U1.06 - Legal Requirements of Contracts
Overview
Dotpoint 6: Legal requirements of contracts
A contract may have the three key elements of intention, agreement and consideration, but it must also satisfy important legal requirements to be enforceable.
This dot point focuses on three requirements:
- Capacity – the parties must have the legal ability to enter into the contract.
- Consent – the parties must enter the agreement freely and genuinely.
- Legal purpose – the contract must be for a lawful activity.
If one of these requirements is not satisfied, the contract may be void, voidable or unenforceable.
Capacity
Capacity means a person or business has the legal ability to enter a contract.
What it means
Most adults have capacity, but there are common limits in business situations:
- Minors - contracts may not be fully enforceable unless they are for necessities or clearly beneficial.
- Mental impairment or incapacity - a person may lack capacity if they cannot understand what they are agreeing to, for example because of severe dementia, serious intellectual disability or extreme intoxication.
- Authority in a business - the person signing must have the power to bind the organisation, such as an authorised manager or company director.
✔ A 17-year-old signs up for a basic phone plan needed for school and work. This may be treated as a necessity, making it more likely to be enforceable.
✘ A Year 11 student signs a 24-month gym contract with high fees and penalties. If it is not clearly beneficial, the gym may struggle to enforce it if the minor cancels.
✘ A casual staff member at a Carousel Shopping Centre store signs a supplier order on behalf of the business without permission. The supplier may find the contract is not binding because the employee had no authority.
✘ A heavily intoxicated customer is asked to sign a finance agreement while clearly unable to understand the terms. Because the person may not understand what they are agreeing to, their capacity to enter the contract may be questioned.
✔ A registered WA builder signs a building contract through a company director who has authority to bind the company.
Why capacity matters in business
- Businesses need to know the person signing has capacity and authority.
- If capacity is missing, the business may lose time, money and the ability to enforce payment.
- Good practice includes checking age or identity where relevant and confirming the signer is an authorised representative.
Example of how to write this in an exam
Capacity is the legal ability of a person or business to enter a contract. For example, if a casual employee signs a supplier agreement without authority to bind the company, the supplier may be unable to enforce the agreement against the business. Businesses should therefore confirm that the person signing is legally capable and properly authorised, reducing the risk that the contract later becomes disputed or unenforceable.
Consent
Consent means each party agrees freely and with a clear understanding of what they are signing.
What can affect consent?
- Misrepresentation - false statements that induce someone to sign.
- Undue influence - unfair pressure from someone in a position of power or trust.
- Duress - threats or coercion, such as “sign or you’ll be fired”.
- Mistake - the parties are not actually agreeing to the same thing.
✘ A Perth car dealer tells a buyer that a vehicle has never been in an accident when it has been repaired after a crash. Consent may not be genuine because of misrepresentation.
✘ A supplier pressures a new café owner in Mount Lawley to sign immediately by threatening to cancel all deliveries. This may amount to duress.
✘ A franchise sales representative uses confusing language and hides key fees, causing the buyer to misunderstand the costs.
✔ A homeowner in Hillarys receives a clear written quote, has time to read it, asks questions and then signs. Consent is more likely to be genuine because the decision is informed and voluntary.
How businesses reduce consent risk
- use clear language rather than tricks or hidden fees
- give customers time to read and ask questions
- put key terms in writing, including price, scope, timeframes, cancellation and fees
- avoid pressure tactics that may later be challenged as undue influence or duress.
Example of how to write this in an exam
Consent requires each party to agree freely and understand what they are signing. For example, if a car dealer falsely tells a buyer that a vehicle has never been in an accident, the buyer may have entered the contract because of misrepresentation. This can make the agreement voidable and expose the business to disputes, losses and reputational damage. Businesses should therefore provide accurate information and allow customers to make informed, voluntary decisions.
Legal purpose
Legal purpose means the contract must involve a lawful activity and lawful terms.
