it’s on one page (and by the way, at Source Legal we specialise in producing great one page contracts!).
Contact Source Legal on ph: +61 428 328 452, or email Stanislav Roth at stanislav.roth@sourcelegal.com.au, for advice on preparing, reviewing and negotiating any contracts.
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