Contract formation
| Author | Julian Bailey |
| Pages | 45-123 |
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CHAPTER 2
CONTRACT FORMATION
Introduction 46
Privity of contract 48
Elements of a contract 50
Agreement on essential terms 51
(i) What is an essential term? 51
(ii) Scope of works 52
(iii) Price 57
(iv) Incomplete particulars of agreement 60
(v) Articulation of terms 60
Agreement 61
(i) Generally 61
(ii) Oer and acceptance 61
Intention to create legal relations 68
(i) Generally 68
(ii) Concluded agreement 68
(iii) Evidence of intention to create legal relations 71
(iv) No intention to enter into legal relations 73
(v) Agreements to agree or negotiate 74
Consideration 74
(i) What is consideration? 74
(ii) Performance of pre-existing obligation 76
(iii) Illusory promises 77
Formalities 78
(i) Introduction 78
(ii) Written contracts 79
(iii) Oral contracts 81
(iv) Partly written and partly oral contracts 81
(v) Implied contract 81
(vi) Deed 82
Capacity to enter into a contract 85
(i) Introduction 85
(ii) Natural persons – generally 85
(iii) Companies 86
(iv) Governments 90
(v) Partnership 92
(vi) Joint ventures 93
(vii) Associations and societies 95
CONTRACT FORMATION
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(viii) Bankrupts 96
(ix) Trusts 96
(x) Plurality of parties 97
Authority to enter into a contract 97
(i) Introduction 97
(ii) Actual authority 97
(iii) Apparent authority 101
(iv) Scope of authority 103
(v) No authority 104
(vi) Duty of agent to principal 104
(vii) Ratication 105
Identity of contracting parties 106
Date of contract operation 107
(i) Generally 107
(ii) Retroactive operation 107
Collateral contract 108
(i) Generally 108
(ii) Promissory and non-promissory representations 109
Contracts implied by custom and usage 109
Estoppel 110
Matters aecting the existence or enforceability of a contract 111
(i) Failure to comply with statutory requirements 111
(ii) Economic duress 112
(iii) Mistake 114
(iv) Unconscionability 115
(v) Undue inuence 116
(vi) Fraud and illegality 117
(vii) Non est factum 123
No contract 123
Introduction
2.01 A contract may be described as an agreement which by law confers and imposes
rights and obligations upon the parties to it.1 e ipside of every contractual obligation
is the right of the other party to call for performance of the obligation.2 A contract
may be one under which only one party owes obligations to the other party. A contract
of guarantee is such a contract. But where, as is usually the case in construction and
engineering projects, two or more parties promise to each other to do certain things, or
to refrain from doing certain things, the contract is bilateral or synallagmatic.3
1 Ultrarad Pty Ltd v Health Insurance Commission [2005] FCA 816 at [50]–[51], per French J. For general texts on
contract law, see Beale (ed), Chitty on Contracts (Sweet & Maxwell, 33rd edition, 2018); Carter, Contract Law in
Australia (Lexis Nexis, 7th edition, 2018); Fisher and Greenwood, Contract Law in Hong Kong (HKUP, 3rd edition,
2018); Phang (ed), e Law of Contract in Singapore (Academy Publishing, 2012).
2 Robertson Construction Central Ltd v Glasgow Metro LLP [2009] CSOH 71 at [28], per Lord Hodge.
3 See United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74 at 82–83, per
Diplock LJ (cf SAM Business Systems Ltd v Hedley & Co [2002] EWHC 2733 (TCC) at [141], per HHJ Bowsher
CONTRACT FORMATION
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2.02 A construction or engineering contract may be described as a contract for labour
and materials.4 It is not a contract for the sale of goods, although it is almost invariably
contemplated that there will be a transfer in ownership of physical materials pursuant
to the contract. e rights that a party acquires by entering into a construction or engi-
neering contract are rights that are described in law as “choses in action”; that is, personal
rights that can only be enforced by taking legal action, and not by taking possession of
property.5
2.03 e number and types of contracts entered into for a construction or engineering
project will vary depending upon the nature of the project, including the scale of the
contemplated development and the procurement route adopted. In a small project, there
may be a single contract (or possibly no contract) between an owner and a contractor
for the performance of certain work. In larger projects, including especially PFIs/PPPs
which involve governments or government entities, there will be contracts relating to
the performance of and payment for the relevant work and an array of other contracts
between project sponsors, funders, special purpose vehicle companies, consultants, con-
tractors, the government, and others.
2.04 From a legal perspective, contracts are the backbone of a construction or engi-
neering project. ey dene the parties’ legal relationships with each other, and provide
a framework for the orderly performance of work, and the determination of nancial
and property rights. Although it is not, generally speaking, essential that a contract be
entered into for the performance of construction or engineering works, it is certainly
desirable that a contract be in place.6 It is desirable because, at the very least, it gives the
parties greater certainty as to the legal incidents of their relationship than if no contract
is entered into. However, all too often works proceed without contracts having been
entered into, or at least with there being doubt as to whether a contract was entered into.
is may be understandable for small jobs, where there may be a level of informality
to the parties’ relationship.7 Yet the problem is one that may aict even very large and
substantial projects. As HHJ Bowsher QC held in one case:
QC); Simic v New South Wales Land and Housing Corporation [2016] HCA 47 at [16], per French CJ; at [36], per
Kiefel J.
4 Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 at 549, per Lord Go.
5 See Pacic Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40 at [191]. A contract may,
however, confer rights that are capable of enforcement through taking possession of property. For example, a
contract may permit an owner, upon validly terminating a construction contract, to use the contractor’s plant and
equipment to complete the remaining works. e owner enforces its contractual right by seizing the plant and
equipment, and it is only if the contractor resists the owner’s attempts to seize the plant and equipment that the
owner may be compelled to commence legal proceedings to enforce its right.
6 ere may, however, be circumstances in which a contract is required to be entered into (in writing). e Austral-
ian statutes concerning the performance of residential building work, discussed in Chapter 19, aord an example of
where a written contract of prescribed content is mandated for building work. One legal commentator has written
that “[a]ll construction works are created by contract”: Chern, e Law of Construction Disputes (Informa, 3rd
edition, 2016) page 1. Although it is common for contracts to be entered into for the performance of construction
work, it is not generally essential that there be a contract for the work.
7 For example, in Mniszek v Redman [1997] EWCA Civ 1807, Auld LJ observed: “Small building jobs informally
arranged frequently end in unhappiness on both sides and in diculties for judges at rst instance in having to
determine from a tangle of diering memories what actually went on and what the proper entitlement is. is is
such a case.”
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