No matter what industry you are in, you can't do business on your own. So every company has to have various agreements and contracts in place.
These agreements are often between you and your customers, employees, suppliers or distributors, and the way all these business agreements are enforced is by creating legally binding contracts between the parties involved.
Unfortunately, all too often when things start to go wrong we see businesses suddenly take an in depth look at their agreements only to find that they have an legally unenforceable contract or the agreement they signed doesn't cover what everyone thought it did.
It doesn't matter what kind of formal transaction it is, whether it's an employee contract, partnership agreement, purchase order, or any other business arrangement, the agreement must be recognised legally by the courts for it to be enforceable if someone were to challenge it.
This is why it's important to understand the key components of a legally binding contract when drafting an agreement.
Key Components and Unenforceable Contract Terms.
Legally binding contracts must include a 'bargain'. This is to say one party doing something in exchange for the other party doing something else; which is typically paying money.
But the exchange could also be exchanging services if money is not involved. The consideration has to be significant, but it does not necessarily need to be adequate. There is no law saying that a bargain must be of equal value, just that it must have some value.
Insufficient consideration could be when a contract allows for one party to avoid a penalty for failing to fulfil their end of the bargain which isn't mirrored by the other party.
Top industries for contract claims & disputesIACCM study on the Most Negotiated Terms & Conditions
Unfair or Unenforceable Contract Terms
Another common example of an unfair term are 'penalty clauses' where one party specifies a monetary amount that is payable upon breach of the contract which is disproportionate to the loss that the party would actually suffer due to that breach.
Does an agreement have to be in writing to be enforceable?
Legally binding contracts do not necessarily have to be written agreements, with a few exceptions such as property purchases/sales, so there are many oral contracts made everyday.
However, you should understand that it is always best to have agreement written down and signed by all parties.
If not, you will be stuck with the burden of proving that the oral contract exists and what the specific terms of the contract are. It is also more difficult to prove the 'intention to be bound' in an unwritten contract.
This is why it is always best to put agreements clearly in writing so there will be less room for interpretation should you end up enforcing the contract.
Steps to consider when reviewing a contract.
Ensure a contract does what you think it does
It can be too easy to assume that what was agreed verbally has been translated perfectly into a written agreement. Often this isn't the case, and a party can be caught out by relying more of the 'sentiment' or 'spirit' of what was discussed rather that what made it into the written contract.
Add a Dispute Resolution clause
Inserting a dispute resolution clause into a contract defines how the parties will seek to resolve differences or misunderstandings before they happen. To avoid litigation, a dispute resolution clause can point towards independent mediation or arbitration to settle the dispute in a fair and mutually agreeable way.
Proactively reviewing your contracts
Just don't wait until you need to enforce a contract before checking that it does what you need it to!
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
Follow us on: