What is a contract?
A contract is a legally enforceable agreement between two or more parties. It records what each side has agreed to do, what each side gets in return, and when and how the deal happens. In business, contracts sit behind nearly every commercial relationship: selling goods, delivering services, licensing intellectual property, protecting confidential information, and engaging staff or contractors.
A contract does not need to be a formal document. It can be written, verbal, or inferred from how the parties behave. What turns an agreement into a contract is that a court will enforce it if one of the parties does not follow through.
To know whether you are in a binding contract, Australian law asks six questions. This article walks through each one, shows how they operate in a realistic small-business exchange, and clears up the misunderstandings that most often cause disputes.
The six elements of a binding contract
Australian courts look for six ingredients in an agreement. If one is missing, the agreement risks being unenforceable. The six elements are:
- Offer and acceptance: one party makes an offer and the other accepts it.
- Consideration: each party provides something of value.
- Intention to create legal relations: both sides intend to be legally bound.
- Certainty: the terms are clear enough to be enforced.
- Capacity: the parties are legally able to contract.
- Legality: the purpose of the agreement is lawful.
Offer and acceptance
An offer is a clear statement of the terms on which one party is prepared to deal. Acceptance is an unqualified agreement to those terms. Acceptance can be spoken, written, or by conduct: starting work in response to a proposal can amount to acceptance.
Negotiation matters here. A counter-offer, such as "we can do the job for $10,000 but only over eight weeks", rejects the original offer and puts a new one on the table. The other party then decides whether to accept that new offer. Advertising, price lists and website product pages are usually invitations to treat, meaning they invite customers to make offers, rather than being offers themselves.
A frequent practical question is whether an email exchange can form a contract. Under s 8 of the Electronic Transactions Act 1999 (Cth) (the Act), a transaction is not invalid merely because it took place wholly or partly by electronic communication. An email thread that contains a clear offer and an unqualified acceptance can therefore be a binding contract. Courts look at the substance of the exchange, not whether it was printed on letterhead.
Consideration
Consideration is the bargain element. Each party must give something of value: money, goods, services, or even a promise, including a promise to refrain from doing something, such as not to compete with the other party for a period.
A promise supported by nothing in return is a gift, and a court will not enforce it as a contract. If a business wants a promise to be binding without anything given in exchange, the usual route is a deed, which can be binding without consideration. Deeds carry their own formalities, including how they must be executed, so that is a situation where advice is worth taking before relying on the document.
Intention to create legal relations
Both parties must intend their agreement to be legally binding. Australian courts assess that intention objectively, looking at what was said and done rather than what a party now claims it privately intended. The High Court confirmed this approach in Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95.
Arrangements between friends or family are often not intended to be binding, but there is no automatic rule; it depends on the circumstances. Commercial dealings usually carry an expectation that the parties intend to be bound, yet the words the parties use can displace that. Where an exchange is expressed to be "subject to contract", the High Court held in Masters v Cameron (1954) 91 CLR 353 that the parties are generally not bound until a formal contract is executed. If you do not want an email exchange to bind you yet, say so in terms. If you do want it binding, avoid "subject to contract" language.
Certainty
A contract needs terms that are sufficiently clear and complete to be enforced. A promise to "pay a fair amount later" or an agreement that price "is to be negotiated" may be too vague to enforce. The more that is pinned down, such as price, scope, timing and what happens if something goes wrong, the safer the agreement. Courts can fill some gaps by implying terms, but they will not rewrite a deal for the parties.
Capacity
The parties must have the legal capacity to contract. Adults of sound mind can contract. Contracts with minors, people under 18, are generally not enforceable against the minor, with limited exceptions.
Companies are a different kind of trap. A company acts through people, and it is only bound by someone with the authority to sign. A supplier agreement signed by an employee without authority may not bind the company. If you are the one signing for your business, check your own authority, and check who is signing on the other side. Where a signature is given electronically, s 10 of the Act sets out when an electronic signature satisfies a Commonwealth legal requirement to sign.
