What is a contract?

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Whilst this question appears on its face to be a very basic one, I am often presented with matters where a dispute has come about due to one or more of the parties failing to appreciate the circumstances in which a contractual relationship will arise.

What Is Needed For An Agreement To Be Binding?

In order for an agreement to be binding under Australian law, it must satisfy each of the following:

(a) Offer – An offer must have been put forward by one party to the other.

(b) Acceptance – Acceptance of the offer must have been made by the other party.

(c) Consideration – Consideration must be agreed to be paid in exchange for the rights conferred under the agreement.

(d) Intention – There must be evidence the parties intended to enter into a binding agreement.

(e) Certainty – There must be certainty as to the agreed terms.

(f) Capacity – The parties must have had the legal capacity to enter into a binding agreement.

(g) Formalities – The agreement must comply with any terms imposed by Legislation.

Common Misconceptions Regarding Contracts

1.  A contract has to be in writing

There is a common misconception amongst that because a commercial arrangement is not in writing it cannot constitute a contract. A verbal contract is equally as enforceable as a written contract provided the above indicia have been satisfied.

There are however some limited circumstances in which contracts are prescribed by legislation to only be enforceable if in writing (a contract for the sale of land for example). A legal adviser with experience in this area can help you identify these situations.

2.  Contracts are always called “contracts”

Agreements, leases, heads of agreement, terms of trade, letters of offer, deeds, bonds, guarantees, treaties – there are many different expressions used to describe what will almost always constitute a contractual relationship. As discussed previously, if the above indicia are met, the document is a contract, irrespective as to what it is called.

3.  A contract will defend itself

Unfortunately a signed contract merely represents the formalisation of an ongoing relationship between the parties. A party to a contract needs to be both diligent in ensuring the other party is complying with their obligations arising pursuant to the contract, and willing to defend his or her rights in Court if necessary.

This is a key area in which an experienced legal practitioner can help you; by preparing a contract that anticipates potential areas of conflict between the parties and ensuring you are aware prior to entering into the contract of the steps you may be forced to take in enforcing your rights under it.

A clause in a contract which is favourable to you is of little use if the time and expense associated with enforcing it outweighs its benefits.

Contracts are the fundamental tools of the commercial world but a failure to understand how they can affect your business could lead to its undoing. You should obtain specialist legal advice prior to entering into any significant contract so that you can ensure your interests are protected and you have a thorough understanding as to all of your obligations arising pursuant to its terms.

If you have any questions or queries regarding this post, please do not hesitate to contact me.

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