Informal contracts explained

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When people hear the word “contract” they often think of a formal legal document, usually prepared by a lawyer that is pages and pages long.

The reason contracts have evolved to take this form is that quite often the subject of the contract is quite important to the parties and usually involves some sort of exchange, often involving payment of a sum of money in return for a good or service, the terms of which need to be clear to all parties involved.

Contracts take all different shapes and sizes.

You can have a contract for the sale of land that sets out the land that is to be sold, the price payable for the land by the purchaser, and a range of other matters including any additional inclusions, timing of payments etc.

An employment contract sets out the duties that an employee is expected to perform in return for payment of wages or a salary by the employer and other things like basic conditions of employment (for example, things like whether or not an employee is entitled to work from home and things of that nature).

Contracts can take the form of terms and conditions that people agree to every day, sometimes without even realising they are doing so. For example, if you enter into a private car park that has a sign posted at the entry with a list of conditions of entry you are usually entering into a contract with the car park owner/operator to use the car park in accordance with those terms.

The reason that most contracts are recorded in writing is to prevent disputes between parties to a contract about the agreement between them.

A contract does not need to be prepared by a lawyer or in a particular form however to constitute a legally binding contract.

While there are certain “ingredients” that determine whether or not a contract exists as a matter of law (which we will explore in another column in the future), contracts can be handwritten, completely verbal, partially written and partially verbal, and often determined by the conduct of the parties even if not expressly set out in a document or conversation.

For example, you might be selling a car. I might come and inspect the car and offer to purchase it from you for $500. You might say to me, “I will accept $500, but you take the car as is”. I might shake your hand and say, “We have a deal, I agree to pay you $500 for the car as is”. You might say, “No problem, pay me the money now and I will fill out the paperwork to transfer the registration to you and give you a receipt”.

This is an example of what might constitute a contract that is both verbal and written in nature. The verbal part is the terms of the contract that were agreed in the conversation. The written part might be the receipt or registration transfer papers or a combination of both.

Contracts like this are just as enforceable as a formal, written contract prepared by a lawyer.

Using the example above, if I were to pay you the $500 and you transferred the motor vehicle registration to me and provided me with a receipt, you could not then come back to me two weeks later and say, “I’ve changed my mind, I now want $1,000 for the car”.

The problem with contracts that are not in writing and lack sufficient detail is that they can be difficult to enforce because parties often end up in a he said she said argument about what the terms of the contract actually were, particularly if it is a verbal contract.

For example, let’s say I drive the car home and three days later it breaks down on the motorway. I might call you and say, “I want my $500 back, this car is a lemon”. You might respond with, “No, you took the car as is”.

I might say, “I would never have agreed to buy a faulty car though, and the car should have lasted me at least six months given the amount of money I paid”.

Disputes like this arise all the time in circumstances where parties to a contract have made assumptions that are not verbalised or recorded in writing or where parties have misinterpreted what the terms of the agreement actually were.

If you are considering entering into some sort of commercial arrangement you should always think about recording the terms of the agreement you are entering into in writing and depending on the nature of the transaction having a lawyer assist you in this process.

Daniel McKinnon

Since graduating with two degrees in Law and Commerce from the University of Wollongong, Daniel’s spent over ten years solving a wide range of legal problems for the people of Western Sydney.

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