Module 5 – Forming a Contract: Comprehensive Study Notes (Agreement, Offer, Acceptance, Intent, Consideration, Consent, Capacity, Legality)

Agreement

• A contract begins with an agreement, defined as a meeting of minds that exists when two or more people share understanding and intention.

• An agreement usually requires a valid offer made and a valid acceptance of that offer.

• Once agreement is reached, the contract comes into existence and the parties are legally obliged to proceed with the contract.

• At the point of acceptance, negotiations and expressions of interest turn into legally binding promises.

• Why this matters: before formation, promises are not binding; after formation, rights and obligations crystallize and risk profiles change in business transactions.

Offer and Invitation to Treat

• An offer is a willingness to immediately enter into a contract on stated terms with the person to whom the offer is directed.

• The offeror is the person making the offer; the offeree is the person receiving it.

• An offer can be:

  • Written

  • Verbal

  • Implied by conduct

• An invitation to treat is not an offer. It is an invitation to bargain and cannot create an agreement if there is an attempted acceptance.

  • Examples of invitations to treat: advertisements, catalogues, price lists, goods in shop windows and shelves (e.g., Partridge v. Crittenden; Pharmaceutical Society v Boots Chemists).

  • Certain interactions that resemble offers can nonetheless be offers (e.g., vending machines, car park entrances).

• Intention matters: courts look to the parties’ intention to determine whether there is an offer or an invitation to treat.

• Responding to a request for information is not an offer (e.g., Harvey v Facey).

• An offer can be directed to:

  • An individual

  • A group

  • The world at large

• Key cases illustrating offer and invitation to treat include: Carlill v Carbolic Smoke Ball Co. (1893), Boots Chemists (1953).

End of Offers

• An offer terminates in five ways: 1) Acceptance: when the offeree accepts the offer, an agreement comes into existence. 2) Rejection: if the offeree rejects the offer, it terminates and cannot later be accepted (a counter-offer operates as a rejection). 3) Revocation: the offeror can revoke an offer if it has not yet been accepted; effective revocation must be brought to the offeree’s notice before acceptance.

  • Revocation cannot occur after acceptance.

  • An offer can be kept open for a period if the offeree provides consideration (an option).
    4) Lapse: if not accepted, not rejected, and not revoked, the offer lapses after a specified or reasonable period, or on death of the offeror (depending on circumstances).
    5) Condition failure: if there is an explicit or implicit condition on which the offer depends and the condition fails, the offer terminates.

• Illustrative example (Hyde v Wrench): a counter-offer rejects the original offer; accepted later, the original offer cannot be accepted.

Acceptance

• Acceptance is the offeree’s indication of willingness to immediately enter into a legally enforceable contract on the terms offered.

• An agreement is formed when the offer is accepted.

• An offeree cannot later change their mind after accepting unless the offeror agrees to release them (requires consideration to be binding).

• Requirements for valid acceptance (three key criteria):
  1) Unqualified: acceptance must be without modification; a qualified acceptance is generally a counter-offer.
  2) Communicated: acceptance is not complete until the offeree communicates it to the offeror; silence is not acceptance (Felthouse v Bindley).
  3) In reliance on the offer: acceptance must be in response to the offer and intended to be binding.

• If the offeror specifies a mode of acceptance, it must be followed unless a just-as-prompt alternative is allowed; if no mode is specified, trade custom or reasonable conduct governs.

• In practice, the concept of acceptance hinges on a genuine meeting of minds and clear communication.

• Related principles and cases: Felthouse v Bindley (1862); R v Clarke (1927).

Intent

• Not every agreement is a contract; the parties’ intention to create legal relations is essential.

• In determining intention, the court uses an objective standard: would a reasonable person consider the agreement legally binding?

• The traditional approach relies on presumptions:

  • Social or domestic agreements: presumed not to be legally enforceable (Balfour v Balfour).

  • Commercial or business agreements: presumed to be legally enforceable (Edwards v Skyways Ltd).

  • These presumptions can be rebutted, though the commercial presumption is hard to rebut.

• Key cases and concepts:

  • Merritt v Merritt (1970): discusses intention in particular contexts.

  • Ermogenous (current approach in some contexts) shows evolving application of the objective test.

  • Letters of intent and letters of comfort can be binding or non-binding depending on surrounding facts (careful drafting advised).

• The test for intent involves assessing conduct, words, documents, circumstances, and outcomes of the agreement (Fitzpatrick, Jeffrey F. et al.).

Consideration

• Consideration is the price or value exchanged to make a promise enforceable.

• Core ideas:

  • The price must move from the promisee (the person receiving the promise) and does not have to go to the promisor directly.

  • Consideration must be sufficient in the eyes of the law, but it need not be adequate (the law allows freely chosen bargains).

• Examples of consideration forms: money, goods, services, an onerous obligation, refraining from doing something, or a promise to do any of these.

• The Dunlop Pneumatic Tyre Co. Ltd v. Selfridge & Co. Ltd (1915) illustrates the tripartite structure of consideration in the Dunlop-Selfridge chain (two separate contracts).

• Deeds are an exception: a deed is a formal contract that does not require consideration to be enforceable; simple contracts require consideration.

• Three important aspects of consideration: 1) Must move from the promisee: the promisee bears the obligation to provide consideration. 2) Must be sufficient but need not be adequate: even a small legal value can suffice; courts do not usually question adequacy. 3) Insufficient types of consideration include:

  • A vague promise (unclear or uncertain value).

  • Past consideration (payment made before the promise, Roscorla v Thomas).

  • A promise to perform a pre-existing duty (prior legal obligation; Collins v Godefroy).

• Examples demonstrating consideration: paying $1000 in exchange for a computer; washing a car for a year; giving up a legal right; etc.

