How to understand different types of contracts

Welcome Admin

Why is this important?

Contracts are ‘legally binding’ agreements, which, in a legal context are valid and must be fulfilled with certain exceptions.

For an agreement to be regarded as a contract, it must contain four essential ingredients: an offer, acceptance, intention of legal consequences, and consideration. The absence of any of these will make the agreement not legally binding.

The law recognises that legally binding contracts can be written, verbal, or a mixture of both. However, for business purposes, written contracts are usually preferred due to the following reasons:

The contents (‘terms') are in writing for all to see.
They can ensure that precise language is used in describing the terms of the agreement.
There is less opportunity for misunderstandings and conflicting assumptions.
There is less need to rely on memories of what was originally agreed.
The individuals involved in the transaction may change over time.

Therefore it is important that when you enter into an agreement, whether it is verbal or written, you understand what is necessary to ensure it is valid and legally binding.

What to do

Written contracts

If the contract has been formally written and signed by the parties, there is an assumption that all the terms of the agreement are contained in the written document regardless of what may have been verbally agreed. Additionally, contracts can be a combination of written and verbal agreements if the written agreement lacks detail and only covers very few terms. Prior to signing, a written contract must:

be presented to and understood by all parties to be valid; and
be recognised by all parties as a contract, that is, it must look like a contract and not simply a receipt or docket

Also, once a contract is signed, it is assumed that all the terms have been read and agreed to.

Verbal agreements

Verbal agreements rely on the good faith of all the parties involved and can be difficult to prove as opposed to written contracts. Some ways in which verbal agreements can be supported are by:

the conduct of the other party both before and after the agreement
specific actions of the other party
past dealings with the other party

As desirable as a written contract is, in certain situations it may be counter-productive, such as:

if the value of the transaction is not particularly high; and/or
the presentation of a substantial document, possibly with many provisions, may raise more questions and uncertainty in the minds of the parties involved than it resolves, often ending in the transaction not proceeding.

Good contracts are those where the parties have carefully taken into consideration of all the circumstances and issues that are likely to arise during the lifetime of the agreement and have adequately provided for them. Such contracts will have clearly and fully covered such matters as:

exactly what is required by each party
limits to what is required
payment terms, including credit terms and under what circumstances
risks — what could go wrong in the relationship and how to provide safeguards against this.

Terms of a contract

The terms of a contract are all the points of agreement between the parties concerning just how and under what circumstances the agreement is to be fulfilled. With some clear exceptions noted below, contract law does not specify what those terms must be as they are up to the parties to determine.

Contract law recognises two types of terms: express terms and implied terms.

Express terms are the terms of the contract which are specifically agreed to between the parties and are put in writing in the contract document or agreed to verbally between the parties.

Implied terms are terms that may not actually be put in writing, talked about or even considered, yet are still binding. These terms will actually be regarded as part of the legally binding agreement because the law requires them to be part of the contract, or because common sense, standard industry practice or past dealings help to support each party's reasonable expectation about how the agreement will be carried out and to what standard.

Common sense

In every agreement, there are matters that are so obvious that they go without saying. For example, common sense dictates that goods are appropriately packaged.

Standard commercial practice

Unless the agreement involves an entirely new product or concept, each industry will have well established customary practices, including recognised quality standards and terminology.

Past performance

Past dealings and arrangements often create an expectation that future agreements will be carried out in the same way, unless the parties decide to change the arrangement.

Source: SMExcellence

Where to go for help

Online Business Directory

NSW Business Chamber Online Business Directory connects you to thousands of businesses across NSW. With exclusive access to special offers and great deals, you will find a service provider, business partner or supplier who can meet your needs. Listing on the Online Business Directory is open exclusively to NSW Business Chamber members.