What it means
If an agreement involves illegal activity or illegal terms, it may be void and cannot be enforced.
Legal purpose also links to business compliance. A contract cannot override laws such as:
- Australian Consumer Law - including misleading conduct and consumer guarantees
- employment law - including awards, the NES and unfair dismissal protections
- licensing and safety rules - such as building regulations and alcohol laws.
✘ A Perth employer writes a contract saying staff will be paid below the award and receive no breaks. Even if the worker signs, illegal terms cannot simply be enforced.
✘ A home renovation agreement involves an unlicensed person performing work that legally requires a registered builder.
✘ Two people make an agreement to sell stolen laptops for cash. Because the agreement involves stolen property and an illegal activity, the courts will not enforce it.
✔ A legitimate Perth supplier agreement for monthly deliveries with clear pricing and lawful goods has a legal purpose.
Why legal purpose matters in business
- Illegal contracts may cause financial losses because payment cannot be enforced.
- Businesses can face penalties and reputational damage for illegal terms or activities.
- Good practice is to check compliance with consumer, workplace, licensing and safety laws before signing.
Example of how to write this in an exam
Legal purpose means that a contract must involve a lawful activity. For example, if two people agree that one will supply stolen laptops and the other will pay $5,000 for them, the agreement has an illegal purpose because it involves stolen property. The courts will not enforce the agreement, meaning one party cannot successfully use the contract to force the other party to supply the stolen goods or make payment. Businesses must therefore ensure that both the purpose and terms of a contract comply with the law.
Contract Validity
A contract can have different legal outcomes depending on whether it meets the requirements needed to be recognised and enforced by law.
Valid
Valid – The contract is legally binding and the courts can enforce it.
Think: Everything is legally OK.
Example:
A café signs a contract to buy coffee beans from a supplier for $500 per month. Both parties agree freely, the purpose is legal and the contract meets the required rules.
Voidable – The contract is valid unless the affected person chooses to cancel it.
This usually happens when the agreement was made unfairly, such as through duress, pressure or misleading information.
Think: Valid for now, but one person can cancel it.
Example:
A customer signs a contract after being seriously misled about an important term. The customer may choose to cancel the contract.
Void
Void – The agreement has no legal effect.
The law treats it as though there is no enforceable contract.
Think: No valid contract exists.
Example:
Two people make an agreement to carry out an illegal activity. The courts will not treat that agreement as a valid contract.
Unenforceable
Unenforceable – An agreement may exist, but the court will not enforce it because an important legal requirement has not been followed.
Think: The agreement exists, but you cannot use the court to force the other person to follow it.
Example:
A type of agreement that legally needs to be in writing is made only verbally. The parties may have agreed, but the court may not enforce it.
Valid → legally binding and enforceable.
Voidable → valid, but one party can cancel it.
Void → no legal effect.
Unenforceable → agreement exists, but the court will not enforce it.
Real WA Business Scenarios
Putting the three legal requirements together
Employment contract
A café in Applecross hires a 17-year-old for weekend shifts.
Capacity → the employee is a minor, so the contract should be fair, appropriate and beneficial.
Consent → the offer, pay rate and shifts are clearly explained before signing.
Legal purpose → the contract follows the relevant award and workplace laws.
A Mandurah café signs a 12-month agreement with a Perth coffee supplier.
Capacity → the person signing is the owner or an authorised manager.
Consent → delivery, cancellation and fee terms are clear and understood.
Legal purpose → the contract involves lawful goods and fair trading practices.
Construction example
A homeowner in Baldivis signs with a registered WA builder.
Capacity → the builder has authority and any required licence.
Consent → the homeowner understands the scope, progress payments and timeframes.
Legal purpose → the building work is lawful and complies with relevant regulations.
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Biz Fact: Anytime Fitness clubs require under-18s to have a parent or guardian sign, or restrict contract length, because capacity is a common issue with minors.