For a commercial contract to be valid and enforceable there are a number of important elements that must be present. If any of those elements are not in the contract then the contract may be unenforceable.
Commercial Contract Requirements Which Make Contracts Valid
Who Are the Parties to the Contract?
One of the commercial contract requirements is that the correct parties are named in the contract. This may sound obvious but all too often when people prepare their own contracts the wrong parties are named.
The first question is who should be the party to the contract? For example, is a contracting party an individual a company a trust or a partnership? Each of these legal structures has a particular format that must be followed in preparing the contract so that the correct parties identified at the outset. If the wrong party is named or the party is not correctly identified by its proper legal name it could mean that the contract is unenforceable.
This is a common problem with contracts where a template has been filled out incorrectly often the wrong party has been named.
Commercial Contract Requirements and the Parties’ Legal Capacity
Does the party you are dealing with have the ability to enter a contract? If a party does not have the legal capacity even though the contract may be clear it will be unenforceable.
For example, if you are dealing with an individual are they:
- a minor under the age of 18;
- suffering from a mental incapacity?
In these examples even though the contract may on its face be enforceable because the contracting party does not have “capacity” the contract will not be binding.
If you are dealing with a company is important to do a company search to check it is not in liquidation or deregistered.
Offer and Acceptance
For a contract to be binding it needs to be clear what one party is offering to do and that an offer is made. It must be clear that the other party is agreeing to accept that offer. An offer can be withdrawn before it is accepted and in that case there will not be a binding contract.
Consideration
Once there has been an offer and acceptance and assuming the parties have capacity the next element to take in to account is whether there has been proper consideration given.
Consideration is a requirement of all contracts (except Deeds). Whether there has been good and proper consideration can be a very complex legal issue. However, in its simplest form consideration is an exchange of promises between the parties to the contract. For example a promise to pay money in exchange a promise to do something. In this example there is an exchange of promises. Without proper consideration a contract is not binding.
Intention to Be Legally Bound
The contract needs to be clear that the parties intend to be legally bound to perform the promises and agreements that are set out in the contract. For example, in the case of Australian Woollen Mills vs The Commonwealth it was found that the Government did not intend to create legal relations.
Certainty
This is often the biggest problem with templates or, DIY contracts or contracts that are oral, verbal or evidenced by an exchange of emails. Often with these types of contracts there is uncertainty about exactly what was agreed. In the case of template or DIY contract the terms of the contract may not properly reflect the agreement of the parties.
Contracts that are oral, verbal or evidenced by an exchange of emails or text messages can be confusing and often fail to clearly set out what has been agreed. Consensus ad idem is a phrase which means “meeting of the minds”. Further, it stipulates that parties to the contract fully understand and agree to the terms. So ambiguity, vagueness and a lack of clarity, will invalidate a contract.
A well drafted contract will clearly identify what it is that must be done, when and how it is to be done and when and how payment will be made.
