Because a contract is an agreement freely entered into between two or more parties that courts will enforce, the parties must provide evidence to establish a number of elements before their agreement will be enforceable. These are offer, acceptance, consideration and intention. In addition, problems may arise in deciding whether a contract will be enforced with issues of certainty, capacity and any formal requirements, such as writing. This is especially relevant with contracts that need to be evidenced in writing because of statutory requirements, such as contracts for sale of land.

Courts will apply an objective test to determine the factual circumstances of the agreement. This means the objectively determined meaning of the words and actions of the parties will be decisive. Although the aim is to determine the “actual intention” of each party, courts do not search for their subjective states of mind. Rather, they look for the “objective intention” of each party as manifested by their words and conduct. See Objectivity.

A contract must establish evidence of agreement, being an offer followed by an acceptance. This may be by way of an oral agreement, or it may be done by writing or a combination of writing and oral agreement. The offer and acceptance may occur in a bilateral way (effectively an exchange of mutual promises) or a unilateral way (a promise by one party followed by an act in response).

An offer is a clear statement by one party indicating that they are willing to be bound on certain terms if the person to whom the offer is made communicates their acceptance before the offer is terminated. Otherwise, the statement may be seen as an invitation to treat, namely a request or invitation for offers. Such invitations are a common feature of negotiations and carry no promissory force.

Nevertheless, some invitations to treat may contain the requisite promissory intent to amount to an offer, depending on the words used. An important example may be a call for tenders.

An offer will not last indefinitely, and may terminate upon the expiry of a fixed or reasonable time, rejection, revocation, failure of condition or death of a party. Each of these is subject to legal rules and exceptions. See Offers.

An offer must be accepted for an enforceable agreement to be possible. To be valid, an acceptance must comply with certain legal rules. It generally must be unconditional and unequivocal, or it may be construed as a counter-offer or rejection. It must satisfy rules of communication to the offeror. The general rule is that acceptance occurs when and where it is received by the offeror, although a special postal acceptance rule, if it applies, deems that acceptance occurs at the time it is posted. See Acceptance.

In many commercial settings, parties negotiate and conclude agreements by way of standard forms. Difficulties often arise because the forms inadvertently contain contradictory and conflicting terms. In such cases, courts may adopt a variety of methods, in addition to strict offer and acceptance analysis, to determine the existence of a contract and its terms. See Alternatives to offer and acceptance.

The requirement of consideration is fundamental to the creation of an enforceable contract. This means that there must be a “price” paid for a promise before the promise can be enforced. A bare or “gratuitous” promise cannot impose contractual liability on its maker, unless it is executed in the form of a deed. In a typical bilateral contract, consideration is provided by way of the offer and acceptance (because they amount to an exchange of promises). In a unilateral contract, consideration is evident in the act given in exchange for the offer.

But consideration must satisfy certain rules to be valid. They include that consideration must be bargained for in the sense that it must be given in reliance on the promise. Consideration must move from the party to whom the promise is made and it cannot be in the past, in the sense that it precedes the promise, unless it falls into an exceptional category. Other rules of consideration should also be noted.

Importantly, consideration must have a legal value although its commercial value need not be equal or comparable to the value of the promise. Whereas consideration cannot in principle be something that the promisee is already contractually bound to give, this rule may be circumvented where a benefit over and above the contractual commitment is provided.

Finally, where existing contracts are varied, the variation will need to be supported by consideration to be enforceable. The promise of an additional benefit within an existing contract must be supported by additional consideration from the promisee, unless the promisor obtains a “practical benefit” or advantage by the variation. See Consideration.

A contract must exhibit an intention by the parties to be legally bound. This is decided objectively on the facts, with a court taking into account the nature of the transaction and the relationship between the parties in the particular factual context.

Two presumptions have traditionally been seen as operating in this area. The first is the absence of intention in contracts of a social and domestic nature. The second is the presence of intention in contracts of a business or commercial nature. Both presumptions are rebuttable on the facts. The future role of the presumptions may be in question, with greater emphasis being placed on an objective assessment of the facts and circumstances of each case, with the party asserting contract bearing the onus of proof.

Letters of comfort in commercial transactions are generally regarded as not creating contractual liability, but the wording of the letters will be crucial in determining the possible presence of intention.

Parties transacting with government entities should realise that intention is likely to be presumed where the agreement is strictly commercial in nature, but unlikely to be presumed where the subject matter of the agreement involves the delivery of assistance or services which the government body is required to deliver by mandate and expenditure of public funds. See Intention to create legal relations.

Courts will not enforce a contract if there are key aspects of the agreement that remain uncertain or incomplete. This will be mainly because of unclear language or indeterminate terms for which no means of determination have been envisaged. Mere ambiguity will not necessarily result in uncertainty.

Although agreements “to agree” are generally unenforceable, agreements to negotiate in good faith could be valid if the parties have agreed on clear duties and limitations in the task of achieving agreement on specific matters that can be measured and assessed by way of clear and agreed standards.

Agreements that are expressed to be “subject to contract” are likely to be considered as unenforceable in the absence of a later document requiring execution. However, parties need to exercise caution with such arrangements and be aware that in some situations courts may consider the preliminary agreement capable of enforcement even if the parties do not proceed to the later contract.

Heads of agreement are commonly used in commercial settings, although care must be taken in their drafting or they may be used by one party to argue there is sufficient certainty to enforce what has been agreed upon. Heads of agreement are meant to outline in principle the structure of a future and proposed bargain between the parties. In other words, they set out the rules of engagement by which the parties intend to proceed towards a final and binding contract.

Care should be taken to delineate binding terms in the heads of agreement from non-binding terms. The binding terms should be aimed at making the preliminary heads workable, while the non-binding terms should be concerned with those aspects of the future agreement that are yet to be negotiated to finality. See Preliminary agreements.