It’s very common in Australia, particularly in rural settings, for neighbours to “do a deal” on the shake of hands, and often without any written contract or agreement. But sometimes deals do come unstuck for a range of reasons – perhaps one party is no longer able to perform, or sees an opportunity for advantage, or simply had a different understanding of the deal.
So, under the law, when is an agreement legally binding and when is it not? The basic requirements for a legally enforceable contract are:
- Agreement must be reached in relation to all the essential elements of the bargain. A party cannot be held to a deal if a fundamental part of the deal has not been addressed or agreed.
- There must be valuable “consideration”. Consideration means something given in exchange for something else. If two parties “have a deal” but one party is getting nothing out of it (not even a peppercorn), then it is not an enforceable contract.
- The parties must intend to be legally bound. This often becomes an issue where the parties enter into preliminary agreement of some kind, such as a “Terms Sheet” or “Heads of Agreement“. Sometimes the document makes it clear the parties are not to be bound unless and until a formal contract is signed, but in other cases it is not so clear. The true intent of the parties is to be interpreted from all the surrounding circumstances and conduct of the parties. Even where the preliminary agreement makes reference to the execution of formal contracts, the courts will hold the parties legally bound if satisfied that was the intention.
In contrast to some people’s understanding of the law, there is no general rule that a contract has to be in writing to be binding and enforceable. Contracts can be oral, written, partly written and partly oral or implied based on the conduct of the parties. However, proving the terms of an oral contract is a matter of evidence and can be difficult when there is nothing in writing to confirm the precise rights and obligations which have been agreed to between the parties.
If an oral agreement becomes the subject of legal proceedings a court may not uphold that agreement if essential elements of the deal are not sufficiently certain. For example, if one party asserts that the agreed term of the contract was for one year and the other party gives evidence that it is understood that the agreed term was for five years then a court could hold that the contract is void for uncertainty and unenforceable.
There is one important exception to this rule, and that relates to land. In all states and territories in Australia, land or any interest in land cannot be sold unless the terms have been agreed in writing and signed by the seller. There are also a number of other legislative provisions which require other kinds of contracts (such as bills of exchange and consumer credit agreements) to be in writing. Additionally, a written contract may be required in circumstances where the parties have agreed that they are not contractually bound until a formal written agreement has been executed. This is commonly referred to as a “subject to contract” agreement.
So if you do a deal to buy land on a handshake, remember it is not a done deal until it is signed by the seller. Equally, if you do a deal which is not in writing don’t automatically assume that you don’t have a deal. So long as there is consideration, the fundamental terms are certain and there is an intention to be bound then a contract has been properly formed and is enforceable.