Contract W2: Formation (Pt 2)

Recap of the Four Elements of a Valid Contract

• There are $4$ fundamental requirements for the formation of a valid contract:

  • Agreement (comprised of offer and acceptance).

  • Consideration.

  • Intention to create legal relations.

  • Certainty and completeness of terms.

• While agreement and consideration are the initial building blocks, intention and certainty/completeness are equally vital for a binding legal obligation.

• In addition to these $4$ core elements, certain ancillary requirements such as capacity and formalities must be considered to ensure the agreement is enforceable.

Intention to Create Legal Relations

• Reaching an agreement is not sufficient on its own to create a contract; there must also be legal intent. The parties must intend for their agreement to be legally enforceable and carry associated legal consequences.

• Legal intent is determined via an objective test rather than a subjective one. As stated in Merritt v Merritt [$1970$] $1$ WLR $1211$ at $1213$: "[T]he court does not try to discover the intention by looking into the minds of parties. It looks at the situation in which they were placed and asks itself: 'Would reasonable people regard the agreement as intended to be binding?'"

• The determination of this intent is made at the precise point of entry into the contract, as established in Darzi Group Pty Ltd v Nolde Pty Ltd [$2019$] NSWCA $210$, [$158$].

• The Role of Presumptions

  • Traditionally, the law applied specific presumptions to determine legal intent:

    • Commercial dealings were presumed to have legal intent.

    • "Private" or domestic arrangements were presumed not to have legal intent.

  • However, contemporary legal views suggest that intent must always be proved based on the facts of the case without the automatic aid of presumptions. Notable cases reflecting this shift include:

    • Ermogenous v Greek Orthodox Community ($2002$) $209$ CLR $95$.

    • Shahid v Australasian College of Dermatologists ($2008$) $168$ FCR $46$.

    • Sion v NSW Trustee & Guardian [$2013$] NSWCA $337$.

    • Ashton v Pratt ($2015$) $88$ NSWLR $281$.

  • The High Court of Australia (HCA) has specifically cautioned that presumptions should be treated with care, as seen in Ermogenous v Greek Orthodox Community.

• Domestic and Social Agreements

  • For social or domestic arrangements, there remains a traditional presumption that parties do not intend to create legal relations. This typically applies to:

    • Spouses: Balfour v Balfour [$1919$] $2$ KB $571$; Cohen v Cohen ($1929$) $42$ CLR $91$.

    • Family members: Jones v Padavatton [$1969$] $1$ WLR $328$.

    • Friends: Trevey v Grubb ($1982$) $44$ ALR $20$.

  • In Sion v NSW Trustee & Guardian at [$40$]-[$41$], Emmett JA noted: "As a matter of human experience, when family members make a promise to each other it is unlikely that they intend it to be legally binding. As a result, the law presumes that, as a matter of fact, family members do not intend to contract when they make arrangements amongst themselves… The presumption applies with diminishing force the more remote the familial connection… The vaguer the language of an arrangement and the greater its informality, the more difficult it will be to rebut the presumption…"

  • In Ashton v Pratt at [$73$], Bathurst CJ offered a refinement: "Notwithstanding what was said by this Court in Sion, in my opinion the effect of the decision of the High Court in Ermogenous was that in considering the issue recourse should not be had to any presumption concerning the contractual or non-contractual effects of family arrangements. That does not mean that the relationship of the parties and the circumstances in which the arrangement was entered into are irrelevant to the question. To the contrary, these factors form part of the surrounding circumstances from which it will be determined whether or not a contract came into existence."

  • Presumptions in domestic cases can be rebutted if evidence shows the agreement was essentially commercial in nature, such as in Riches v Hogben [$1986$] $1$ Qd R $315$ or Roufos v Brewster ($1971$) $2$ SASR $218$.

• Commercial Dealings

  • Business or commercial transactions are strongly presumed to be legally binding (Edwards v Skywards [$1964$] $1$ WLR $349$).

  • Displacing this presumption is difficult (Helmos Enterprises Pty Ltd v Jaylor [$2005$] NSWCA $235$).

