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Contract Law Definitions

Contracts are legally enforceable agreements between two or more parties. Contracts often involve the exchange of money for goods or services. A contract can be either written or oral. When a party breaches their obligations under a contract, the injured party may be awarded damages or other remedies. This article outlines contract law in Australia and provides definitions of some of the terms commonly used in contract law.

What is contract law?

In order for a valid contract to exist, a number of elements must be satisfied. In addition to these basic elements, certain types of contracts must also meet other requirements in order to be legally enforceable.

The elements of a contract are:

  1. There was a clear offer from one party (the promisor);
  2. There was a clear acceptance by the other party (the promisee);
  3. Consideration was given by both parties;
  4. Both parties intended the agreement to create legal relations;
  5. The terms of the contract were certain;
  6. Each party had capacity to enter into the contract.

What is an offer?

An offer is made when a party indicates a willingness to be bound by stated terms. Examples of valid offers are:

  • A tradesman telling a person the price for which they are willing to perform a task;
  • A shop displaying goods with a price attached;
  • A carpark exhibiting the price per hour for parking with terms stating that upon entry, a driver is deemed to have accepted the terms of the notice.

What is acceptance?

Acceptance occurs when a party accepts the terms of an offer. This can be done in words or by conduct. Example of valid way to accept an offer are:

  • Agreeing to pay a tradesman to perform a task;
  • Taking goods up to the counter of a shop and handing over money;
  • Driving into a carpark that has its rates per hour displayed along with the terms of entry.

What is the contract law definition of consideration?

‘Consideration’ is payment of some kind for the goods or services that are promised or the benefit that is received. The payment does not have to be monetary, but it does have to be valuable.  The following are examples of consideration:

  • The payment of money in exchange for goods;
  • The performance of a service in exchange for goods;
  • The cancellation of a debt in exchange for a service;

The consideration that is to be given must be stipulated by the promisor and not by the promisee. The consideration can be anything stipulated by the promisor provided that it is not illegal.

A good example of how the requirement of consideration works in contract law lies in the difference between paid work and volunteer work. A person who performs work in exchange for wages or a salary is a party to a contract. A volunteer, who performs work for no consideration, is not a party to a contract.

What is intention to create legal relations?

For a contract to be enforceable, the parties must have intended to create a legal relationship. Whether such an intention existed will be assessed by reference to the consideration provided, the capacity of the parties, the relationship between the parties, the conduct of the parties after the agreement was made and the context in which the agreement was made.

What is the definition of certainty?

The requirement of certainty means that the terms of the contract must be sufficiently certain that all parties are clear about their rights and obligations under the contract.

What is the contract law definition of capacity?

‘Capacity’ is a party’s legal ability to enter into a contract. Some persons and classes of persons lack capacity to enter into contracts which generally means that contracts are not enforceable against them. Parties who lack contractual capacity are said to suffer a disability.

Mental disorder

If a party is unable to understand the nature of a contract due to mental disorder, the contract may be voidable. However, the other party/ies would have to have known of the party’s disability. The party seeking to withdraw from the contract would have to prove that they were suffering a disability and that the other party was aware – or should have been aware – of the disability.


If a party is unable to understand the nature of a contract due to their intoxication, the contract is voidable if the other party knew – or should have known – that they were intoxicated.


The capacity of person who are under the age of 18 to contract is limited both by common law and by statute. Contracts entered into by minors are generally voidable; however, there are exceptions. Contracts for necessities are binding on both parties even where a party is a minor. Minors can also validly enter into employment contracts provided the contract is not   unfair or oppressive. When a minor turns 18, they can repudiate an employment contract that they entered as a minor.

Different states have different legislation setting out the obligations of minors under contracts. For example, the Victorian Supreme Court Act 1986  makes certain contracts with minors void and In New South Wales, the Minors (Property and Contracts) Act 1970 contains rules about the consequences of contracting with a minor.


Companies only have capacity to contract to the extent that their constitution gives them this capacity.

If you require legal advice or representation in any legal matter, please contact Armstrong Legal.

Fernanda Dahlstrom

This article was written by Fernanda Dahlstrom

Fernanda Dahlstrom has a Bachelor of Laws, a Bachelor of Arts and a Graduate Diploma in Legal Practice. She has also completed a Master’s in Writing and Literature. Fernanda practised law for eight years, working in criminal defence, child protection and domestic violence law in the Northern Territory and in family law in Queensland.

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