How to make a contract
A contract is a type of agreement the law can enforce. You make a contract when two or more parties agree on terms that are clear, each giving something of value, and all parties intend to be bound. Agreements can be verbal. A written document is better evidence of what was agreed.
What makes a binding agreement
| What it means in practice | |
|---|---|
| Offer and acceptance | One party proposes some terms. The other either accepts or rejects. If you reply with different terms, you have rejected the proposal and made a counter-offer. |
| Exchange of value “consideration” | Each party gives something: a promise, money, work, products, etc. If there is no exchange, the agreement might not be enforceable (unless it is a deed – a type of agreement). |
| Intention to be bound | Each party must intend to create legal relations. A document that says “subject to contract” might mean there is no intention (or it could mean, a part of the agreement is not yet settled). |
| Certainty | The terms must be clear enough to enforce. Is the price set? You generally need: who, what, when and how (much). Sometimes people put ‘why’, but it can add confusion. |
| Capacity | Each party must be legally permitted to make a contract, or it can be voidable. |
Does it have to be in writing?
Lots of contracts are not written in a ‘contract format’. It can be a text message thumbs up, an email exchange, a handshake or a signed quote. These can unravel when a new situation comes up and each party has a different view. A stock feed transport handshake agreement will not deal with an oil price shock where the trucking company wants to pass on the increased fuel cost and the customer is fighting higher costs all over its business. Some types of agreement must be in writing (including sale of land, guarantees, and some domestic building contracts).
It is tempting to have verbal agreements – less awkward, more speed. However, a verbal agreement can’t cover everything and writing is still important. If you have a disagreement or dispute, the party with the written records will usually win – they can prove their case.
Six steps to make a contract
- Correct party names. Full legal name and ABN, e.g. “Canton Plumbing Chairs Pty Ltd (ABN …)”, don’t use the trading name (e.g. Plummaz). If you sign in your own name instead of your company, you might be exposing your house, rather than your company assets.
- Describe the scope. Say what is included and what is not. Disputes can begin with a variation (new scope) that wasn’t written down.
- Price and payment. Is it rates or lump sum, when can you invoice, are there milestones, and how many days to pay? Say whether the price includes GST (usually price is GST exclusive for business and inclusive for consumers).
- Timings. Start date, end date, milestone / key dates. What delays get an extension of time?
- Things go wrong. Who fixes defects? How long after provision must a defect be fixed? What is the total financial risk (liability limitation) of each party? How do you change the contract (variation)? How do you end the contract?
- Sign it properly. Companies can sign with 2 directors, or a director and secretary, or the sole director. Companies can authorise representatives to sign. Some signatures must be witnessed. Electronic signatures are mostly valid for companies – you can google this.
Mistakes that lead to disputes
- Starting work before the contract is signed. You take on risk and have no protection.
- Accepting the other side’s terms without reading them. A purchase order, quote or website checkout can bring in their standard terms. You might want to use your own standard terms.
- Changing the job without changing the contract. Agree changes in writing before you start the new work. Even an email recording the change is better than nothing.
- Using someone else’s template. If you haven’t read it and now that you have read it you don’t understand it, you shouldn’t use it. Other people have a different risk profile to you.
Unfair terms
Australian law bans unfair contract terms in standard form contracts with consumers or small business (less than 100 employees / under $10 million turnover). Keep your terms balanced – Simple Terms are written to be balanced.
Templates that help
- Services Agreement: for a one-off job or project (or ongoing if you write it clearly in the Details)
- Services Terms: standard terms for repeat customers
- Consultant Agreement: for professional advice and services
This guide is general information, not legal advice for your situation.