1. What is a contract?
2. What are the essential elements of a contract?
3. When can a contract be invalid?
4. Can a contract be verbal or written?
5. What general matters are covered in a contract?
6. Standard contracts and obtaining legal advice
7. Getting the right advice
8. Terms of contract

What is a contract?

A business contract is a legally binding agreement between two or more parties to do or not to do certain things. For example, a business contract could be for the sale of goods or supply of services at a certain price.

There are many different types of contracts including:

• the sale and purchase of a business agreement;
• partnership agreements;
• leases of business premises;
• leases of plant and equipment; and
• employment agreements.

The process for creating a contract generally includes information exchange, discussion, negotiation and employment agreements.

What are the essential elements of a contract?

To be legally binding a contract must contain four essential elements. These four elements are:

• offer;
• acceptance;
• intention of legal consequences; and
• consideration.

The four essential elements of a contract can be briefly explained as follows; a contract is formed when one party makes an offer and that offer is accepted by another party for an exchange of some benefit or something of value by the parties (this is the consideration element). The intention of the parties is that they are legally bound by the contract. Read more...

When can a contract be invalid?

Even if the four essential elements are present a contract could in be invalid if:

• It is an illegal contract. Examples of illegal contracts are an agreement to commit a crime and an agreement that breaches legislation, such as unconscionable conduct under the Competition and Consumer Act 2010.
• The person or entity lacks the capacity to enter into the contract. Examples of persons lacking capacity are minors and bankrupts.
• The contract involves misleading or deceptive conduct, mistake, duress, undue influence, unconscionable conduct or other categories that at law can cause the contract to be avoided.

Can a contract be verbal or written?

Contracts can be verbal or written, provided they contain the four essential elements of a contract. However, a verbal contract is much more difficult to prove. Some types of contract such as those for buying or selling real estate and credit must be in writing.

A written agreement is recommended as it:

• becomes your proof of what was agreed upon;
• prevents ambiguity or misunderstanding;
• prevents either party forgetting or changing the terms later; and
• makes the parties focus on the essential issues and come to a definite agreement.

Unless you're a lawyer nobody expects you to write your own contracts. However, as a business owner you're expected to be able to read a contract and understand what it means.

What general matters are covered in a contract?

Some of the general matters that a business contract can cover include but are not limited to:

• parties to the contract
• date of the contract
• definitions used in the contract
• description of the goods and services that your business will provide or receive
• payment amount and details of payment dates
• interest on late payments
• delivery dates of goods and performance dates for services
• insurance provisions
• guarantee provisions
• termination dates of the contract
• renewal terms
• damages for breach of contract
• termination conditions
• special conditions.

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Standard contracts and obtaining legal advice

The Small Business Development Corporation (SBDC) is frequently asked for standard business contracts for a variety of purposes such as buying a business, leasing commercial premises, partnerships or employment contracts.

We do not provide standard contracts or templates, although some 'standard contracts' may be available through industry associations. We recommend contracts are drafted to reflect the unique commercial circumstances of the parties negotiating the agreement. The lawyer drafting the contract will take into account their client's concerns, commercial risks and matters agreed during negotiations.

Get the right advice

In business it is particularly important to get the right advice before entering into a business contract, or you could face significant and far-reaching consequences.

Legal advice will ensure your rights are protected and favourable terms are negotiated on your behalf - terms that better suit your business and allow you to trade profitably, which means the likelihood of costly disputes in the future is reduced.

Furthermore, the underlying transaction of a contract can have GST, taxation and stamp duty consequences and this aspect of the contract could also require professional advice.

It is strongly recommended you seek professional advice before signing any contracts. Read more...

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What's next...

• Do you need to hire a lawyer?
• Do you understand your commercial lease?
• Do you need more information about employing people?

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