Some contract law basics that every professional needs to know

Legal tips for all business professionals | RP DataArticle by RP Data Senior Corporate Counsel, Chris Spanos

As a practicing solicitor in a misspent youth, the principles of contract law quickly become second nature.  Whether drafting, interpreting or entering a contract, you can forget that most people don’t read the terms and conditions when installing iTunes!

Understanding some basics regarding contract law is important for every professional, including brokers.  Additionally, many of you will be increasingly paid for services rendered, as opposed to a traditional commission model.  This means you will have to rely on a contract to detail services rendered and fees payable.

 

Legal capacity
While it may seem obvious to some, ensuring you contract with the correct legal entity is a critical first step.  If the other party is a corporation, is the individual you are dealing with authorised to bind the company?  Are they a director or officer of the company?  Does their role in company, like CEO, give you some comfort that they have authority to make corporate decisions?

Are you entering an agreement with a trust?  With the rise of SMSFs, you will increasingly encounter trusts in your professional life.  Do you know who can execute contracts on behalf of the trust?  This topic alone can occupy an entire article – we’ll save it for a future edition.

 

Intention to create legal relations
This is another element of contract law which might sound obvious, but often isn’t.  Where you provide services to friends or family, especially in a social or domestic setting, the law often presumes you did not intend to create a binding legal agreement or understanding.

To rebut this presumption, you should always capture commercial arrangements in writing where possible.  By codifying a commercial relationship you help support the view that you expected to form a legally binding contract that can be enforced in court if necessary.

 

Offer and acceptance
In order to form a contract one party must make an offer that the other party can accept.  An offer needs to be more than an invitation to deal or negotiate – you cannot have an agreement to agree.  It must be a clear promise to be bound should the other party accept the offer.

Acceptance refers to a statement or act which confirms that a party agrees to an offer.  The act of acceptance must be clear and positive – a failure to act or respond cannot be deemed an act of acceptance (e.g., if you do not return a new vacuum cleaner within 30 days you are not deemed to have bought it!).

 

Consideration
The last major element of any contract is consideration.  Even with a clear offer and its acceptance, you cannot form a legally enforceable relationship without consideration.  In short, this is the price paid in exchange for goods or services rendered.  The ‘price’ can be anything from money to something of value like reciprocal goods or services.

You may have heard the expression ‘the law doesn’t recognise gifts’.  This refers to a situation where goods or services are provided without a reciprocal exchange of value.  In this circumstance you have a non-enforceable gift as opposed to a contract.  Courts take a dim view of gifts because, in the past, they have often been used to ‘save’ assets from a liquidator during an insolvency event.

 

Final Thoughts
Of course, where you are entering a material commercial arrangement you should always seek independent legal advice.  To heavily paraphrase, a professional that relies upon themselves as their lawyer has a fool for a client.

While contract law may seem unnecessarily technical or difficult to understand, it provides a critical piece of infrastructure to all commercial relationships which helps give parties confidence.  As you become familiar with the concepts, you’ll appreciate the importance of a good contract to protect you livelihood.

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