The first requirement for a valid contract is an agreement.
An agreement is usually broken down into two parts: an offer and an acceptance and involves a 'meeting of the minds' (a consensus) between two or more parties.
Whether or not there is a consensus is determined (like most things in contract law) objectively; in essence, this means that if it would appear to a reasonable person that the parties had reached an agreement that is sufficient, even if one of the parties might have been operating under a misunderstanding or was secretly crossing their fingers behind their back and not subjectively intending to agree or make a contractual offer.
See Smith v Hughes.
No particular form is required to constitute an offer. An offer is a communication amounting to a promise to do something (or not do something) if the person to whom the offer is directed does something (or refrains from doing something) - or makes a promise - in return.
An offer may be made to an individual, group, or even to the world at large
An offer must be distinguished from an invitation to deal. This is not always a simple process; the test is one of intent; did the party making the statement intend that an affirmative response would give rise to an agreement or simply result in further negotiation? The leading case on this issue is Pharmaceutical Society of Great Britain v Boots, in which the English Court of Appeal placed great emphasis on the commercial impact that classification of the conduct as an offer would have had in that case. Thus, if it would be 'commercially inconvenient' to treat a statement or other conduct as an offer then it is more likely the courts will classify it as only an invitation to deal.
Auctions are generally analysed as an invitation to deal by the auctioneer, with bids constituting offers.
Invitations to tender are also generally considered invitations to deal, with the tenders themselves constituting offers which may be accepted or rejected. However, the invitation to tender may carry with it a separate offer to consider all tenders submitted.
Offers may be terminated in a number of ways: (1) revocation (2) rejection (3) failure to accept on time (4) death (5) failure of a condition.
Revocation
As a general rule an offer may be terminated at any time prior to acceptance - even if the offeror had promised they would keep it open until a particular date (unless that promise is supported by consideration). To be effective a revocation must be communicated - whether directly or indirectly - and any form of words or conduct conveying an intention to no longer be bound by the offer will suffice.
Rejection
Once an offer is rejected by the offeree it can no longer be accepted. Rejection can take the form of an outright refusal or a counter-offer - that is, a purported acceptance but on different terms. Even if the different terms are immaterial the counter-offer will be treated as a rejection and new offer. As a result, it is important to distinguish counter-offers from mere requests for further information (see Hyde v Wrench). To be effective rejection must be communicated; the postal rule does not apply to letters of rejection.
Time
If an offer stipulates a time for acceptance then acceptance after that time will be ineffective. If no time is stipulated acceptance must occur within a reasonable time or the offer will lapse.
Death
The general rule is that death of the offeror will terminate the offer. This is always the case where the offeree knows of the offeror’s death. Where the offeree is not so aware then in most cases it is possible for the offeree to accept the offer and create a binding contract - however, this will not be possible if the contract is for services that were to be personally rendered by the deceased (eg, a portrait painting)
Failure of condition
An offer may stipulate that it will terminate if a particular condition is (or is not) satisfied - eg, you might offer to sell produce on condition that you are able to acquire the requisite amount from a stipulated supplier by a certain date.
Acceptance is an unequivocal statement (oral, written or by conduct) by the offeree agreeing to the offer. An offer may only be accepted by the person to whom it is directed and to constitute a valid acceptance this statement or conduct must occur in response to the offer (although compliance with terms of an offer raises a rebuttable presumption that the act was done in response to the offer). It is sufficient if the offer was one of the reasons for the offeree acting in the way s/he did - even if not the dominant reason
Generally no particular form is required for acceptance. In Empirnall the Court stated the test as follows: ‘whether a reasonably bystander would regard the conduct of the offeree, including his silence, as signalling to the offeror that his offer has been accepted.’
While an offeror cannot stipulate that silence will be deemed to be constitute acceptance and thereby impose upon the offeree a positive obligation to reject (Felthouse v Bindley (1862) 142 ER 1037) it is possible to waive the requirement for notification of acceptance in some cases - generally where it would be commercially impractical to require such communication - as in reward cases (see, eg, Carlill)
To be effective, acceptance must be communicated - a mental decision to accept is not sufficient. The general rule is that an agreement is concluded when and where communication of acceptance is received - in relation to instantaneous modes of communication acceptance is deemed to be received when it is given to the offeror (even if they do not read it). Where post (or possibly other non-instantaneous methods of acceptance) is used a special rule applies (the postal rule!): provided post is contemplated by the parties (expressly or by implication) acceptance occurs when and where the letter is posted.
Related to this, if a particular form for acceptance is made mandatory then, to be effective, acceptance must take this form - however, the courts will be slow to conclude a stipulated form is mandatory unless clear language is used to that effect - where clear language is not used then an equally fast and effective method of communication will usually be held to suffice.
Note that there are now special rules that apply in relation to electronic transactions. See, for example, the Electronic Transactions Act 1999 (Cth), Part 2, Division 3.
In some cases it is not easy to classify conduct of the parties into 'offer' and 'acceptance'. This is particularly the case when documents pass back and forth frequently between the parties as part of contractual negotiations. This is referred to as the 'battle of the forms' and, in such a case, where it appears that the parties have reached agreement, although offer and acceptance cannot be clearly discerned, the courts will look at the circumstances of the particular case to determine if true agreement was reached and, if so, on what terms.
Acceptance in the case of unilateral agreements generally takes the form of performing an act. The issue has arisen of whether or not an offer may be revoked once performance has begun but before it is completed. This issue is not yet resolved. In Daulia Ltd v Four Millbank it was reasoned that acceptance occur once the acts requested by the offeror were embarked upon and that the offer could not thereafter be revoked.
If acceptance is performing the act asked for (as Carlill suggests it is) then, applying the general rule an offeror could revoke after performance has started but before it is completed. However, in Daulia v Four Millbank it was suggested that in the case of offers of unilateral contracts, the offer is accepted and a contract is made when an unequivocal commencement of the act has occurred.
There are some cases in which it is not possible to clearly identify offer and acceptance but it is nevertheless possible to conclude the parties have reached an agreement by virtue of their conduct. For a good example see:
If an agreement is uncertain in a material respect it cannot constitute a binding contract. This might occur if the agreement is 'vague or ambiguous', incomplete or constitutes a mere 'agreement to agree'.
If it is not possible to give a definite meaning to words used in an agreement it will be considered too vague or ambiguous to constitute a contract.
Illusory contracts are also unenforceable
As a general rule parties must deal with the essential terms for the agreement in order for it to be enforceable. Price is generally considered essential (although in the case of goods legislation will step in and 'complete' the agreement if parties do not agree on price (see, eg, s 13(2) Goods Act (Vic) which requires a reasonable price to be paid where no price is stipulated ). It is not essential that an agreement be worked out in great detail and it is possible for parties to nominate one of the parties - or a third party - to determine certain matters in the future - provided the parties themselves do not need to reach further agreement.
Agreements to enter into a future agreement are not binding. In the UK, the House of Lords has held that agreements to negotiate are likewise not enforceable. In Australia, however, in Coal Cliff Colliaries, the Court suggested that agreements to negotiate may be enforceable in appropriate circumstances. It is clear that lockout agreements - that is, agreements not to negotiate with a third party for a period of time - are sufficiently certain and will not be struck down for uncertainty.
Any uncertain part of a contract will be unenforceable - if it is possible to sever this part from the remainder of the contract then the court will do so and uphold the remainder, otherwise the whole agreement will be unenforceable.
