You may have heard or read the term ‘legally binding contract’, and it may well be that you have sought the advice of your commercial lawyer before previously entering into such a contract in relation to your business.
What the general assumption would seem to be amongst many people, including a lot of business owners, is that in order for a contract to be enforceable that it has to have been written. In other words, their belief is that verbal contracts carry no legal weight, and obligations given verbally are not binding on either party.
That may be the case in other countries around the world, but in Australia, a contract does not have to be in writing for it to be legally binding on all parties. Now, before we go any further, we have to point out that, as with all aspects of the law, especially commercial law, there are exceptions and caveats to what we have just said.
For a start, for any contract to be valid, there are certain elements that must be satisfied. These are:
- A clear offer has been made by one party. This party is called the ‘offeror’.
- The offer has been accepted by the other party. This party is called the ‘offeree’.
- A payment, known as a ‘consideration’ must have been made between the two parties.
- Evidence of intention from each party must be clear.
- The terms of the contract must be clear and unambiguous
- Each party must have the ‘capacity’ to enter the contract. This covers whether someone had the authority to enter the contract or that they were of sound mind to do so.
As well as these elements all being in place, there are also some other elements that will render a contract invalid with the most obvious of these being duress, undue influence, deception, illegality, or even a crime arising as a result of the contract.
Now, despite us stating that a contract does not have to be in writing for it be legally binding, there are certain types of contracts, that are required to be in writing.
The prime example of this is a contract to buy land or property, which would seem obvious. After all, the mayhem that could arise if you could buy and sell land, simply by verbal agreements is clearly not desirable.
There are other examples, where written contracts would logically need to be in use and these include employment contracts, financial agreements, loan agreements, insurance policy agreements, and leasing property.
Doubtless, you can think of others where the importance of what is being agreed to one, or both, parties is such that having the contract in writing makes total sense.
In truth, there are many business contracts where both the business making an offer, and the business accepting the offer would both be best served, and better protected if their contract is in working.
That does not mean that some kind of verbal agreement cannot be made, but whether or not that would constitute a contract, subject to being seen as legally binding is questionable.
Certainly, if all the elements which we outlined above were in place, then it is possible, but for most businesses, having their most important contracts in writing, makes most sense.