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Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

In this installment of Contracts 101 the focus is on briefly understanding what constitutes a contract. Why? Because most small businesses and nearly every freelancer that roams the land appears to believe they are magic pieces of paper with arbitrary demands that everybody signs and then some happy God-being makes it all rosey on the other side. In fact, the six elements required for a legally binding contract must include:

1. agreement
2. consideration
3. capacity
4. legality of object
5. possibility of performance
6. genuine consent

Through this series I will briefly explain each one of these elements. Of particular interest, what constitutes an agreement and what is regarded as consideration are critical industry knowledge for the small business operator. After that point I’ll venture into the world of Promissory Estoppel.

Further to these elements there are some general points to understand about contracts:

• A contract is more than a domestic agreement… Balfour v Balfour (1919)
• There must be intent to create legal relations… Kleinwort Benson Ltd v Malaysia Mining Corp BHD (1989); Administration of the Territory of Papua New Guinea v Leahy (1961); Merrit v Merrit (1970)
• A contract may be in writing or it can be made orally or otherwise, but if it is not in writing then part performance can provide equity… Rawlinson v Ames (1925)
• Exclusion clauses may be included but the party relying on them must do everything reasonably necessary to bring the clause(s) to the other party’s attention or while making the contract… Otley v Marlborough Court Ltd (1949) – also, exclusion clauses require part performance to be carried out under the contract… TNT (Melbourne) Pty Ltd v May and Baker (Aust) Pty Ltd (1966)
• Based on notions of fairness, the courts will be unlikely to interpret a contract to enforce something unfair or unconscionable… Stern v McArthur (1988)

Briefly, these later points simply mean that any old agreement between a husband and wife is not a contract the court will enforce; there must be an intent to be bound by the contract in a legal sense; a contract can be in writing or verbal; a verbal contract having been partly performed can be provided equity by the courts; and, critically, be careful about relying on exclusion clauses as a fine print way of hoodwinking others – you need to be explicit about their existence and meaning to the other party (or the court may just ignore your clauses entirely). And the courts will not help you rip somebody off just because they signed on the dotted line. I add this because there seems to be a myth about signed pieces of paper binding others regardless of the situation.

Some small contract tips: be ethical, be fair and try to create win / win situations. Why? Because broken contracts and legal proceedings will send you just as broke as not being paid at all. Keep contracts in context and leave your ego at the door. Court is a last resort, not a war-starting salvo…

This installment of Contracts 101 was a little daunting right off the starting post but the next installment will begin looking at each of the six elements that make up a contract under Australian Common Law.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

• Contracts 101 – Part 1: Outline
• Contracts 101 – Part 2: Which Contract?
• Contracts 101 – Part 3: The Six Elements
• Contracts 101 – Part 4: The Agreement
• Contracts 101 – Part 5: The Offer
• Contracts 101 – Part 6: The Acceptance
• Contracts 101 – Part 7: Battle of the Forms
• Contracts 101 – Part 8: Consideration
• Contracts 101 – Part 9: Capacity
• Contracts 101 – Part 10: Legality of Object
• Contracts 101 – Part 11: Possibility of Performance
• Contracts 101 – Part 12: Genuine Consent
• Contracts 101 – Part 13: Promissory Estoppel
• Contracts 101 – Part 14: Ending the Contract
• Contracts 101 – Conclusion: Protect your Business

This entry was posted on Monday, November 9th, 2009 at 7:01 am and is filed under business, contracts 101, legal. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.