Legality
Finally, the purpose of the agreement must be lawful. An agreement to do something illegal, or that is contrary to public policy, will not be enforced. Drafting an unlawful arrangement into a written contract does not protect it.
A contract in practice: the email deal
Consider a realistic example. Peta runs a design studio in Melbourne. A prospective client emails asking for a quote to redesign its website. Peta replies with a detailed proposal: $12,000 plus GST, three milestones, a six-week timeline, and a line stating that the final design files are licensed rather than owned until the last invoice is paid. The client replies, "Great, let's proceed". Peta begins work and the client pays the first milestone.
Is there a contract? Run through the six elements. The proposal is an offer on stated terms. The reply email is an unqualified acceptance. Peta provides design services and the client provides payment, which is consideration. This is a commercial engagement, so intention to create legal relations is readily inferred. The price, scope and timeline give the terms certainty. Both companies act through people with authority, and the services are lawful. On these facts there almost certainly is a binding contract formed by email. No signed document is required. If the client walks away mid-project, Peta can enforce the deal for the unpaid milestones.
The catch is evidence and content, not existence. If the proposal had said "subject to a formal agreement", there may be no contract yet under Masters v Cameron. If it said nothing about intellectual property, ownership of the design files would be decided by default rules that may not match what Peta intended. And if the client disputes what was agreed, Peta's case rests on the email thread. None of this changes whether a contract exists, but it changes how comfortable Peta should be relying on it, which is why a properly drafted written agreement is still the safer route for meaningful work.
Common misconceptions about contracts
Misconceptions about what makes a contract binding are widespread and costly. The most common are:
- "It is not a contract unless it is signed": A signed document is strong evidence of a deal, but it is not a requirement. Verbal agreements and email exchanges can be just as binding.
- "Small deals are not contracts": There is no minimum value for a contract. The value of the deal affects what is worth litigating, not whether an agreement exists.
- "If we both signed, it is enforceable": Not necessarily. If consideration, certainty, capacity or legality is missing, a signed document can still be unenforceable.
- "Nothing needs to be in writing": Some deals genuinely do. A contract for the sale of land or an interest in land must be in writing, or evidenced by a signed note of it, before a court will enforce it: s 54A of the Conveyancing Act 1919 (NSW), with equivalent provisions in the other states. A consumer credit contract must be in the form of a written contract document signed by the debtor and the credit provider under s 14 of the National Consumer Credit Protection Act 2009 (Cth), which contains the National Credit Code. For most other business agreements, writing is a matter of prudence rather than legal compulsion.
When a lawyer should look at your contracts
The value a lawyer adds to contracts is usually before a dispute starts. A practitioner will turn the way your business actually sells into written terms: scope, payment timing, what happens on cancellation, who owns the intellectual property, and how disputes are resolved. They will also review the other side's terms before you sign, because a one-page supplier agreement can contain clauses that quietly shift risk to your business.
Three situations are worth particular attention. First, where a deal is intended to be binding without consideration, which points to a deed and its formalities. Second, where a company is signing, because execution method and authority determine whether the document binds it, including how electronic signatures are used. Third, where an exchange has already happened informally, such as the email deal above: a lawyer can tell you whether you are already bound, and on what terms, before you build further work on that foundation.
The question to ask before you rely on a deal
The most expensive contract mistake for a small business is usually not signing the wrong document. It is assuming that an unsigned or unwritten deal is not a contract at all. That assumption cuts both ways. You can be bound by an email exchange you thought was just a discussion, and you can be without a remedy because the deal you relied on never had enforceable terms.
Before you treat a deal as done, ask one question: if the other side walked away tomorrow, could you point to the offer, the acceptance and the terms you relied on, and where is the evidence? If the answer involves your memory of a phone call or a conversation in a corridor, the fix is simple: send a confirming email setting out the terms and ask the other side to confirm. If the answer is "subject to contract" or a half-signed draft, understand that you may not be bound at all, and get advice before you spend money on that basis.