No business operates in complete isolation. Agreements must be made between your business and its customers, as well as with other businesses such as suppliers and distributors. So how do businesses enforce their agreements? The answer is through the formation of legally binding contracts.
Unfortunately, many businesses get caught out with unenforceable contracts and, in turn, they cannot enforce their rights against third parties. No matter the type of agreement – employment contracts, bills of sale, distributor agreements, etc – these need to be recognised by the courts to be enforceable. This article outlines the key components of legally binding contracts.
AN AGREEMENT – OFFER AND ACCEPTANCE
A legally binding contract involves a valid offer made by one party, followed by acceptance of this offer by the other contracting party. An offer is distinguished from an ‘invitation to deal’ such as a request for a tender. The latter does not amount to an offer according to Australian contract law. Also, acceptance of an offer must be of the exact terms of the offer. If acceptance is not of the exact terms, it will be considered a counter-offer, which must then be accepted by the initial offeror.
A legally binding contract must involve a bargain – that is, an act by one party in exchange for an act by the other party. This usually involves the payment of money, but it can take many forms, such as an exchange of services. Consideration must be sufficient, but it need not be adequate – i.e. it does not need to be of equal value, but it still must hold some value. An example of insufficient consideration is where a term of the contract allows a party to avoid performing their side of the bargain without facing any penalty.
INTENTION TO BE BOUND
Both parties to the contract must intend to be bound by it. The law will presume intention to be bound in commercial agreements, unless the contract contains an ‘honour clause’ stating otherwise. The court looks at all of the facts and circumstances to determine this. Therefore, it is presumed that you and your business intend to be bound by any agreements you enter into on behalf of your business.
DOES IT NEED TO BE IN WRITING?
No, legally binding contracts do not need to be in writing, except for a few exceptions (e.g. purchase/sale of property). Most contracts can be made orally. But just because you can, doesn’t mean you should. The parties to oral contracts often face the difficulty of proving its existence, or the exact terms agreed upon. Further, proving an intention to be bound by a contract can be more difficult if it is not in writing. Therefore, it is always best to put your agreements in writing to avoid any trouble enforcing it later on.
REVIEW YOUR CONTRACTS
Drafting legally binding contracts that enforce your wishes and protect your business can be a difficult task for the novice business owner. Therefore, it is strongly advised that you seek the help of a solicitor to draft your business contracts for you.