• To illustrate movement of consideration, common illustrations include the Dunlop chain: Undertaking + Tyres -> Contract between Dunlop and Dew; contract between Dew and Selfridge.

Consent and Capacity (Consent to Contract)

• Even with agreement, intention, and consideration, a contract may be unenforceable if there is a lack of true consent.

• Forms of lack of consent include:

  • Mistake (less central in business; often subsumed under misrepresentations or deceit in practice)

  • Duress

  • Undue influence

  • Unconscionability

• Duress: if one party compels another to enter into a contract by threats (physical, property, or economic), consent is not genuine and the contract is voidable (Barton v Armstrong).

• Undue influence: where a dominant party abuses a pre-existing relationship to override the weaker party’s independent judgement (presumed in relationships such as doctor-patient, lawyer-client, trustee-beneficiary, parent-child, or religious leader-follower). The stronger party bears the burden of showing they did not exercise undue influence; if not, the contract may be voidable (Johnson v Buttress).

• Unconscionability: if one party exploits a special weakness or disadvantage of the other party (e.g., sickness, illiteracy, lack of education, or undue pressure) and takes unfair advantage, the contract may be set aside (Commercial Bank of Australia Ltd v Amadio).

• Practical implications in business and consumer law: many modern statutes address unconscionable terms and practices; awareness of these principles helps prevent invalid contracts.

Capacity to Contract

• Capacity refers to the ability of a party to understand and appreciate the consequences of entering into a contract.

• Common lack of capacity cases include:

  • Minors (under 18 in Australian jurisdictions) can be bound for necessaries or beneficial contracts of service (apprenticeships) under common law; statutes modify rules in some states (e.g., NSW, SA, Tas).

  • Intellectual impairment or intoxication: the party must show they did not know what they were doing and the other party knew of their condition to void the contract.

• The policy aim is to protect vulnerable parties while allowing informed adults to contract freely.

Legality and Formalities

• The objects of the contract must be legal; illegal contracts are unenforceable.

• Formality refers to whether a contract must be in a particular form (e.g., a deed) or whether a simple contract suffices with consideration.

• Modern consumer and commercial law continues to address illegality and formal requirements, including statutory prohibitions and consumer protections.

Deeds vs. Simple Contracts

• Deeds: formal contracts signed with witnesses and sealed; do not require consideration to be enforceable.

• Most business contracts are simple contracts and require consideration.

• The distinction matters for enforceability and remedies.

Real-World Relevance and Implications

• The shift to online agreements and AI-driven commerce raises questions about offer/acceptance, consent, and formality; core principles tend to follow established rules (objective intent, reasonableness, and reliance).

• The law remains fact-intensive and case-specific; understanding the three essentials (agreement, intention, and consideration) plus consent and capacity helps analyze modern arrangements.

• Practical takeaways for business:

  • Clearly distinguish offers from invitations to treat to avoid unintended commitments.

  • Ensure proper communication of acceptance and avoid unilateral assumptions of acceptance through silence.

  • Recognize when a deed is appropriate and when a simple contract suffices.

  • Be mindful of the conditions that can undermine enforceability (duress, undue influence, unconscionability, and lack of capacity).

Case Highlights and Illustrative Examples

• Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256: illustrates that an advertisement can constitute an offer when it is clear, definite, and explicit, and acceptance can be by performance.

• Pharmaceutical Society v Boots Chemists [1953] 1 QB 401: distinguishes between an offer and an invitation to treat; implications for automated and shelf pricing.

• Hyde v Wrench [1840] 49 ER 132: counter-offers terminate the original offer.

• Dickinson v Dodds [1876]: revocation can occur before acceptance if communicated to the offeree.

• Partridge v. Crittenden [1968]: advertisements generally are invitations to treat, not offers.

• Ramsgate Victoria Hotel Co Ltd v Montefiore [1866]: lapse of offers and time sensitivity (perishables vs. long-term property offers).

• Fas to enforceability of contracts with informal letters: Merritt v Merritt [1970] 2 ALL ER 760; Ermogenous considerations.

• Bar for intention in commercial contexts: Edwards v Skyways Ltd [1964] 1 WLR 349; Balfour v Balfour [1912] 2 KB 571 (presumptions about social vs commercial contexts).

• Roscorla v Thomas [1842]: past consideration is insufficient.

• Collins v Godefroy [1831]: prior legal obligation is not good consideration.

• Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847: classic case illustrating the structure of consideration in interrelated contracts.

• Amadio (Commercial Bank of Australia Ltd v Amadio) [1983] 151 CLR 447: unconscionability and vulnerability within relationships.

• Motive and capacity: Chapple v Cooper [1844] 153 ER 105 and Blomley v Ryan [1956] 99 CLR 362: capacity concepts for minors and intoxication.

Summary of Three Core Elements (Recap)

• Agreement: offer + acceptance forming a legally binding promise.

• Intention: objective assessment of whether the parties intended to create legal relations; strong presumptions in commercial contexts.

• Consideration: the price exchanged; must move from the promisee and be sufficient in value; deeds provide an exception.

Quick Reference Checklist for Enforceability

• Do the 3 essentials exist? (Agreement, Intention, Consideration) ext{(3 essentials)}

• Is there true consent? Look for mistreatment, duress, undue influence, or unconscionability.

• Do the parties have capacity? Assess minors, mental/physical impairment, intoxication.

• Is the contract legal and, if required, formal? Consider whether it should be a deed or a simple contract.

• Has there been proper offer, valid acceptance (unqualified, properly communicated, and in reliance on the offer)?

• Have the offer terms and mode of acceptance been adhered to (or justified as reasonable under the circumstances)?