Contents

Introduction to Formation of a contract

Agreement
Consideration
Intention to Create Legal Relations
Capacity
Formalities
Detailed discussion
Agreement
• Offer
• Ways of termination of an offer
 revocation
 rejection
 failure to accept on time
 death
 failure of a condition
• Acceptance
 Communication of acceptance
 Battle of the forms
 Acceptance in the case of unilateral agreements

Certainty and Conditions

 Vague or ambiguous
 Incompleteness
 Agreements to agree and agreements to negotiate
Termination of a contract
Performance
Discharge by Agreement
Discharge for Breach
Discharge by Frustration

Formation of a contract
It is generally accepted that four essential elements are necessary for contract formation. They
are,
 Agreement
 Consideration
 Intention to Create Legal Relations
 Capacity
Agreement
The first requirement for a valid contract is an agreement, which normally consists of an 'offer'
and an 'acceptance' (although the parties may not articulate their arrangement in these terms) and
involves a 'meeting of the minds' - or consensus - between two or more parties. Complex rules
exist to determine when an offer and acceptance are valid.
To be effective an agreement must also be certain in all material respects. Thus, an agreement
which is 'vague or ambiguous', incomplete or constitutes a mere 'agreement to agree' will not be
enforceable.
Consideration
Consideration is the price that is asked by the promisor in exchange for their promise and is an
essential requirement in Australia before a contract will be binding (save for agreements made
under seal). Consequently, gratuitous promises are generally not enforceable.
Consideration is a complex requirement containing many rules and qualifications. In addition,
the doctrine of promissory estoppel now operates to permit the enforcement of agreements even
absent the existence of valid consideration.
Intention to Create Legal Relations
For a contract to exist the parties to an agreement must intend to create legal relations. Usually,
the presence of consideration will provide evidence of this, but not always, so that this
requirement must be separately proved in each case. The onus is on the party seeking to prove
the contract to demonstrate intention and the nature of the relationship between the parties, while
relevant, no longer carries with it any presumption about the contractual intention of the parties
involved.
Capacity
There are certain persons and classes of persons that lack the capacity to enter into a contract
with the consequence (normally) that resulting contracts will not be enforceable against them.
Lack of capacity now often stems form a fear of vulnerability to exploitation. This area has
become more complex as a result of statutory developments at a state level (calls for national law
reform have not yet met with success) which result in a variety of different rules.

Formalities
In most cases there is no requirement for a contract to comply with any formalities. However,
statute does impose such a requirement in a limited range of contracts - most commonly, those
relating to the sale or disposition of land or guarantees.

**Let’s discuss the above mentioned essential elements of contract formation in

detail.

Agreement
The first requirement for a valid contract is an agreement, which normally consists of an 'offer'
and an 'acceptance' (although the parties may not articulate their arrangement in these terms) and
involves a 'meeting of the minds' - or consensus - between two or more parties.
Offer
No particular form is required to constitute an offer. An offer is a communication
amounting to a promise to do something (or not do something) if the person to whom the
offer is directed does something (or refrains from doing something) - or makes a promise -
in return.
An offer may be made to an individual, group, or even to the world at large (Carlill v
Carbolic Smoke Ball Co).
An offer must be distinguished from an invitation to deal. This is not always a simple
process; the test is one of intent; did the party making the statement intend that an
affirmative response would give rise to an agreement or simply result in further
negotiation? The leading case on this issue is Pharmaceutical Society of Great Britain v
Boots, in which the English Court of Appeal placed great emphasis on the commercial
impact that classification of the conduct as an offer would have had in that case. Thus, if it
would be 'commercially inconvenient' to treat a statement or other conduct as an offer then
it is more likely the courts will classify it as only an invitation to deal. Auctions are
generally analysed as an invitation to deal by the auctioneer, with bids constituting offers
(AGC (Advances) Ltd v McWhirter)). Invitations to tender are also generally considered
invitations to deal, with the tenders themselves constituting offers which may be accepted
or rejected. However, the invitation to tender may carry with it a separate offer to consider
all tenders submitted (Blackpool & Flyde).
Offers may be terminated in a number of ways:
(1) revocation
(2) rejection
(3) failure to accept on time
(4) death
(5) failure of a condition.