  • Parties in a commercial context can explicitly state that an agreement is binding "in honour only," which prevents it from becoming a legal contract (Rose and Frank Co v J R Crompton & Bros [$1923$] $2$ KB $261$). This method of excluding legal intent can also be used in non-commercial contexts (Cuthbert v Abbott [$2023$] QCA $139$).

  • The intent behind specific commercial documents like Memoranda of Understanding (MOUs) or Heads of Agreement can be unclear and requires further exploration regarding their status as preliminary agreements.

Certainty and Completeness of Terms

• General Principles

  • A valid contract requires that terms be sufficiently certain and complete.

  • Absolute certainty is not required; the law follows the maxim ut res magis valeat quam pereat, meaning "it is better for a thing to have effect than to be made void" (Vestry of St Leonard’s, Shoreditch v Hughes ($1864$) $17$ CB (NS) $137$; Hall v Busst ($1960$) $14$ CLR $206$).

• Completeness and Essential Terms

  • A contract must include all essential or critical terms agreed upon by the parties. An essential term is one without which the contract would not be enforced (Thorby v Goldberg ($1964$) $112$ CLR $597$).

  • Example: The specific amount of rent payable is an essential term in a lease agreement (NZI Insurance Australia v Baryzcka ($2003$) $85$ SASR $497$).

  • If too much essential detail is omitted, the contract fails (ANZ Banking Group v Frost Holdings Pty Ltd [$1989$] VR $695$).

  • Mechanisms for Completeness:

    • Parties can use a mechanism or formula to determine an essential term at a later date, provided the mechanism is workable (Royal Botanic Gardens v South Sydney Council ($2002$) $240$ CLR $45$; Booker Industries v Wilson Parking (Qld) Ltd ($1982$) $149$ CLR $600$).

    • If the stipulated mechanism fails, the contract also fails (George v Roach ($1942$) $67$ CLR $253$).

    • Courts are highly unlikely to find a contract incomplete if the parties have already commenced or finished performance (G Percy Trentham v Archital Luxfer [$1993$] $1$ Lloyd’s Rep $25$).

  • Curing Incompleteness:

    • Statute may provide missing terms (e.g., Sale of Goods Act 1895 (SA) s $8$ regarding price).

    • Courts might imply terms at common law or through statute (KSY Juice Blends UK Ltd v Citrosuco GMBH [$2025$] EWCA Civ $760$).

    • Courts will make assumptions, such as implying that a task must be completed within a "reasonable time" if no timeframe is specified.

    • Crucially, courts will not "write the contract" for the parties (ANZ Banking Group v Frost Holdings [$1989$] VR $695$, $702$).

• Certainty in Terms

  • Once complete, terms must be legally certain. Uncertainty is distinct from difficulty in interpretation; a contract is not void for uncertainty simply because it is hard to understand (McDermott v Black ($1940$) $63$ CLR $161$).

  • Courts avoid a pedantic or narrow approach and will strive to find meaning unless it is literally impossible to do so (Upper Hunter County v Australian Chilling Co ($1968$) $118$ CLR $429$).

  • Tools to resolve uncertainty include:

    • Pragmatic interpretation.

    • Rectification.

    • Severance (removing the uncertain portion while keeping the rest).

  • If uncertain portions cannot be clarified or severed, the entire contract is unenforceable (Whitlock v Brew ($1968$) $118$ CLR $445$).

  • Meaningless terms that serve no purpose do not necessarily invalidate the entire contract (Fitzgerald v Masters ($1956$) $95$ CLR $420$).

  • Enforceable uncertain standards include "negotiating in good faith" (United Group Rail v Rail Corporation NSW ($2009$) $74$ NSWLR $618$) and using "reasonable endeavours" (Transfield Pty Ltd v Arlo International ($1980$) $144$ CLR $83$; Electricity Generation Corp v Woodside Energy ($2014$) $251$ CLR $640$).

Legal Capacity to Contract

• Definition and General Rule

  • Capacity refers to the legal ability of a person to enter into a contract. Contracts made with individuals lacking capacity are typically voidable (able to be undone).

  • Three categories of people are legally regarded as lacking contractual capacity: minors, the mentally incapacitated, and the intoxicated.

• Minors

  • Minors are persons under the age of $18$. They are generally considered to lack capacity because they may not fully appreciate the consequences of agreements.

