A contract is legally binding when:
- A party makes an offer;
- The offer is accepted by the other parties;
- The essential terms of the contract are agreed;
- There is consideration for the promise;
- It is the intention of the parties to form a contract; and
- The parties have legal capacity to make a contract.
A contract may be in writing or it may be made verbally.
A contract in writing is advantageous because the terms of the contract are at least express. However, some terms may also be implied so that the contract is effective. Nevertheless, even though terms of a contract are in writing, there may be disagreement as to their meaning in the event of a dispute.
In a busy commercial world, parties will often make a verbal agreement, and that can be a valid contract, although it may be challenging to prove its terms and conditions.
Supporting documentation such as diary notes, records of telephone conversations, and correspondence comprising letters and emails can assist in proving the terms and conditions of an oral contract.
In the absence of such documentation, it is one party’s word against that of another.
In any case, when dealing with an oral (or any) contract, it is still necessary to prove the essential elements of the contract. There must be:
- An offer – an offer is an expression of readiness to enter into a contract;
- Acceptance – acceptance occurs when unconditional agreement is communicated to the offeror by the offeree. If the acceptance is of terms which vary from the original offer, it is a counter offer, not an acceptance;
- Agreement on the essential terms of the contract – such terms include details of the contracting parties, description of goods or services, price, payment details and dates, milestones and key dates, and the duration of the contract;
- Consideration – this is what induces a party to enter into a contract. It is the exchange of something valuable in return for a promise by the other party. That is usually a price, and consideration binds the parties;
- Intention to create legal relations – there is a presumption that social and domestic agreements are not legally binding, whereas commercial agreements are binding. Intention to create legal relations is the readiness of contracting parties to accept that an agreement exists and has legal consequences; and
- Legal capacity to contract – contracting parties must possess the capacity to contract. Children, as minors, do not have the capacity to contract. Persons who may be mentally impaired and do not understand the consequences of their actions are unable to enter into a contract.
The hardest part of establishing an oral contract is the burden of proof. The party trying to prove a contract must give oral evidence of what transpired and what was the agreement. Oral evidence will usually have to be supported by other evidence such as emails, text messages, and other documents or records.
If a party fails to perform its obligations under the contract then the innocent party may terminate that contract or sue the defaulting party for damages, just like a party may do so in relation to a written contract.
Therefore, a party should not be deterred from enforcing an oral contract. It is harder to prove an oral contract but the law recognises such contracts occur.
Practically, those persons negotiating contracts should keep records of text messages, emails, and correspondence. Any meetings should be diarised and what was discussed at those meetings should be recorded in minutes or other written records, and forwarded to the other party as soon as possible for confirmation. Ideally, parties should take legal advice and have their contracts put in writing.
If you are presently involved in a dispute and would like to know more about your options, then please contact Murdoch Lawyers in Toowoomba and call us on (07) 4616 9898.
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.