Commercial Contract Requirements
Commercial contract requirements are in place to ensure a valid contract is created between parties having capacity and legal intent. As such, a number of elements must be present to make a commercial contract valid and enforceable.
What is the essential information to needed to prepare a legally enforceable commercial contract or business agreement?
For a contract to be valid and binding there are a number of important elements the agreement must have for it to be legally enforceable. If any of the following elements are not in the contract then it is probably 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 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 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 now a common problem with contracts where a template has been filled out incorrectly and 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 correct legal capacity even though the contract may be clear it will be unenforceable
For example, if you are dealing with an individual are they:
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 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 and it must be clear that the other party is agreeing to accept that offer. 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. See this article which references the case of Smith and Hughes.An offer can be withdrawn before it is accepted and in that case there will not be a binding contract.
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 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 for a service or 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.
This is often the biggest problem with template or DIY contracts or contract 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 contracts the terms of the contract may not properly reflect the agreement of the parties. This reference to Australian Woollen Mills vs The Commonwealth cites a case where it was found the government did not intend to create legal relations. Instead, the court found that the government was seeking to promote industry.
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.
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.