Exchange occurs when the contracts are “exchanged” or signed by the parties to the contract. Settlement, or in the case of a sale of business, completion, will occur when everything that needs to be done in order for the contract to come into force, has been performed.
Unlike most everyday contracts that you will engage in, such as buying groceries or signing up for a new mobile plan, for some contracts such as a purchase or sale of a business, not everything is finalised at the point that the contract is signed. One of the most common contracts in which this occurs is a sale of business contract, in which you will be able to see that there is a date for exchange and a date for completion (or settlement). This is because for most sale of business contracts, there are things such a leases that need to be transferred, or finance that needs to be organised as part of the sale before it can be completed.
Exchange occurs when the contracts are signed by the vendor and the purchaser and each party is given a copy of an executed contract. This means that the contract has been signed and will now become legally binding.
Exchange can occur in a number of different ways. Traditionally, this required the production of physical copies of the contract to both the vendor and the purchaser and for each party to sign and exchange copies of the contract. With the rise of electronic communication, however, this can now be done without the need for the vendor and the purchaser to physically meet.
Completion, or settlement, is the actual finalisation of the contract. In other words, the contract has now been performed. As above, the main reason there is a delay is because, with these kind of contracts, there are things that need to occur before the contract can be finalised. The reason why this doesn’t happen before exchange is because, without exchange, there is no binding agreement and it would be unfair to expect either party to begin the process of transferring the lease, for example, without the guarantee that the contract will be performed.
Other examples of things that need to be done include transferring employees, transferring suppliers, doing a stocktake, inspecting equipment, and organising finance.
The separation of Exchange and Settlement serves a practical purpose. If you need any help in exchanging or settling any contract, contact LegalVision on 1300 544 755 and we’ll put you in touch with our specialist small business lawyers to help you.