What Is A Contract?
This guide explains the legal definition of a contract, core elements, and what makes it enforceable based on Australian contract law.
Written by: Mark Lazarus, Commercial Lawyer, Director of Lazarus Legal
Last updated: 11 December 2025
Legal Disclaimer: The information on this page is general in nature and is not intended to constitute legal advice. It does not take into account your personal circumstances. Laws and legal processes can change, and their application varies between cases. You should seek independent legal advice before acting on any information on this page.
What Is A Contract?
A contract is a legally binding agreement between two or more parties that Australian courts will enforce. It’s not just any promise or handshake deal. For an agreement to become a contract under Australian law, it must meet specific legal requirements.
It’s not just any other agreement. In everyday language, people use “agreement” and “contract” interchangeably. But legally, they’re different. An agreement is any understanding between parties. A contract is an agreement the law will enforce if someone breaks it.
The distinction matters when things go wrong.
- If you have a contract, you can take legal action.
- If you only have a casual agreement, you might have no recourse.
Australian contract law comes from common law principles developed over centuries in courts. These principles determine when your agreement becomes enforceable and when it’s just words.
Core Elements Of A Contract In Australia
Five essential components must exist for a valid contract under Australian law. Missing even one element means you don't have an enforceable contract.
- Offer. Someone must make a clear proposal to do something or provide something. The offer must be definite enough that accepting it creates a binding agreement.
- Acceptance. The other party must accept the offer without changing its terms. Acceptance must mirror the offer exactly. If you counter with different terms, that's a new offer, not acceptance. Silence usually doesn't count as acceptance.
- Consideration. Both parties must exchange something of value. This is what separates a contract from a gift. Consideration can be money, services, goods, or even a promise to do something or not do something. The consideration doesn't need to be equal.
- Intention To Create Legal Relations. The parties must intend their agreement to be legally binding. In commercial contexts, courts presume you intended to create legal relations. In family or social situations, courts presume the opposite.
- Capacity And Legality. The parties must have legal capacity to contract. Minors generally can't make binding contracts except for necessities like food and clothing. People with mental impairments may lack capacity if they couldn't understand what they were agreeing to. The contract's purpose must be legal.
Types Of Contracts And Formation Methods
Contracts don’t always need to be written documents with formal signatures.
Written Contracts
These provide the clearest evidence of what parties agreed to. Employment contracts, commercial leases, and business sale agreements are usually written. Written contracts reduce disputes about terms and make enforcement easier. But writing isn't always legally required.
Oral Contracts
Verbal agreements can be just as binding as written ones if they contain all five essential elements. The problem is proving what was said. Without written evidence, it becomes one person's word against another's. Some contracts must be in writing under Australian law, like certain property transfers or guarantees.
Implied Contracts
Sometimes your conduct creates a contract without words at all. When you board a bus, you've entered an implied contract to pay the fare. When a tradie starts work after you discuss the job, a contract exists even without written terms. Courts look at what reasonable people would understand from the parties' behaviour.
When Are Contracts Not Enforceable?
Understanding what a contract is also means knowing when it falls short of legal requirements. After all, not every agreement becomes a legally binding contract.
Missing an essential element makes the agreement unenforceable. If there’s no consideration, you have a promise, not a contract. If terms are too vague or uncertain, courts can’t enforce what parties agreed to. A contract to “work together on a fair basis” is probably too uncertain.
Parties lacking capacity create problems. A contract with a minor is usually voidable at the minor’s option. Contracts made under mental impairment may be void if the person couldn’t understand the agreement.
Illegal purposes make contracts void. You can’t enforce a contract to do something unlawful. Contracts against public policy, like agreements to avoid legal obligations, are unenforceable.
Genuine consent issues arise from duress, misrepresentation, or undue influence. If someone threatened you to sign, or lied about key facts, or took advantage of a special relationship, the contract might be voidable. These situations show consent wasn’t freely given.
Real Life Examples Of Contracts
When you ask “what is a contract,” it helps to realise that you encounter them constantly, both personally and in business, often without recognising it.
Buying groceries creates a contract. You offer to buy at the marked price. The retailer accepts when they scan the items. Payment is your consideration. Receiving the goods is theirs.
Hiring a contractor happens through contract. They quote a price for services. You accept. They provide the work. You pay the fee. Both parties intend the arrangement to be legally binding.
Signing a supplier agreement for your business is a contract. The supplier offers goods at specified terms. You accept their proposal. They deliver inventory. You pay within the agreed timeframe.
Bringing on a co-founder requires a contract. You agree on equity splits, roles, and vesting schedules. They agree to work on the business. Both contribute time, expertise, or capital as consideration.
Renting a property requires a contract. The landlord offers the premises at a stated rent. You accept by signing the lease. Your consideration is rent payments. Theirs is allowing you to occupy the property.
Onboarding your first employee creates a contract. You offer employment at a salary with specific duties. They accept the position. They provide their labor and skills. You provide payment and entitlements.
Why Understanding Contracts Matters
Knowing what creates a binding contract protects you in business and daily life.
Legal enforceability means you have remedies if someone breaks their promise. You can claim damages, seek specific performance, or pursue other legal relief. Without a valid contract, you’re relying on goodwill alone.
Informal agreements carry risk. Thinking something is just a casual understanding can backfire badly. If all contract elements exist, you’re legally bound even without a formal document. But proving terms becomes harder without written evidence.
Clear terms prevent disputes. Writing down what parties agreed to reduces misunderstandings. Specifying deadlines, payment terms, and obligations helps both sides know what’s expected. Having a commercial lawyer review agreements before signing helps ensure terms are clear and enforceable.
Consumer protection applies to many everyday contracts. Australian Consumer Law implies certain guarantees into consumer contracts for goods and services. You have rights even if the written contract doesn’t mention them.
Summary
- What is a contract? In Australia, it’s more than mutual understanding. It’s a legally enforceable agreement meeting five essential requirements: offer, acceptance, consideration, intention to create legal relations, and capacity plus legality.
- Many ordinary transactions are contracts even without formal documents. Buying goods, hiring services, and accepting work all create binding obligations. Verbal and implied contracts are valid, though harder to prove than written ones.
- Before entering any agreement, consider whether all contract elements exist. Check if terms are clear enough to enforce. Confirm parties have capacity to contract. Ensure the purpose is legal. Understanding these basics helps you protect your rights and avoid unexpected legal obligations.
- Most people enter dozens of contracts weekly without thinking about it. Knowing what makes these agreements legally binding gives you power to enforce your rights when necessary and avoid creating obligations you don’t intend.
About Mark Lazarus – Director, Lazarus Legal
Admitted in both Australia and the UK, Mark brings more than two decades of global legal experience to Lazarus Legal. Having worked as a barrister, in private practice, and as in-house counsel for a major international consumer brand he combines courtroom-honed advocacy with commercial insight. Specialising in commercial law, intellectual property and dispute resolution, Mark advises startups, creative businesses, and established enterprises on transactions, trademarks, contract drafting, and litigation strategy. His cross-jurisdictional background and history as a former in-house legal director give clients confidence that their legal issues will be managed with both strategic foresight and commercial realism.