In Short
- For a contract to be legally binding, ensure acceptance of its terms, clear mutual promises, and an intention to form legal relations.
- Written agreements help minimise disputes, though verbal agreements can still be valid if they meet the same criteria.
- Watch out for unfair contract terms, which may be unenforceable and carry penalties.
Tips for Businesses
Regularly review your contracts to ensure they remain fair and enforceable. Make sure all essential details are included, and confirm everyone fully understands their obligations. Courts assume parties have read and accepted any signed document, so use clear, definitive language. Seek legal advice if you have concerns or complex needs.
Table of Contents
- Acceptance of the Terms
- Acceptance by Conduct and Click-to-Accept
- The Agreement is Complete
- An Exchange of Promises
- Intention to Form Legal Relations
- Capacity to Consent
- Entering a Contract With a Company
- Verbal Agreement
- Unfair Contract Term Considerations in Commercial Contracts
- Key Takeaways
- Frequently Asked Questions
When your business enters legal contracts, you must ensure they are legally binding. A legally binding written contract is an agreement that is valid and, therefore, enforceable. When parties sign a legally binding contract, they must fulfil their obligations. If they do not comply, they could face penalties. For instance, the other party might enforce the contract or claim damages. Although agreements do not have to be legally binding in writing, having a written record of your agreement is a good idea. This minimises the risk of a dispute by ensuring you and the other party are on the same page. This article explains the requirements you must satisfy to have a legally binding agreement.
Acceptance of the Terms
To make a written agreement legally binding, you need to accept the contract terms in the document. There is not a specific form required for you to accept. Instead, there are various types, such as acceptance by:
- signing;
- actions; or
- spoken agreement.
The key question is whether a reasonable third party would view the actions of the accepting person as indicating acceptance of the offer.
A signature is the most common way to accept a contract’s terms. If all parties involved sign the written agreement, this demonstrates clear acceptance of the terms. A signature usually encompasses anything that indicates the parties’ acceptance, including electronic signatures. Under contract law, it does not matter whether the parties read the document or not. If the party signs the document, the court assumes they have read, understood and accepted the terms. If a party has not signed the written agreement, it might still be a legally enforceable contract if they accepted the terms through conduct or otherwise.
Acceptance by Conduct and Click-to-Accept
Contractual terms may also be accepted by conduct. However, it is only effective when the conduct is a clear communication of acceptance. The person’s conduct cannot be ambiguous. Acceptance by conduct can be demonstrated through:
- Commencement of Performance: for offers involving services or goods transfer, delivering the product to the other party shows acceptance through conduct;
- Payment or Part-payment: if an offer sets a price for goods or services, the recipient paying that price, partially or entirely, shows acceptance through their conduct;
- Retaining Goods or Services: if an offer is for goods or services, keeping or using them without objection can show acceptance by conduct; and
- Taking Possession or Control: for offers transferring possession/control of property/assets, taking possession or control can constitute acceptance by conduct.
Circumstances and the nature of the offer determine if the conduct shows acceptance. Ensure the conduct aligns with the offer’s terms, leaving no doubt about the intent to be bound by the contract. Explicit written acceptance can avoid potential disputes over contract formation, even if conduct can show acceptance.
A contract’s terms can also be accepted ‘orally’. When it comes to oral acceptance, the words used by the accepting party must indicate their agreement to the terms of the offer. Statements such as “I accept your offer,” “Yes, I agree to those terms,” or “Deal” can constitute oral acceptance, provided that the offer’s terms are clear and understood by both parties.
More recently, contracts have been accepted by ‘click-to-accept’ arrangements. Sometimes referred to as clickwrap agreements, these are common in terms and conditions or online agreements, such as Software as a service (SaaS) agreements.
The Agreement is Complete
A written agreement is only legally binding when you have finalised all the essential terms of the agreement. Essential terms are those necessary to hold the parties accountable for their promises.
An Exchange of Promises
For a written agreement to be legally binding, the parties must promise each other something in return for what they gain from the contract. For example, you promise the buyer the house when selling your home. In exchange, they promise you a certain amount of money. This is known as consideration.
The parties’ promises must be certain, and the language should not suggest discretion. You can achieve this by using definitive language, such as “Party A will sell the house” rather than “Party A may choose to sell the house”.
It is important to remember that the court will not judge whether the consideration you provided is enough. For example, the court will need to determine whether the price paid for a house was enough money based on its value. This is known as the peppercorn principle. In essence, if you satisfied all elements of entering into a contract and provided $1 as consideration, the court would deem this to be sufficient.
Intention to Form Legal Relations
Written agreements are only binding if the parties intend to form legal relations. Individuals generally intend to be legally bound and protected in commercial contexts when making agreements, so this is not an issue.
If you are unsure whether your written agreement has legal intent, consider what is at stake if a party fails to comply. The greater the loss, the more likely the parties intended for the contract to protect them legally.
Capacity to Consent
Contracts involve the voluntary assumption of legal obligations. Therefore, for a contract to be enforceable, the parties must have the legal capacity to voluntarily consent to the legal obligations they undertake. The law recognises that the following groups may have restricted capacity to consent:
- minors;
- people with mental disabilities;
- intoxicated people; and
- bankrupt people.
Furthermore, there are certain limitations on bankrupt people. For example, they may have the capacity to consent when entering into a contract. However, they should do so cautiously.
Entering a Contract With a Company
If you enter into a contract with a company, Australian law considers them to have the same legal capacity as people. This means you can enter into a contract with a company, and the company can sign using the following:
- its common seal;
- someone who acts on behalf of the company; or
- an authorised person acting on the company’s behalf.
The latter option is generally the most common.
If you are entering a contract on behalf of your company, you should ensure you execute it correctly. An agreement executed incorrectly risks you being personally liable for any loss or damage resulting from the contract.
Verbal Agreement
A verbal agreement is a contract between two parties exchanged orally. Generally, verbal agreements are enforceable if they are legally binding. Accordingly, it must meet the same elements as other contracts. The verbal agreement can be enforced like a formal written contract if the other party breaches a term of the agreement.
However, it is important to note that a verbal agreement can lack the ability to provide proof of the contract that a written contract provides. Thus, they can be challenging to enforce.
Unfair Contract Term Considerations in Commercial Contracts
A final consideration that all business owners should be making relates to unfair contract terms (UCTs). Recent changes to the law around unfair contract terms mean that certain terms in standard-form contracts may be unenforceable and, therefore, not legally binding. In addition, from 9 November 2023, you may be subject to significant penalties if your standard form contracts contain unfair contract terms.
As a result of these changes, you should ensure that:
- your agreements are balanced;
- all terms are reasonably necessary to protect the legitimate interest of your business; and
- no term will cause detriment to the other party if you seek to rely on it.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Key Takeaways
Written agreements are important as they record mutual understandings between parties. You should carefully draft and review your agreements, which often have legal implications. For example, you likely have a legally binding written agreement if you and the other party have:
- accepted the terms of the agreement;
- detailed all of the essential terms in the agreement;
- exchanged promises;
- the legal capacity to consent; and
- an intention to form legal relations.
If you have any questions about legally binding agreements and ensuring you have a valid contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A legally binding agreement is legally valid and, therefore, enforceable. If somebody breaks a legally binding agreement, they are liable under the law.
Agreements do not have to be legally binding in writing. For example, a verbal contract can still be a binding contract. However, having a written record of what you have agreed to when it comes to verbal agreements is a good idea.
You must meet all elements of a valid, enforceable contract, including offer, acceptance, and an intention to create legal relations by both parties and consideration. Furthermore, the parties must both be able to enter into the contract.
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