Navigating the intricacies of contract law is an essential skill for both individuals and businesses. From understanding the fundamental components that should be incorporated into a contract to the nuanced process of executing agreements, each aspect plays a pivotal role in ensuring the legality and enforceability of contractual relationships. In this exploration of contract law, we delve into critical topics such as the elements that constitute a contract, the significance of proper execution, variations, and the importance of due diligence before you enter into a contract. Whether you are a seasoned professional or a newcomer to the realm of contracts, this comprehensive guide contains valuable insights into the key principles that govern contractual agreements.
What elements are crucial in a contract?
Every legally binding agreement should address these six essential aspects: Who, What, Where, When, How, and How Much? The relevance of specific clauses, such as those pertaining to intellectual property rights, obligations, privacy/data protection, and indemnities, varies depending on the nature of the contract.
Construction contracts, leases (including occupation licences), and employment or independent service provider agreements necessitate a distinct perspective. These areas are heavily regulated by their legislative frameworks and general laws, introducing considerations that differ significantly from other contract types.
When entering into a contractual relationship, it's essential to recognise that certain terms may be inherently governed by law, and attempting to exclude them may be illegal or render them unenforceable. Notably, the Australian Consumer Law mandates specific consumer guarantees in all consumer contracts, with the added application of the unfair contract terms regime when dealing with standard form contracts.
Executing Contracts: Authorisation and Methods
It is crucial to ensure that contracts are executed by individuals duly authorised by their contracting entity. Failure to adhere to proper authorisation may lead to difficulties in enforcing the contract, potential legal actions from other contractual parties, and internal disciplinary or legal proceedings against individuals who wrongly executed the contract.
For sole traders and individual Trustees of Trusts, signing is a straightforward process—either with or without a witness, depending on the contract. While legal requirements vary across States and Territories, a witness is considered best practice for evidence purposes, even if not strictly mandated by the contract type.
In the case of companies, the Corporations Act (Cth) 2001 outlines various execution methods, notably in sections 126 (individuals signing on behalf of a company) and 127 (execution by company officers).
If a document appears to be executed in accordance with section 127, a third party is entitled to assume proper execution. As long as there are no other legal issues affecting the legality of the contract, it may be assumed enforceable on its terms.
When an individual signs a contract under section 126, whether or not they are a director, due diligence by the other party is advisable. This includes conducting a company search and reviewing source documents that establish the alleged authority, such as power of attorney or internal delegations, depending on the risk profile of the contract.
Electronic signatures, applicable under section 126 or 127, offer flexibility through the use of technology. The “technology neutral” provisions allow various methods, such as a scanned and emailed “wet” signature or electronic platforms like DocuSign or Adobe Sign, ensuring adaptability to different technological approaches.
Don't see what you need?
Due Diligence: Conducting Preliminary Investigations
Prior to entering into any deal (even an informal “head's of agreement” or “memorandum of understanding”), it is often highly advisable to perform basic due diligence, even if you already have a relationship with the other party. This allows you to gain a genuine understanding of the entity you are entering into a contract with, beyond what may be conveyed in their marketing materials or the communications between the parties.
The significance of the financial and commercial stability of the other party will vary depending on the nature of the contract and your position in the arrangement.
Performing rudimentary due diligence on a contracting company is both cost-effective and straightforward, thanks to readily available online services. Among other things, it is prudent and very easy to conduct a company search to ensure proper incorporation, obtain directors and shareholders details and confirm that the company is not under external administration or in liquidation.
Exercise caution when dealing with trusts. Other than in the case of statutory trusts, it is the Trustee that is the legal entity you are dealing with, not the Trust itself (which is not a legal entity).
Note that partnerships and joint ventures are also not legal entities unless they are incorporated.
Preventing Unintended Legal Commitments
A non-binding agreement is commonly referred to as a "Memorandum of Understanding" (MOU) when there is no intention for further development of the relationship, or as "Heads of Agreement," "Commercial Terms Sheet," or "Letter of Intent" when the parties plan to establish a legal relationship later.
Non-binding agreements are frequently used to articulate an intent to undertake an initiative inter or intra governments and between government and non-government organisations, and are used by private entities as a precursor to formal legal agreements, to provide time and resources for feasibility study/due diligence to take place.
Labelling a document as a MOU or Heads of Agreement does not inherently render it non-binding. The document's substance determines whether the parties have established a legal relationship, as illustrated by the “duck test” – if it looks like a duck and quacks like a duck, it is probably a duck.
Where immediate commercial responsibilities or legally binding obligations are required, such as payment of a price (or part price), confidentiality or privacy obligations, intellectual property rights, exclusions or limitations of liability, releases, and indemnities the document may well be binding.
While a document can contain both binding and non-binding terms, such "hybrid" documents pose increased risks and should be drafted or advised on by a legal professional. Critical or high risk terms like releases, indemnities, guarantees, and insurance obligations must be addressed through separate agreements or, in some cases, deeds.
How Can I Modify or Change a Contract?
A contract will be varied when the parties mutually agree to deviate from the original terms without changing so much of the contract that it is effectively terminated and replaced with a new contract. It is crucial to understand the scope of the variation and the necessity driving the changes to avoid unintended consequences of the variation.
An agreement to vary must be reached by mutual consent, although certain contracts may expressly grant a party the right to unilateral variation under very limited circumstances. Compliance with any formal requirements under the contract in relation to the form of the variation is essential, typically outlined in the 'variations' clause or otherwise set out in a law (such as the prescribed form for variation of a registered lease, under property laws of a particular State or Territory).
There is no universal method for varying a contract that applies to all situations. Sometimes an exchange of letters or emails may suffice (although not recommended other than for the lowest risk matters), sometimes a formal Deed of Variation is necessary.
It is important to note that once a contract has expired, it becomes unalterable, necessitating the creation of a new contract to give effect to any future modifications. Caution is particularly warranted when dealing with lease contracts, as they involve special considerations to ensure that the lease is not unwittingly terminated and replaced with a completely new lease, which can have a detrimental effect on the ongoing rights of both parties.