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Contract
9 November 2017

Do you have a Contract?

What is needed for a contract? Is a verbal contract binding? Lawyers are often asked these questions and in many industries handshake deals are common. However, when something goes wrong, clients want to know if a contract has been formed.

Four elements are needed for a contract to be in place.

1. Offer and Acceptance

There needs to be formal communication of both an offer and an acceptance.  For example, a TV is for sale for $100.  I offer to pay the store $100 for that television, and the store accepts.  In a supply arrangement, I might offer to supply you 100 TVs for $1000, and you accept.  In these examples, there is a clear offer and acceptance. 

A common misconception is that the store simply displaying the TV for $100 constitutes an offer; this is not the case.  This is an “invitation to treat” or, in other words, an act which is calling for offers to be made.  The offer comes when I offer to pay the $100 (or some other amount) for the TV.

2. Consideration

There must be “consideration”.  This is an exchange of promises between the parties.  In the second example above, I am promising to supply you 100 TVs and you are promising to pay me $1000, so there is an exchange of promises.  If I was simply promising to supply you 100 TVs and there was no promise given by you in return, then there would be no consideration.  Consideration comes in many different forms, but is an essential element for a contract to be in place.

3. Certainty as to Terms

The parties must agree on all terms necessary to carry out the contract.  In the supply example, you and I might have to agree on these essential terms for a contract to be in place:  the price, the number of TVs being supplied, the timeframe for supplying the TVs and the timeframe for payment.  There must be agreement on these essential terms. 

4. Intention to Create Legal Relations

The parties must have an intention to create a binding contract.  When we are contracting for the sale of the TVs, we have an intention to form a contract; we are not merely joking or speculating about the possibility of me supplying you the TVs in the future.  We are committing to the promises given.

These elements can all be satisfied without being written down (except in a contract for land).  However, a properly drafted contract removes any uncertainty and protects both parties from the risk of non-performance in the future. 

On occasion, Courts have said that verbal arrangements or even conduct between parties has satisfied the above four elements and created a contract.  Therefore, people need to be careful in their dealings as to what they are agreeing to, either by words or conduct, as they may have given representations that amount to a contract being in place.

 

The above information is of a general nature only. You should contact our firm for advice relating to your specific circumstance.

 

 

Nick Strettell

About Nick Strettell

Nick is a member of Saunders Robinson Brown's Commercial Team. He specialises in commercial property matters and business sale and purchases acting for a number of Saunders Robinson Brown's commercial clients.

View all posts by Nick Strettell