  • Exceptions for Minors:

    • Necessaries: Goods and services required to maintain the minor's "status or condition." This is determined on a case-by-case basis but generally includes food, drink, basic clothes, and medical services. A car for work might be included (Mercantile Credit v Spinks [$1968$] QWN $32$), but inessential designer items are excluded (Nash v Inman [$1908$] $2$ KB $1$). Under the Sale of Goods Act 1895 (SA) s $2$, minors are bound to pay a "reasonable price" for necessaries.

    • Beneficial Contract of Service: Contracts concerning education, trade, or professional development (e.g., employment contracts). These are binding unless they are harsh or oppressive (Roberts v Gray [$1913$] $1$ KB $320$).

  • Other contracts are not binding unless ratified by the minor after they turn $18$ (Minors' Contracts (Miscellaneous Provisions) Act 1979 (SA)).

• Mental Incapacity and Intoxication

  • A contract with a person having impaired mental capacity (e.g., intellectual disability) is voidable at their option. The person must prove:

    1. They were incapable of understanding the contract at the time it was made.

    2. The other party knew or ought to have known of the incapacity.

  • This test, from Gibbons v Wright ($1954$) $91$ CLR $423$, applies identically to intoxicated persons.

  • Voidable contracts can be ratified once the person regains sobriety or recovers their sanity, making the contract binding (McLaughlin v City Bank of Sydney ($1912$) $14$ CLR $684$).

• Companies

  • A corporation has the legal capacity of an individual but must act through a person with express or implied authority, governed by the Corporations Act 2001 (Cth) ss $124$-$126$.

Formalities and Form Requirements

• The general rule is that contracts do not need to be in writing to be enforceable (Beckham v Drake ($1841$) $9$ M & W $79$).

• However, specific legislation may require writing, such as the Statute of Frauds 1677 (Imp) s $4$ and the Law of Property Act 1936 (SA) s $26(1)$.

• Electronic equivalents of writing are usually sufficient under the Electronic Transactions Act 1999 (Cth) s $9$ and the Electronic Communications Act 2000 (SA) s $8$, though some exceptions exist under the Electronic Communications Regulations 2017 (SA) reg $6$.

• Contract Variations: Many contracts contain clauses requiring all variations to be in writing. In Australian practice, such stipulations are often treated as evidence of whether an oral variation was actually agreed upon (Liebe v Molloy ($1906$) $4$ CLR $347$; Alstom Ltd v Yokogawa Australia [$2012$] SASC $49$). This contrasts with the UK approach in Rock Advertising v MWB Business Exchange [$2018$] UKSC $24$, which strictly enforces "in writing only" clauses.

Practical Exercises and Scenarios

• Scenario 1: Photographer Friend

  • Katy Perry and Sharon Dignity (a professional photographer) discuss photographing a party for Katy's new album, "AFL Songs I'll Never Sing."

  • Katy insists on paying; Sharon agrees to "mate's rates" (a $60\%$ discount on her usual fee).

  • Sharon fulfills the task and sends an invoice. Katy refuses to pay, claiming it was just an arrangement between friends and citing poor quality.

  • Legal Question: Was this a domestic arrangement lacking intent, or did the commercial nature of the service (professional business, invoice, agreed discount) rebut the domestic presumption?

• Scenario 2: Sufficiency of Consideration

  • Items to evaluate as legally sufficient consideration:

    • A fountain pen.

    • A $€1$ coin.

    • A plastic bag full of plastic bags.

    • A pebble on the floor.

    • A volleyball.

    • A blank painting canvas.

    • A promise to clean your room if you feel up to it.

    • A bet with a friend to pay them $\$50$ for $50$ pushups.

• Scenario 3: Laptop Sale Dialogue

  • Joan asks Kian about a laptop. Kian says he has others looking at it. Joan asks if he will take a near offer to the $\$400$ post. Kian says he won't go lower than $\$350$. Joan says, "That's my budget so I'll give you $\$350$, cheers!"

  • Kian sells the laptop to someone else that afternoon.

  • Legal Question: Did Kian's statement "I won't go lower than $\$350$" constitute an offer that Joan accepted, or was it an invitation to treat/preliminary negotiation?