A legally binding written agreement is an agreement which is valid and therefore enforceable. It means that the parties who have signed the agreement are expected to fulfil their obligations under the agreement. If they do not, they may be penalised. Although agreements do not have to be written to be legally binding, it is a good idea to have a written record of what you have agreed to. 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 need to satisfy to have a legally binding written agreement.
Acceptance of the Terms
For a written agreement to be legally binding, it must contain an acceptance of the terms in the document. The most common way to accept is through a signature.
If all of the parties involved sign your written agreement, there is a clear acceptance of the terms. In most cases, a signature encompasses anything that indicates the parties’ acceptance, including electronic signatures. It does not matter whether the parties read the document or not. If they have signed the document, it is assumed they have read, understood and accepted the terms. If your written agreement is not signed, it might still be enforceable if the parties have clearly accepted the terms through conduct or otherwise.
The Agreement is Complete
A written agreement is only legally binding when you have finalised all of the essential terms of the agreement. Essential terms are the terms necessary to hold the parties accountable for their promises.
For example, the price of a house is an essential term in the sale of a property because the parties cannot execute the contract before they decide on the price. You should consider whether your written agreement contains all of the details necessary to fulfil the promises made by parties. If it does, your written agreement may be legally binding.
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 out of the contract. For example, when selling your house, you promise the buyer the house, and in exchange, they promise you an amount of money.
The promises the parties make have to be certain and the language of the agreement should not suggest discretion. This is achieved by using definitive language such as “Party A will sell the house” rather than “Party A may choose to sell the house”.
Intention to Form Legal Relations
Written agreements are only binding if there is an intention to form legal relations. In commercial contexts, this is not an issue, as individuals generally intend to be legally bound and protected when making agreements.
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 it is that the parties intended to be legally protected.
Capacity to Consent
Contracts involve the voluntary assumption of legal obligations. Therefore, for a contract to be enforceable, the parties need to have the capacity to consent to the legal obligations they are undertaking voluntarily. The law recognises that the following groups have restricted capacity to consent:
- people with mental disabilities;
- intoxicated people; and
- bankrupt people.
For example, under the Minors (Property and Contracts) Act, minors are only bound to contracts that are “for their benefit” at the time of formation. Likewise, a person with a mental disability, or a person who is intoxicated, is not bound by a contract they are incapable of understanding. If intoxicated, the person must reject the contract as soon as they become sober, or else the contract will bind them.
Furthermore, there are certain limitations on people who are bankrupt. When entering into a contract, they may have the capacity to consent. However, they should do so cautiously.
Written agreements are important as they record mutual understandings between parties. You should carefully draft and review your agreements, as they often have legal implications. For example, it is likely you 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 capacity to consent; and
- an intention to form legal relations.
If you have any questions, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
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