Everyday, we make multiple business decisions in the ordinary course of our day. We negotiate costs, sign up clients, and deal with our suppliers. In most circumstances things go off without a hitch. Particularly in frothy economic times, minor bumps in the road are easily resolved, and life goes on.
Other times, a decision that has become an afterthought suddenly crops up and becomes the centre of a dispute. When this happens, you find yourself backtracking and asking yourself, “What actually happened?” You think back on all the legal knowledge you obtained from all those episodes of Law & Order, Judge Judy and LA Law.
This ‘knowledge’ helps rationalise your position.
For example, you might tell yourself that anything you said previously cannot be enforced because it wasn’t in writing. Is that correct?
\Well, not necessarily.
Too often we find parties make a number of incorrect assumptions about how the law works, particularly in a dispute context. Below we outline some common legal misconceptions you can avoid to protect your business and minimise future disputes.
It wasn’t in writing, so there is no contract!
This is not correct. In most cases, a legally enforceable contract does not even need to be in writing.
Contracts can be formed verbally, as long you can demonstrate all of the legal elements necessary to have a legally binding contract. In simple terms, in Australia these elements are:
- Offer: An offer is made where A promises to do something (for example pay X dollars) in return for a promise from B to do something in return (for example, provide consultancy services).
- Acceptance: The person who receives the offer (the offeree) must accept the terms of the other party’s offer.
- Consideration: The offeree must agree to give something up in exchange. This means that each party to the contract must have some sort of obligation to the other party – the mutual offers above usually covers this. In contract law, this is called ‘consideration’ and applies in Australia, the US and the UK (and other common law countries). This is not required in Europe and in civil law countries.
- Intention to create legal relations: The parties must intend to create a legally enforceable agreement and be legally bound by it. In commercial and business transactions, this is usually assumed based on the commercial relationship of the parties.
- The terms must be certain: The terms and requirements of the contract must not be certain and unambiguous. Any uncertainty or ambiguity in the terms will render the agreement void.
There are some contracts which must be in writing (for example the sale and purchase of land and some consumer contracts). However, generally for commercial contracts between two companies or people, there is no requirement for it to be in writing. This means you need to be super careful about the promises you make to others, particularly in employment settings or with contractors. A casual conversation at the pub could form the basis of a binding contract – creating headaches down the line.
Even if there is a contract, I never signed my name on anything!
There are a number of types of contracts which do not need to be signed. Most people don’t realise that they’ve entered into a legally binding contract doing ordinary things, even things like shopping.
A traditional example of this is when you enter into a car park. As you enter the car park, there are a number of terms and conditions displayed at the entrance before you take the ticket and enter. The car park operator has provided you sufficient notice of the terms and conditions, and by simply entering the car park you have chosen to accept the terms and conditions, irrespective of whether or not you chose to read them. Provided the car park operator gave you sufficient notice of the terms and conditions (which you had the ability to reject by leaving the car park), you will be bound by them whether or not you read them.
And even if a signature is required, it can be provided in other ways and does not need a signature signed with wet ink. For example:
- Electronic signatures
- By clicking “I Agree” before finalising an online purchase or signing up as a user
Anything in writing is better than nothing at all
As we have outlined above, a verbal contract can be just as legally enforceable as a signed and written contract. While there are in most cases no strict legal requirement that contracts be in writing, it is always preferable to have a form of written proof of your agreement.
This might mean you follow up a contract that was concluded orally by sending an email to the other side to confirm your understanding of what the contract is. Done fairly, and soon after the contract was concluded, this can provide a useful evidential basis if the other party doesn’t correct you, continues to act as if they were bound but later breaches the contract.
Why? A such a confirmation provides some evidence of the parties’ intentions and legal obligations if a dispute arises. Say for example you promised you would provide Client A with 30 hours of consultancy services for $50 an hour, but he later claims you agreed to $40 an hour. A follow up email would help resolve any dispute early by pointing to the verbal agreement which indicated the correct amount was $50 an hour.
