Elements of a Contract
What turns an agreement into a binding contract in NSW, from offer and acceptance to capacity, and when a contract must be in writing.
Contract law basics / 5 min read
A contract is an agreement the law will enforce. In NSW it generally needs an offer, an acceptance, consideration, an intention to be legally bound, terms certain enough to enforce and parties with capacity to contract. Most contracts do not need to be in writing, but some, such as contracts for the sale of land, do.
What makes an agreement a legally binding contract?
A contract is an agreement the law will enforce, and in NSW it generally needs six elements. If one is missing, there may be an understanding between the parties, but not a contract a court will enforce.
Offer
one party puts forward terms the other can accept. A price list or a request for quotes is usually an invitation to make an offer, not an offer itself.
Acceptance
the other party agrees to those terms as they stand. A reply that changes a term is usually a counter-offer.
Consideration
each side gives or promises something in return, such as money, goods, work or a promise. It need not be a fair price, but something already done before the promise was made generally does not count.
Intention to create legal relations
the parties intend to be legally bound, judged objectively from what they said and did.
Certainty and completeness
the essential terms are agreed and clear enough to enforce. An "agreement to agree" on a key term later is usually not enough.
Capacity
each party is legally able to contract. A person is of full age at 18 under the Minors (Property and Contracts) Act 1970 (NSW), which sets special rules for younger people.
Does a contract need to be in writing?
Most contracts do not. A spoken agreement, emails or conduct can create a binding contract if the elements above are present, although an unwritten deal is harder to prove.
There are exceptions. Under section 54A of the Conveyancing Act 1919 (NSW), no action can be brought on a contract for the sale or other disposition of land, or an interest in land, unless the agreement, or a note or memorandum of it, is in writing and signed by the party being sued or someone lawfully authorised by them. The section preserves the law of part performance and allows these contracts to be made and signed electronically. Some other contracts have formal requirements under their own legislation.
Can an email or an electronic signature create a contract?
Yes, in most cases. The Electronic Transactions Act 2000 (NSW) provides that a transaction is not invalid just because it took place wholly or partly by electronic communication, and sets out when an electronic method satisfies a legal requirement for a signature. The Act allows regulations to exclude particular documents, so a few still have their own signing rules.
What does "subject to contract" mean?
It signals that the parties may not intend to be bound until a formal document is signed, but the words do not settle the question on their own. In Masters v Cameron (1954) 91 CLR 353, the High Court described three situations where parties agree terms and also agree that a formal contract will follow:
Bound now, document to follow
Every term is agreed and the parties intend to be bound immediately.
Terms agreed, performance deferred
Every term is agreed, but performance depends on signing the formal document.
No deal until signing
The parties do not intend to make a concluded bargain unless and until they sign.
The first two create a binding contract; the third does not. Which applies depends on the words used and all the circumstances.
Can a family or social arrangement be a contract?
It can, if the parties intended to be legally bound, assessed objectively rather than by what either person privately thought. In Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95, the High Court doubted the usefulness of "presumptions", such as the idea that family arrangements are presumed not to be binding, and said the answer depends on all the circumstances. In commercial dealings the intention to be bound is usually clear; between relatives and friends, the circumstances need closer attention.
What does this look like in practice?
Suppose, hypothetically, a café owner phones a coffee roaster and asks to buy 20 kilograms of beans a week for six months at a fixed price. The roaster confirms the quantity, price and start date by email, and the café owner replies "Great, see you Monday." A binding contract has probably been formed, even though nobody signed anything.
If the roaster's email had said supply was "subject to our formal supply agreement being signed", the parties may fall into the third Masters v Cameron category. If the café stops ordering after two months, whether it is in breach of contract depends on which of these the facts support. Where no contract exists, a party who relied on a clear promise may still have a claim in estoppel.
Frequently asked questions
Generally, yes, if it has all the elements of a contract. The difficulty is proving what was agreed, so notes and messages made at the time matter. Contracts for the sale of land are an important exception.
Not usually. A contract can be accepted by words, email or conduct. Signing requirements apply to particular contracts, such as those covered by section 54A of the Conveyancing Act 1919 (NSW).
Possibly. A pre-contract statement may have become a term of the contract. If it was false, it may also support a claim for misrepresentation or misleading or deceptive conduct.
Speak with Vamp Law about a contract question
This guide is general information about NSW contract law, not advice on your situation, and whether a binding contract exists depends on the facts and the documents. Vamp Law acts in contract disputes, and Kyra Pastrovic reviews the emails, drafts and conduct behind a disputed agreement before advising on where you stand. Make an enquiry or call +61 431 569 686.
More contract law basics
When the question has become a dispute, these are the pages on how Vamp Law acts in it.
Breach of Contract
What counts as a breach of contract in NSW, when a breach lets you end the contract, and what to do next if it does not.
Estoppel
How estoppel can hold a party to a promise or assumption it caused you to rely on, even where no binding contract was ever signed.
Misrepresentation
When a false statement made before a contract lets you undo the contract or claim compensation, under the general law and the Australian Consumer Law.
In a dispute?
Talk to us about your contract
This guide explains the law in general terms. For advice on your own contract, send us the documents and we will explain where you stand.