BTF5955 · Business and Company Law
Contract Law: Formation
Topic 3 covers how a valid, legally binding contract is formed — the elements a court checks before a promise binds: offer and acceptance (agreement), consideration, intention to create legal relations, and capacity. It is the second area (with negligence) examined in the 30% Take-Home Assessment, and the landmark case is Carlill v Carbolic Smoke Ball Co. The recurring exam skill is deciding whether something is a true offer or a mere invitation to treat, and whether acceptance was validly communicated.
What this chapter covers
- 01The elements of a valid simple contract: agreement (offer + acceptance) · consideration · intention · capacity
- 02Offer vs invitation to treat: displays and advertisements are usually invitations to treat (Pharmaceutical Society v Boots); a unilateral offer to the world can be a true offer (Carlill v Carbolic Smoke Ball Co)
- 03Termination of an offer: revocation (before acceptance, communicated), rejection, counter-offer, lapse of time, death
- 04Acceptance: unqualified (mirror image), must be communicated; silence is not acceptance; the postal acceptance rule (Adams v Lindsell)
- 05Intention to create legal relations: commercial agreements presumed binding; social/domestic presumed not (Balfour v Balfour)
- 06Consideration: bargained-for exchange; sufficient but need not be adequate; must move from the promisee; past consideration is not good consideration
- 07Existing legal duty is generally not consideration (Stilk v Myrick); promissory estoppel as an equitable exception (Waltons Stores v Maher)
- 08Capacity: minors, mental incapacity/intoxication, and companies (capacity via the Corporations Act)
IRAC on contract formation: an online price glitch
- +1Issue. Was a binding contract formed between GadgetHub and Mia — in particular, was the website listing an offer that Mia could accept, or merely an invitation to treat?
- +2Rule. The display or advertisement of goods for sale is generally an invitation to treat, not an offer (Pharmaceutical Society of Great Britain v Boots [1953] 1 QB 401); the customer makes the offer, which the seller may accept or decline. Acceptance must be a mirror-image, unqualified assent and must be communicated to be effective; a true unilateral offer to the world is the exception (Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256).
- +1Application — offer or invitation to treat. A price listing on a retail website resembles a shop display or advertisement, so on Boots it is an invitation to treat, not an offer. That means Mia's email is not an acceptance of an offer but is itself an offer to buy at $49, which GadgetHub is free to accept or reject.
- +1Application — acceptance and communication. GadgetHub had not communicated any acceptance (no order confirmation) before it declined, so there is no mirror-image, communicated acceptance of Mia's offer. Unlike Carlill, nothing on the facts turns the listing into a unilateral offer to the world that performance could accept. Contrast the position if GadgetHub's terms said a contract forms only on dispatch — that would confirm no contract yet.
- +1Conclusion. No binding contract was formed. The listing was an invitation to treat, Mia's email was an offer, and GadgetHub declined before accepting, so there is no agreement. Mia cannot compel the sale at $49.
Key terms
- Offer vs invitation to treat
- An offer shows a willingness to be bound on stated terms once accepted; an invitation to treat merely invites others to make offers. Displays and advertisements are usually invitations to treat (Boots), though a unilateral offer to the world can be a true offer (Carlill).
- Acceptance
- Unqualified, mirror-image assent to all the terms of the offer. It must generally be communicated to the offeror; silence is not acceptance. A qualified 'acceptance' is a counter-offer that destroys the original offer.
- Postal acceptance rule
- An exception to the communication requirement: where post is a proper mode of acceptance, acceptance is effective when the letter is posted, not when received (Adams v Lindsell). Instantaneous communications (phone, email) are effective on receipt.
- Consideration
- The 'price' of a promise — a bargained-for exchange of benefit or detriment. It must be sufficient but need not be adequate, must move from the promisee, and past consideration is not good consideration.
- Intention to create legal relations
- The parties must intend legal consequences. Commercial/business agreements are presumed to be intended as binding; social/domestic agreements are presumed not to be (Balfour v Balfour). Both presumptions are rebuttable on the facts.
- Promissory estoppel
- An equitable doctrine that can make a promise enforceable despite the absence of consideration, where the promisee reasonably relied on the promise to their detriment and it would be unconscionable to resile (Waltons Stores (Interstate) v Maher).
Contract Law: Formation FAQ
What is the difference between an offer and an invitation to treat?
An offer is a definite proposal that the offeror is willing to be bound by the moment it is accepted; an invitation to treat is a step before that — it invites others to make offers. The distinction decides who is the offeror. Shop displays, advertisements and website price listings are generally invitations to treat (Pharmaceutical Society v Boots), so the customer makes the offer and the seller can still decline. The exception is a unilateral offer to the world, like the reward promise in Carlill v Carbolic Smoke Ball Co.
When is acceptance effective — on sending or on receipt?
The general rule is that acceptance must be communicated and is effective on receipt, especially for instantaneous methods like phone or email. The postal acceptance rule is a historic exception: where post is a proper mode of acceptance, it is effective when the letter is posted (Adams v Lindsell). Acceptance must also be a mirror image of the offer — a change of terms is a counter-offer, not an acceptance.
Does consideration have to be adequate?
No. Consideration must be sufficient (real, and recognised by law as having value) but it need not be adequate — courts do not weigh whether the bargain was a good one, so a nominal price can be good consideration. It must move from the promisee, and past consideration (something already done before the promise) is generally not good consideration. Where consideration is missing, promissory estoppel may sometimes make a promise enforceable.
Can Sia help me with contract-formation problems?
Yes, as a study aid. Sia can walk you through the elements in order — offer, acceptance, consideration, intention, capacity — drill the offer-versus-invitation-to-treat distinction on fresh facts, and check whether your IRAC answer applied each element to the scenario. It explains the method and checks your reasoning; it does not do your graded Take-Home or exam, and Monash academic-integrity rules apply.
Exam move
Contract formation is the second Take-Home topic, so master the checklist of elements and test them in order on every problem: is there an offer (or just an invitation to treat)? A communicated, mirror-image acceptance? Consideration moving from the promisee? Intention (commercial vs domestic presumption)? Capacity? Anchor each element to its case — Boots and Carlill for offer, Adams v Lindsell for the postal rule, Balfour v Balfour for intention, Stilk v Myrick and Waltons Stores for consideration and estoppel. Practise by writing visible IRAC answers on fresh facts (online glitches, auctions, reward promises) that apply each element rather than reciting it, and always identify who is the offeror. When a step won't click, ask Sia to explain it a different way and to set you a fresh formation problem; it teaches the method and checks your reasoning, and it never substitutes for your own graded work.
Working through Contract Law: Formation in BTF5955? Sia is AskSia’s AI Business Law tutor — ask any BTF5955 Contract Law: Formation question and get a clear, step-by-step explanation grounded in how BTF5955 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
