Contrary to popular belief, you do not need to sign a written document to have a legally binding contract. Gentlemen’s agreements, handshake deals and verbal agreements can all be legally binding contracts, provided they comply with the following requirements:
- Essential terms – all of the essential terms to the contract must be agreed. For example, an essential term to a contract to purchase a car will be the purchase price. Without agreement on the fundamentals of a proposal, there can be no contract.
- Consideration – there must be valuable “consideration”. Both parties to the contract must get some benefit from the contract. Using our same example of a contract to purchase a car, the seller will receive money and the buyer will receive a car. If there is nothing to be gained by one party, there is no contract.
- Intention to be bound – the parties to the contract must intend to be legally bound to their promises. The intention of the parties is determined from the surrounding circumstances. Going back to our car purchase, if the buyer wants to have the car inspected by a mechanic before agreeing to purchase it, there can only be a conditional agreement. A deal made where neither party truly intends to uphold their end of the bargain will not be a contract.
If the above requirements are met, you will have a binding contract, which can be wholly written, wholly oral or partly oral and partly written. You can also have a contract that is entirely implied from the conduct of the parties.
One notable exception to this rule is contracts for the sale of land, which must be in writing and signed. Legislation may also require certain types of contracts to be in writing e.g. building contracts.
It is generally desirable for all important contracts, such as a loan of money to a friend, to be documented in writing. Even though you may have a legally binding oral contract, evidence may become an issue. If it becomes necessary to commence legal proceedings to enforce an oral contract, you will need to prove the contract to the Court. This can become a “he said, she said” battle between the parties. There is no better evidence of the terms of a contract than a written contract, signed by all parties.
It is dangerous to assume a deal on a handshake is a done deal. But it is also dangerous to assume an oral agreement will not be binding. The only way to be certain you have a binding contract is to have a written contract drafted by lawyers.
If you need advice in relation to an oral contract, or would like assistance in preparing a contract, please contact McLaughlins, commercial lawyers on the Gold Coast.