Contracts. We’ve been involved in them from the moment we learnt to say no. Getting to see a movie on the weekend if we finish our homework, getting extra pocket money if we clean the gutters after we mow the lawn. If you’ve not been a part of agreements like these, you’ve lived a unique life, trust us.
What makes a contract binding, though? Outside our homes, outside our relationships with family and friends, contracts exist; what makes them valid and accountable to Australian law? This simple, helpful guide will unpack the essential elements of a valid contract in better detail.
First things first: what’s a contract?
Simply put, it’s a legally binding agreement between two or more parties. It’s an agreement driven by action and expectation; each side expects the other to perform the action they’ve agreed to. A contract keeps each side accountable and protects their rights in the matter.
A handshake, a conversation over a few beers, a formal document; in Australia, they all count as contracts.
Offer and acceptance
If the essential elements in this guide are different parts of a house, this element is the front door. No offer, no acceptance, and you’re not coming inside. Sorry. Without a clear offer from one party and clear acceptance from the other party, a contract neither exists nor is valid.
Distil this step to its essential elements and you’re left with three: honest, transparent, and meticulous. Both parties have to be honest with their expectations, transparent with their terms, and meticulous in their details. Conduct themselves in this manner and the contract should prove beneficial to both.
Ambiguity has no business in a valid contract. Nor do terms with holes in them. If you’re entering into a contract, make sure it’s watertight. Fixing contractual leaks in court somewhere down the track is never the path you want to take.
Consideration
If a contract is a promise, consideration is the price paid for that promise. The consideration must have value for the contract to be valid. In the real world, Jack’s mother was right to scold him for exchanging the family cow for magic beans; an Australian court would have deemed this consideration to have no real value. Promising to give your mate a lift to work each morning as payment for leasing their car would encounter the same legal roadblock.
The rules with consideration bend when you factor in deeds. Deeds require no consideration, though they do require the party creating the deed to sign and seal it.
Intention to create legal relations
An agreement between two parties doesn’t make a contract. Objectivity rules here; no court will take seriously a contract with subjective intentions. You and the other party must be willing to make the contract legally binding, or it’s not valid. Simple as that.
Agreements between family members rarely take this path, whereas commercial agreements always do. It will depend on the situation. Like anything legal, the less concrete evidence of a legally binding agreement, the tougher it becomes for either party to prove matters in court.
Again, it’s important to engage in any agreement with honesty, transparency, and meticulousness. Even if the agreement you settle upon with another party doesn’t technically meet the criteria to make it legally binding, at least you’ll know exactly where you stand in the matter.
Capacity to contract
Regardless of what your inner eight-year-old says, you can’t enter into a valid contract with your cat. Cats are undoubtedly smart, but unfortunately, they have no genuine means of communicating their compliance in the matter (again, eight-year-old will dispute this).
On a serious note, the same applies to certain groups or people in our community. Minors, people with mental impairments, prisoners, and bankrupts are some of those who cannot enter freely into valid contracts. A child understands a simple contract—buying an ice cream, for instance, and can genuinely consent to its making. Ask that same child to genuinely consent to a merger between corporations and it’s a safe bet a court will intervene.
Legality and Formality
It would go without saying if it wasn’t still an issue: a contract involving illegal conduct is not a legally binding contract, the same way a legal contract performed illegally is illegal. No amount of word-twisting will change this.
A contract can’t remain valid and enforceable if it has been spoiled by some form of illegality. Of course, this rule has nuances. For example, if you agree to buy a Holden HQ from someone online, only to discover the seller has stolen it from a vintage car collector, you may still be able to hold the seller accountable and recover money or anything else you transferred under the account.
Also, Australia has federal law and it has state law. State law is where matters can become slippery and difficult to grasp. A great example of this is property law. We’re a nation that’s become accustomed to viewing property as an investment option. For this reason, you must never assume a particular law carries weight over state lines.
On the topic of property law, this is one field that demands contracts be written and signed. It’s a formality you can’t get around, despite it not being essential with many other types of contracts.
Speak to an expert
This guide is genuine in accuracy but general in scope. If you need detailed advice on the matter, the best approach is to consult an experienced lawyer who has completed a contract law course. They’ll have the requisite and specific qualifications to help you navigate any contract, no matter its size or complexity. Taking their advice will keep you from taking any unnecessary risks and getting into legal trouble.
This goes for any kind of law. To an outsider—which is most of us—the field of law is knotty and impenetrable; sadly, clarity isn’t always on the checklist of essential elements. If you can find someone who’s sincere and qualified in contract law, you stand every chance of enjoying a positive contract experience.