Legally Binding Contracts: What You Need To Know

LEGALLY BINDING CONTRACTS: WHAT YOU NEED TO KNOW

There is no doubt that running a business has risks. These risks may come from your employees, your contractors, your suppliers or customers.

As a business owner, you need to take control of your business by assessing these risks and determining how to reduce these risks. One of the best ways to protect your business is to understand contracts. The terms and conditions on your website document the contract between you and every user of your website. If you don’t have any written terms and conditions, you are guessing about the agreement you have with your website users. 

When you sell your product or services, you need a written sales contract to be certain that you are protecting your interests. If you operate an online platform to market or sell your products or services, you need a contract for use of your website (usually terms and conditions). Or, if you want to protect your confidential information such as your client list and trade secrets, then you need a confidentiality deed.

Contracts are an essential part of all businesses as they form the basis of the majority of business relationships and transactions. It is, therefore, crucial for you to know when you do and do not have a binding contract. A binding contract is something that is legally enforceable. So for example, having fun with your friends in a pub is not going to be a binding contract, it’s going to be a bit of a joke and a bit of fun. In order to get a binding contract, you have to have all of the essential terms agreed and an intent to create legal relations. You also need to be able to give evidence of the terms of the agreement.

CASE STUDY

We recently had a client who entered into a contra deal with another service provider, each expecting to complete between $3,000 – $5,000 of work for the other party. Our client wasn’t able to, or wasn’t prepared to trawl through historical emails to specify the details of what they had committed to provide, and they had not invoiced periodically. (An invoice with a credit applied can assist in evidencing that an agreement was made.)

The other party provided a written engagement for services and invoiced regularly. After 12 months, the other party claimed they had received nothing from our client and took legal action to seek payment in full of their invoices. Because our client was not organised, wasn’t able to specify the agreement made or clearly identify the work produced, they ended up in a position of having to either invest in legal services to defend a court matter, or compromise the claim and pay the other party.

A bitter pill to swallow!

For a contract to be legally binding in Australia, it must contain at least the following elements:

1. offer

A contract is essentially a promise between people to do or not do certain things, and it starts with an offer.

An offer must be clear, unambiguous, and contain the essential terms that are to be agreed upon between the parties. That might include the parties to be involved in the contract, the timing of the contract, payment terms under the contract, and any other essential terms necessary to make sense of the purpose of the contract.

When you communicate to another person your promise, you are making an offer. For example, if you promote your services in three different packages on your website, then you are making an offer to each person who views that webpage.

When thinking about business contracts, a company that prepares a proposal is making an offer. If the business looking at that proposal accepts it, that is the first step toward a binding contract, but if they come back and says, “we want something different,” then that offer no longer stands as the offer It’s a counteroffer and the counteroffer takes the place of the original offer.

This will go on until the parties reach a point where there is an offer that is capable of being accepted, and that’s where you get acceptance.

2. acceptance

There must also be acceptance of the offer through a clear statement or conduct in response to the offer. Acceptance can be evidenced in a variety of ways, so it could simply be an email, a telephone conversation, or the signing of a formal written contract.

For online services, acceptance will be when your customer clicks on that button that says, ‘Buy Now’. That is accepting the offer that has been made available on the website.

Contracts are commonly accepted by signature, or by checking a box next to a statement that says you agree to the terms and conditions.  Many contracts are binding without a signature, but not all contracts can be legally binding without being signed. Contracts for the sale of land must be in writing and signed. Wills must also be in writing and signed to be enforceable without needing court intervention.

A form of signature is preferred because even if the parties did not read the contract before signing it, their signatures indicate that they have read and understood and are bound by the terms.

However, this does not mean that if your contract is not signed, it is not valid and therefore not enforceable. Parties can also accept the contract terms through their conduct or other circumstances. It all depends on the circumstances and intention exhibited by the parties. As long as it has been sufficiently communicated, it will be valid acceptance.

For example, completing work referred to in the contract signals acceptance of the contract terms, and that person will be entitled to seek payment under the contract.

A counteroffer is not acceptance, it is a new offer that needs acceptance.

3. consideration

A person must give some value in return for a promise to create a legally binding contract. In other words, each party must receive a benefit.  The most common form of consideration is payment in exchange for goods or services.

With the online example, you’ve clicked the ‘Buy Now’ button. The consideration is the payment of money, and as soon as that consideration has passed, there is a binding contract in place.

Using the example of a proposal, once the terms of the proposal are agreed and accepted by one party, either the payment of money or the start of work or both, will be consideration. The essential terms of the contract must be agreed before the point of consideration to be binding.

So, if you ask a client to pay first and then give them terms and conditions after payment, then the terms and conditions won’t be binding because the consideration has occurred before those elements of the contract are agreed. This can be different where a deposit is conditional upon certain terms being accepted.

Terms and conditions of a contract given to a purchaser only after the contract was formed will not be binding.

4. Intent to create legal relations

As entertaining as it might be to dare a friend in a pub to do something, if they do it, your payment to them is only enforceable based on your goodwill and is not legally enforceable.

This is different to a restaurant promising that a huge meal is free if you can eat it all. That can be enforceable because the restaurant intends people to rely upon that promise in ordering the meal in the first place.

other elements of a binding contract

Aspects of contracts that can affect whether or not a contract is binding include capacity, mistake, illegal intent, fraud, misrepresentation, duress or no intent to create a legal contract.

capacity

Capacity is whether somebody has the legal capacity to make a contract. Only an adult can enter into a contract; that is somebody over the age of 18 years. A person under 18 years does not have legal capacity to form a binding contract.

A person with a disability or an older person who has lost capacity through dementia or Alzheimer’s disease may not have capacity to make a contract, or may have only intermittent capacity.

mistake

A mistake in a contract can sometimes invalidate a contract. Typographical errors are generally not fatal mistakes.