(1) Revocation: As a general rule an offer may be terminated at any time prior to
acceptance - even if the offeror had promised they would keep it open until a particular
date (unless that promise is supported by consideration). To be effective a revocation must
be communicated - whether directly or indirectly - and any form of words or conduct
conveying an intention to no longer be bound by the offer will suffice. See further
Dickinson v Dodds (1876) 2 Ch D 46 and Byrne v Van Tienhoven (1880) LR 5 CPD 344.
(2) Rejection: Once an offer is rejected by the offeree it can no longer be accepted.
Rejection can take the form of an outright refusal or a counter-offer - that is, a purported
acceptance but on different terms. Even if the different terms are immaterial the counter-
offer will be treated as a rejection and new offer. As a result, it is important to distinguish
counter-offers from mere requests for further information (Hyde v Wrench). To be
effective rejection must be communicated; the postal rule does not apply to letters of
rejection.
(3) Time: If an offer stipulates a time for acceptance then acceptance after that time will
be ineffective. If no time is stipulated acceptance must occur within a reasonable time or
the offer will lapse.
(4) Death: The general rule is that death of the offeror will terminate the offer. This is
always the case where the offeree knows of the offeror’s death. Where the offeree is not
so aware then in most cases it is possible for the offeree to accept the offer and create a
binding contract - however, this will not be possible if the contract is for services that were
to be personally rendered by the deceased (e.g., a portrait painting)
(5) Failure of condition: an offer may stipulate that it will terminate if a particular
condition is (or is not) satisfied - e.g., you might offer to sell produce on condition that
you are able to acquire the requisite amount from a stipulated supplier by a certain date.

Acceptance
Acceptance is an unequivocal statement (oral, written or by conduct) by the offeree
agreeing to the offer. An offer may only be accepted by the person to whom it is directed
and to constitute a valid acceptance this statement or conduct must occur in response to
the offer (although compliance with terms of an offer raises a rebuttable presumption that
the act was done in response to the offer). It is sufficient if the offer was one of the reasons
for the offeree acting in the way s/he did - even if not the dominant reason.
Generally no particular form is required for acceptance. In Empirnall the Court stated the
test as follows: ‘whether a reasonably bystander would regard the conduct of the offeree,
including his silence, as signaling to the offeror that his offer has been accepted.’ While an
offeror cannot stipulate that silence will be deemed to be constitute acceptance and
thereby impose upon the offeree a positive obligation to reject (Felthouse v Bindley
(1862) 142 ER 1037) it is possible to waive the requirement for notification of acceptance
in some cases - generally where it would be commercially impractical to require such
communication - as in reward cases.

Communication of acceptance
To be effective, acceptance must be communicated - a mental decision to accept is not
sufficient. The general rule is that an agreement is concluded when and where
communication of acceptance is received - in relation to instantaneous modes of
communication acceptance is deemed to be received when it is given to the offeror (even
if they do not read it). Where post (or possibly other non-instantaneous methods of
acceptance) is used a special rule applies (the postal rule!): provided post is contemplated
by the parties (expressly or by implication) acceptance occurs when and where the letter is
posted. See further: Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgessellschaft
mbH and Bressan v Squires. Related to this, if a particular form for acceptance is made
mandatory then, to be effective, acceptance must take this form - however, the courts will
be slow to conclude a stipulated form is mandatory unless clear language is used to that
effect - where clear language is not used then an equally fast and effective method of
communication will usually be held to suffice (Manchester Diocesan)
There are now special rules that apply in relation to electronic transactions (e.g.,
Electronic Transactions (Victoria) Act 2000, s 13. Pursuant to this legislation, for
example, where email is contemplated as a means of acceptance, that acceptance occurs
when the email is sent (if not contemplated, then when it comes to the recipient’s
attention) and it will be deemed to have been received at the addressee’s place of business,
regardless of where in fact the email is read.

Battle of the forms

In some cases it is not easy to classify conduct of the parties into 'offer' and 'acceptance'.
This is particularly the case when documents pass back and forth frequently between the
parties as part of contractual negotiations. This is referred to as the 'battle of the forms'
and, in such a case, where it appears that the parties have reached agreement, although
offer and acceptance cannot be clearly discerned, the courts will look at the circumstances
of the particular case to determine if true agreement was reached and, if so, on what terms.
See further Butler Machine Tool Co Ltd v Ex-Cell-O Corp (England) Ltd and Maxitherm
Boilers Pty Ltd v Pacific Dunlop Ltd.
Acceptance in the case of unilateral agreements
Acceptance in the case of unilateral agreements generally takes the form of performing an
act. The issue has arisen of whether or not an offer may be revoked once performance has
begun but before it is completed. This issue is not yet resolved. In Daulia Ltd v Four
Millbank it was reasoned that acceptance occurs once the acts requested by the offeror
were embarked upon and that the offer could not thereafter be revoked.
If acceptance is performing the act asked for (as Carlill suggests it is) then, applying the
general rule an offeror could revoke after performance has started but before it is
completed. However, in Daulia v Four Millbank it was suggested that in the case of
offers of unilateral contracts, the offer is accepted and a contract is made when an
unequivocal commencement of the act has occurred. More recently in Australia the Full
Federal Court in Mobil Oil v Wellcome (1998) held that there was no general rule that
offers for unilateral contracts could not be revoked after the offeree had commenced
performance.