This is the most basic reason why written contracts are a necessity – more sophisticated terms regarding when the contract is terminated, penalties, how to resolve disputes, etc., will further minimise any future issues.
I haven’t paid anything yet, so I am under no obligations!
Usually a contract becomes legally binding once it is properly executed by the parties. That means that even if you have not started to perform your obligations under the agreement, there is still a binding, enforceable contract and you are required to perform your end of the bargain or risk legal consequences.
So, using the example above, even if your consultant has started working with your company and you change your mind, you are still liable to fulfill your obligations under the contract. Particularly if the consultant has already started doing work for you on reliance on your promise in the contract to pay him or her the agreed amount.
I trust the other party, we don’t need a written contract!
If only the world was always a this kind, and simple. Every lawyer has a handful of horror stories where a client said these exact words only to regret them later.
You can assume that everything is going right and in most cases it will, but what about when things go wrong? Without a written contract, your rights will be harder to enforce and your allegations about the most simplest terms of the contract (price, terms, duration etc.) will be difficult to prove if they are disputed. It is your word against theirs.
Having a written contract will also alleviate the process to occur to resolve disputes and protect you. Having a contract in place beforehand will save you a lot of heartache and trouble fighting with the other party, dealing with lawyers and very quickly accruing legal costs.
I can walk away from the contract because I can’t perform the contract for reasons outside my control!
Too often we have seen that for various reasons outside a person’s control, a party cannot perform their end of a bargain (for example, lack of funding, inability to complete one component of their product due to a subpar consultant, delay in receiving hardware from a third party). They assume that because they have acted reasonably and in good faith, and have done all they can do, that they can be absolved from their obligations under the contract.
This is, unfortunately, just wrong. In most cases (and depending on the terms of the contract) you are still likely to be responsible for any issues that occur or any issues with your inability to stick with your promises. The other party can likely still hold you responsible and seek legal recourse against you for your failure to deliver – they may not care what your intentions are or the attempts you made to fix the situation (although taking certain actions to mitigate damages may be beneficial).
Absolving yourself of responsibility without considering what your legal obligations are, can lead to more trouble – accruing potential damages due to the other party and accruing your and their legal costs (which if you are in the wrong, you may be required by a Court to pay).
Always understand your obligations under a contract and what happens if you fail to deliver. When negotiating a contract, we recommend that you have a think about how realistic it is for you to deliver your end of the bargain and any potential risks (such as Covid-19 business closures and limited trading are a good examples of this). You can then negotiate the terms of your obligations and protect yourself if you can’t deliver for reasons outside of your control.
We agreed to some changes to the contract via email. The emails are enforceable!
This one depends. If you have a properly written contract, chances are that they contain a term hidden somewhere amongst the fine print that any changes to the contract must be in writing and signed by the parties.
Many companies assume that any changes to a contract where agreement is reached by email is enough. For example, a consultant writes to his customer, “We want to increase the price of the contract to $60 an hour” and the customer replies, “Okay we agree to this”. It is clear from the words both parties have agreed to increase the price to $50 an hour. However, technically, this is not a proper amendment to the previously signed and written contract because the original contract requires any amendments to be signed by the parties. If the customer were to dispute the price increase in the future, they would have an argument that the previously signed and written contract requires any changes to the contract be signed, and since this procedure has not been followed, there is no legal obligation they pay $50 an hour to the consultant.
On the other hand, some contracts explicitly provide for variation in writing via email.
Always double check what the contract says.
The law can be tricky to navigate. Some parties make assumptions about their contractual obligations on the basis of misconceptions about how the law actually works in practice.
Or they bluff and bluster to intimidate, or to advance their own interests and try to get out of fulfilling a contractual promise they regret making.
It may be helpful to get a second opinion on your contractual position from lawyers who deal with this stuff day in, day out, and know the traps to avoid and the tricks to help uphold your view of the truth in an uncertain contractual situation.