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Contract Health Check – How to Take Your Agreements from Good to Great

Commercial Law

Do you regularly draw up your own contracts? Although it’s not legally required to have a lawyer write your contracts, engaging the help of an experienced contract lawyer can protect you from poor or vague wording that leaves you liable for legal action. Read on as Janelle Boutros, Partner covers the key contract elements that require a closer look.

A contract is more than a simple agreement between two people. By its very nature, a contract is a legally binding and enforceable understanding between two or more parties. If you are drawing up a simple document, you may not necessarily need or want the services of a lawyer, as the contract will be legally valid as long as it satisfies five basic elements. If one or more of these elements is missing, a court may find that it is not legally binding.

These five elements are:

  • Offer and Acceptance
    An offer has been communicated by one party, setting out the terms on which they agree to be bound. The other party accepts before the offer is withdrawn. There are some instances that do not constitute an offer/acceptance.

    • Invitation to treat: One party expresses they are willing to negotiate on a specific matter, however, this invitation is not binding upon acceptance. Examples include advertising, priced goods in a store or real estate listings.
    • Counter offers: If the receiving party makes a counter offer, this renders them incapable of accepting the initial offer. For example, you offer to purchase a house in Sydney for $1,000,000 and the seller counters with $1,200,000. If you reject this offer, the seller can’t change their mind and accept your initial $1m offer.
  • Consideration
    This is the agreed-upon price for the promise of the other party. Although it must be something of value, this does not necessarily need to be money.
  • Capacity
    All parties must have the legal capacity to enter a legally binding contract. This means that minors, those with diminished mental capacity, or mental impairment may not be legally able to enter a contract.
  • Intention to Create Legal Relations
    All parties involved must intend and agree to enter into a legally binding contract. This does not always need to be explicitly recorded, and can include verbal communication.
  • Certainty
    The agreement must be “sufficiently certain and complete”. That is, the terms must not be vague, all parties must have agreed on all elements, and the promisor is bound to act on the agreement.

How to write a contract

There is no required format that your contract must follow, as long as it satisfies the above conditions. That said, to ensure a watertight contract that fully protects your interest, it is best to include certain terms, conditions and warranties that are tailored to your specific situation.

  • Description of the goods, services or results
    This should be as detailed as possible and include information such as the work to be done, specific dates, location, and expected outcome. You should also implement rules around any faulty or incomplete work, such as a reasonable time to remedy the issue, and the consequences of failing to do so. If these details are not included, it is very easy for you to become liable for any unforeseen expenses and issues.For example, an agreement to employ a construction company should include information such as an adherence to drawings/specifics, time frame for completion (often in stages), location/s of construction, calculation of cost (materials vs labour), and required approvals. This ensures that if any issues arise (for example, the company losing employees or the cost of cement increasing), the construction company is still legally required to abide by the original terms of the agreement. If the description of the item were vague, you would then be potentially liable for the cost of any extra equipment, contractors, labour time or materials.
  • Payments
    This should include not only the amount, but also the method and timing of payments, as well as methods for dealing with any expenses or additional costs, and whether GST is included (under Australian law, if GST is payable on the sum, then the contract price must include GST).

    Being specific in this clause is crucial, especially if you are engaging in a large project. For example, stipulating that a non-refundable deposit must be secured or progress payments be made as each stage of the project is completed and clear milestones are achieved, will ensure a level of financial protection.
  • Intellectual Property
    If any form of IP is involved in the interaction, then specifying the information you wish to protect, what is considered a breach of the contract, and the repercussions of doing so are crucial.For example, by defining the purpose of disclosing the information in the most specific terms possible, you will be able to restrict the use of the information and ensure it is only used for its intended purpose, and kept confidential. Other inclusions such as the waiver of moral rights, and ownership of any IP created can further protect your business assets.
  • Exclusivity/restraint of trade
    If you wish to include these clauses, be aware that the court will generally not enforce it if it is considered “unreasonable”. Whether the stipulation is unreasonable will usually take into account factors such as the geographic region, duration of time, and public interest.For example, you may wish to enforce a “non-compete” on an employee after they have left your company. Terms that are broad, such as “for five years throughout Australia”, will not be enforceable in court. However, something more specific, such as “for one month in Sydney, two months in Melbourne, and three months in Perth” may be seen as reasonable.

The wording of your personal and business contracts spell the difference between security and vulnerability, with a poorly-worded contract having the potential to hurt you both personally and financially. Act now and contact the team at AV Lawyers today to ensure your assets are protected.