Certainty and Conditions

If an agreement is uncertain in a material respect it cannot constitute a binding contract.
This might occur if the agreement is 'vague or ambiguous', incomplete or constitutes a
mere 'agreement to agree'.
Vague or ambiguous
If it is not possible to give a definite meaning to words used in an agreement it will be
considered too vague or ambiguous to constitute a contract.
Incompleteness
As a general rule parties must deal with the essential terms for the agreement in order for
it to be enforceable. Price is generally considered essential (although in the case of goods
legislation will step in and 'complete' the agreement if parties do not agree on price (e.g., s
 13(2) Goods Act (Vic) which reasonable price to be paid where no price is stipulated). It
is not essential that an agreement be worked out in great detail and it is possible for parties
to nominate one of the parties - or a third party - to determine certain matters in the future
- provided the parties themselves do not need to reach further agreement.
Agreements to agree and agreements to negotiate
Agreements to enter into a future agreement are not binding. In the UK, the House of
Lords has held that agreements to negotiate are likewise not enforceable. In Australia,
however, in Coal Cliff Colliaries, the Court suggested that agreements to negotiate may be
enforceable in appropriate circumstances. It is clear that lockout agreements - that is,
agreements not to negotiate with a third party for a period of time - are sufficiently certain
and will not be struck down for uncertainty.
Any uncertain part of a contract will be unenforceable - if it is possible to sever this part
from the remainder of the contract then the court will do so and uphold the remainder,
otherwise the whole agreement will be unenforceable.

Termination of a contract
When the rights and obligations arising out of a contract are extinguished, the contract is said to
be discharged or terminated. A contract may be discharged in any of the following ways.
Performance
A contract may be discharged in a number of ways; most commonly through performance, by the
parties, of their contractual obligations. As a general rule, for a contract to be discharged by
performance the contractual obligations must be performed completely and exactly; it is not
sufficient to 'substantially' perform a contract. There are, however, some exceptions to the rule
that exact performance is required. The parties may also modify this requirement - by expressly
or implicitly providing that exact performance is not required. Determining the relevant level of
performance will, therefore, depend on proper construction of the contract involved.
Discharge by Agreement
Parties are free to terminate their contract by agreement. This might take the form of a
termination provision in the contract itself or through a new and separate contract.

Discharge for Breach

Breach of contract may give the non-breaching party a right to terminate a contract. The non-
breaching party may terminate a contract for breach if (a) a provision of the contract permits
discharge for breach in the circumstances (e.g., it might provide that in the event of failure to
supply goods on a specific date the other party may terminate the contract), (b) if the other party
repudiates the contract - that is, renounces their obligations under it (e.g., they say that will not
perform the contract); or (c) the breach is sufficiently serious (minor or technical breaches will
generally not allow the non-breaching party to terminate)

Discharge by Frustration
In some cases a contract will be brought to an end because of a supervening event that is beyond
the control of the parties; for example, a contract between A and B, whereby B agrees to hire A's
theatre on a particular night may be frustrated if, as a result of a terrorist act the theatre is
destroyed prior to the date for performance of the contract
The doctrine of frustration applies only in a limited range of circumstances - generally where the
event renders performance of the contract something fundamentally different from that
anticipated by the parties. The courts are likely to be unsympathetic if the event could have been
anticipated and therefore provided for by the parties in their contract.
Where frustration is established the contract is terminated automatically (in future); there is no
option to discharge or to perform and, at common law, the loss resulting from the termination
lies where it falls (although there are limited exceptions to that rule). Statutory modification
means that in most cases the harshness that might result from that common law rule is avoided.

References.
http://www.atkinson-law.com/homeR.htm (retrieved on 2009.11.25)
http://www.australiancontractlaw.com/law/formation.html(retrieved on 2009.11.25)
http://en.wikipedia.org/wiki/Australian_contract_law (retrieved on 2009.11.25)
http://www.australiancontractlaw.com/law/termination.html (retrieved on
2009.11.25)