Usually, a party will be bound by the documents they signed, whether or not they’ve read or understood them. However, where a party signs a contract that they fundamentally believe to be something different to what it is, this may be a mistake sufficient to affect the binding nature of the contract. For example, if a person believes that they are purchasing a copyright work (say a painting) where in fact, what they’re signing is only a limited license to use that copyright work for a limited purpose (hanging  the painting in their office). In those circumstances, there is quite a significant difference between what the first person understands they are paying for, and what they are actually getting under the contract.

That may give rise to a doctrine of what’s called a non est factum, which means, ‘it’s not my deed’ or ‘it’s not my contract’ or ‘I didn’t agree to this’. It is very rare to argue this type of mistake.

There are other types of mistakes, for example, one party could be mistaken about what it is they are buying. A party might think they are buying a website with all the existing content and so on, where in fact, what they’ve done is entered into a contract to buy a domain name.

Now, it is likely that the seller in that circumstance knows that they are only selling a domain name and they probably have a level of awareness that the purchaser is mistaken as to what they are actually getting.

In those circumstances the purchaser may not be able to end the contract, there might not be a remedy under contract law or common law, but there may be a remedy in equity. In equity, the party who knew the other party was mistaken as to what was involved in the contract, may be required to allow the other party to revoke the contract or to have rectification of the contract.

Rectification is amendment to the contract to make it reflect what was understood to be the terms of the contract. Occasionally, both parties to a contract have mistaken some aspect of the contract, but different aspects.

There have been some recent cases in Queensland regarding property development, where two parties to a development contract had different understandings of different aspects of the contract and they were ventilated when it went to court. Again, it is rare to have a circumstance where there is a unilateral mistake by both parties about different issues to the contract.

A common mistake is where both parties are mistaken about something to do with the contract. A good example is where both parties think a description of a property refers to a visual address they agree upon, only to find in a property title search that the property they thought they were transacting is the property next door.

For online content, the contracting parties might both think that the website is built with a particular programming language, for example, HTML, when it is built on a different system or with different programming language.

Where there is common mistake, all party’s expectations around the contract are altered because something has risen that none of them were aware of when they first went into the contract. Again, the remedy is more likely to be an equity in terms of a rescission of contract or rectification of the contract, rather than a specific ability to terminate the contract. However, if all parties are mistaken and they have a mutual agreement to end the contract, then that is not a problem at all. It is only a problem when the parties are in dispute.

illegal purpose

Another aspect that will affect the binding nature or enforceability of a contract is whether or not it’s for an illegal purpose. A contract for the purpose of committing a crime is not enforceable. There are differences in criminal law in the different states and territories of Australia.  There are also proposed changes around Australia regarding slavery laws at the moment.

Consider modern slavery, such as people immigrating from overseas and then having their passports taken from them and essentially going into indentured labor services. An offer to find work for someone in exchange for their payment to get help in immigrating will not be enforceable if it results in indentured labor.

fraud or misrepresentation

If there is misrepresentation or fraud before the contract is made, which influences one party to enter into the contract, then the contract may be challenged. Fraud is a deliberate untruth that can be relied upon to void a contract. Misrepresentation is something less.

Consider an IT Service Provider. They say that they will be able to provide you a secure computer system and a phone system (being very simplistic, obviously), for a set monthly fee and an installation cost. Then you find out halfway through installation that it simply will not work with your existing systems, unless additional products or services are purchased, or there is some variation to what needs to be done.

This may be misrepresentation, particularly if you have asked the service provider to review what your requirements are and tender on that basis, then you have accepted the tender and they can’t deliver what they said they would deliver. A remedy for misrepresentation is likely to be damages.

duress

Coercive control is a form of domestic violence that is very topical at the moment, and difficult for the legal system to articulate. Duress or coercive control is putting someone in a position where they feel they have no choice but to enter into the agreement.

In a business situation, holding up payment pending an agreement can be a form of duress if the party withholding payment knows that it will have an adverse effect on the party due to be paid, and they intend to use that as leverage for future negotiations. It is effectively holding the company that is owed money to ransom for money it is already owed.

Although the creditor company might have remedies in terms of taking the debtor to court for recovery of payment, the time involved in recovering that payment may be sufficient to effectively put the creditor out of business without the payment due being received.

A threat can also form duress, unless there is a term of the contract that was agreed which supports it. “If you don’t sack that person, we will terminate this contract” is a threat unless the contract includes a provision that you can require the contractor to replace people if you are not happy with them.

spoken contracts, or partly spoken and partly written

An oral contract can also be valid and enforceable. A contract can be partly written, partly verbal and partly included in an exchange of emails. [https://onyx.legal/articles/contract-dont-have-to-be-in-writing/]

For this reason, you need to be aware of when you’re making promises to other people and when you might be creating binding contracts, whether you intended to or not. Having a formally written contract with signatures on it is proof of the contract that was agreed. The documentation is not what is required to make it binding.

Evidence obviously becomes an issue when contracts are oral. That is when disputes end up in courts, with different people claiming perfect, and differing, recollection of what was agreed.

contracts and deeds are different things

There is a difference between deeds and contracts. Contracts need consideration, which is the doing or giving of something in exchange for understanding that the other party to the contract or the other parties to the contract have obligations that they will fulfill in exchange.

A deed is binding without consideration, and as a result, there are specific rules around the signing of a deed before it can become binding.  

remedies

Once a contract is formed, the nature of the remedy depends upon the nature of the problem in the contract and can include a variety of remedies from voiding the contract from the beginning through to payment of damages, specific performance, damages for losses occurring within the contract and so on. These all depend on the terms of the contract agreed between the parties.