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Understanding Contracts – What makes a binding contract?

What is Commercial Law?

Commercial law, also known as corporate law or business law, focuses on laws pertaining to commercial transactions. Commercial law falls under the umbrella of civil law and incorporates a range of topics such as contracts for the sale of goods or services, the establishment and administration of businesses, partnerships and/or companies, employment agreements, loan agreements and other security documentation, consumer disputes, and property disputes.

What is a Contract?

A contract is a verbal or written agreement between two parties, for one party to perform a certain obligation in exchange for the other party performing a certain obligation. Most commonly, one party will agree to provide a good or service in exchange for payment of money.

Written contracts provide the parties with far greater certainty than a verbal contract as a written contract should set out all of the terms of the agreement between the parties. This ensures that the rights and obligations of the parties are clearly established, thereby reducing the possibility of a dispute over the terms of the agreement.

Elements of a legally binding contract

For a contract to be legally binding, there are a few essential elements that must be satisfied. There must be:

Offer and Acceptance: An offer is a clear communication that amounts to a promise to do something (or not do something) in exchange for the other person doing something or making a promise. There also must be acceptance of the offer through a clear statement or conduct in response to the offer.
Consideration given: A person must promise to do something or give some value in return to create a legally binding contract. A common form of consideration is payment in exchange for the other person providing goods or services under a contract.
Intention to create a binding agreement: Both parties must have the intention that their agreement creates a legally binding contractual relationship.
Legal Capacity: The parties must have the legal capacity to enter a legally binding contractual relationship. This may exclude minors, individuals with mental impairment and individuals with diminished capacity.
Certainty in the Contract: A court can find that a contract is void for uncertainty because of vague conditions such as indefinite timeframes. A contract must be sufficiently complete and certain to accurately identify rights and obligations of the parties. There also must be clear and certain timeframes for performance of key obligations.
Formalities: A contract must meet relevant standards set out in the applicable legislation for it to be legally binding. For example, contracts for a transfer of an interest in land must be in writing.

How to Terminate a Contract?

There are several ways in which a contract can be terminated. They are:

Termination by agreement: Parties can terminate the contract by agreement. They can either provide a termination provision in the contract itself or draft a new contract.
Termination by breach: A party breaching the contract may give the other party the right to terminate the contract. The non-breaching party may be able to terminate the contract for a breach if a provision of the contract permits the termination in the circumstances. They also may be able to terminate the contract if the breaching party renounces their obligations under the contract (e.g. if they say they cannot perform the contract). Lastly, the non-breaching party may be able to terminate the contract if the breach was sufficiently serious (it can’t be a minor or technical breach).
Termination by frustration: On rare occasions, a contract may be terminated in the event of a supervening event that is beyond the control of the parties. For example, a contract to hire a theatre could be terminated by frustration if that theatre is destroyed by an accidental fire prior to the date of hire.

How we can help

If you need a contract written, reviewed or need assistance with terminating a contract, please contact Stone Group Lawyers on (07) 5635 0180 to book your complimentary 30 minute consultation with one of our friendly commercial lawyers.