Contract Law 101

By Ross Dillon | Litigation

Everyone comes into contact with the law. The law that we all come into contact with can be split into 3 main areas – (i) criminal law, where the State imposes obligations on us all, (ii) torts, which can be described as norms of society which we must all abide by and that the courts will enforce, and (iii) contract, which are obligations we enter into voluntarily and which can be very extensive in their nature.

An example of criminal law is traffic regulations. An example of tort law is the law of negligence. So, if you have a traffic accident, you may breach traffic regulations and get sued in negligence by the owner of another vehicle that you damaged. This shows how criminal law and tort law often overlap. Generally, both involve obligations that are imposed on you.

Contract law is a different type of law. In a contract, you agree to assume certain obligations, in exchange for some benefit. The most common example of a contract is probably an employment contract. Your labour is exchanged for money. But this example also raises the first warning about contract law. Quite apart from the terms of the contract parties to it might agree, there are a series of statutes dealing with this particular type of contract. The parties are not completely free to make up terms that suit them. They must also comply with the requirements of such statutes.

However, with that warning flag raised, let’s start at the beginning. What is a contract? Let’s provisionally propose a definition – A contract is an agreement between at least two competent parties, who agree to perform specified obligations for the other(s) and intend to be bound by such agreement.

That may seem simple enough, but let’s look at an example. Two children are in the school playground having lunch. One has a drink and the other has two donuts. The one with the drink offers to share his Coke for a donut. The other agrees. Is this a contract?

We have agreement between two parties. We have an exchange of obligations. The parties each intend to be bound. So, yes, it does look like one. But let’s unpack this further.

Can either enforce the contract? They are both under the age of 18 so the provisions of subpart 6 of the Contract and Commercial Law Act 2017 applies (I did warn about legislation earlier). This deals with Minor’s contracts (anyone under 18). In effect, this deals with their competence to enter into and be bound by contracts. A related issue is whether children in the schoolyard intend to enter into legally enforceable obligations. If not, then we are probably not looking at a contract anyway.

Whether we have a contract or not has to meet a series of legal tests which flesh out the requirements of our earlier definition.

First, we have to show an offer, then an acceptance of that offer.

"First, we have to show an offer, then an acceptance of that offer."

An offer is a communication of a willingness to be legally bound to an obligation or obligations, without further negotiation. It has to be distinguished from an invitation to discuss matters further. For instance, a shop window display of goods with a price has not been accepted by the Courts as an offer, but merely as an invitation. A more obvious invitation is a call for tender. It is the submission of a tender that will usually amount to an offer.

To have a contract, the offer then must be accepted. To be accepted, acceptance has to be communicated to the person making the offer. A tender acceptance is a good example of that. Also, consider an auction process. The “bids” are each an offer. The fall of the hammer is the acceptance of the final offer. But there are always problems. What happens when an offer is withdrawn? What happens if acceptance is communicated by email but the person making the offer does not receive the email? The short answer to both questions is – that is why we have lawyers. The long answer is that a lot will depend on factual issues of timing and the course of conduct between the parties and how the Contracts and Commercial Law Act 2017 deals with electronic communications.

If we can establish offer and acceptance, we then must establish “consideration”. This is what distinguishes a contract from other types of promises. Consideration is the provision of something of value in exchange for some other obligation in return. In other words, you have to show you are giving something in order to get something else. Our playground example shows consideration – a drink from one is consideration for the donut from the other.

There are, of course, problems with this requirement. For instance, the consideration has to be for something that will occur in the future. If, in the playground example, one child had given the donut and then asked for a drink in return for the donut, the “consideration” had already occurred. It is not a contract as contractual consideration has to be “forward looking” – an agreement to do something in the future (although there are a number of statutory exceptions to this rule).

Finally, there has to be an intent to create legal obligations – the parties must intend to be legally bound by their promise and suffer enforcement proceedings should they fail to perform. This “intent” is not a subjective issue. A party can not later simply say “I didn’t intend to contract”. The Court will look at the context in which the agreement came about and if a reasonable person in that context would expect legal obligations had been intended, then the contract will be enforced. If it looks like a contract, flys like a contract and quacks like a contract, intent to contract will be established.

Two other factors need to be considered. One is contractual certainty. A contract must create certain, not uncertain, obligations. That you will provide me a cubic metre of gravel on Tuesday to my house at a price of $85.00 is certain. To provide a load of gravel when you can and I will pay you, is not. Who, what, when, where and how have to be dealt with in the contract, although some of these requirements are often implied rather than expressly stated.

A final key factor is privity of contract. This is about who has agreed to the contract, and who can enforce the contract. Consider the playground example. The two kids are parties to the agreement, and each has promised something to the other. But consider if one says “I will give you some on my drink if you give a donut to my sister”. The sister stands to gain but is not a party to (privy to) the agreement. Again, the Contract and Commercial Law Act has an answer to this issue, but it also takes us into agency law, where contracts are negotiated on behalf of other entities. But I think we need to leave that area of law for another day.

So, whether or not you have a contract depends on offer, acceptance, communication of acceptance, consideration, intent to create legal obligations, certainty and privity. With an important gloss of whether any statute imposes other requirements (for instance, that the contract must be in writing).

If you have any questions or concerns about your contract, or whether you even have one, you know where to find us.

We have taken care to ensure that the information given is accurate, however it is intended for general guidance only and it should not be relied upon in individual cases. Professional advice should always be sought before any decision or action is taken.