A Simple Way To Understand Contract Law Once and For All

Funny thing happened the other day.

An Aquarius Education client brought in a contract for revision. It was a simple one but she wanted to make sure she isn’t missing anything.

After reviewing the contract it seemed somewhat familiar. I was wondering how and where I have seen this exact contract and then it hit me – I headed over to the website of the Government of South Australia and found this exact same contract I was holding as a template for supplier contracts!

Although I was surprised at first, the feeling quickly changed to pure regret. It seemed that business owners are truly downloading and copy-pasting contracts off the Internet. And while the Australian government is a reliable source, not all Internet sites are.

Then I figured it out – no wonder business owners copy-paste contracts and agreements off the Internet – contract law is complicated. That’s why I always advise business owners (even small and one-person businesses) to hire a lawyer to draft all of their contract templates once and for all. Then they can use those in every business transaction.

However some don’t want to spend the time and money on a lawyer’s services. Other prefer to be contract law savvy so that they can understand the contracts they are presented by suppliers and partners (especially when you work with big corporations, you are mostly given a contract draft.)

If you are one of the business owners that want to stay on top of contract law and don’t want to leave everything to the other party and your lawyer, here is what you need to know:

How do you form a contract?

A contract is formed when two parties agree to do something for each other. A contract can be verbal as well, so when you say you will do something and get something in return you are bound by a contract. Showing agreement is considered contract formation. You don’t need to sign anything to be in contractual relationship.

What is a contract based on?

Each contract is based on consideration, i.e. what will each of the parties do. A consideration is the obligation of each of the parties and must be measurable – each consideration should be balanced with the other. This means that a contract that provides a service that costs $30 elsewhere and charges you $300 might be deemed unfair and invalid.

In addition, there should be genuine consent to enter into contractual agreement, so explicitly saying or writing that you will do something is necessary.

What should I look out for?

There are two important elements of a contract that provide you with the knowledge if it is legal and if it is going to be completed – intention and legal capacity.

Those show if the other party is going to be able to fulfil the contract. For example, the ownership of a restaurant needs to be proven before it is re-sold. This is legal capacity.

When is a contract illegal?

As the guys at The Law Handbook explain a contract can be illegal for many reasons. For example, if the other party is incapable of completing the contract or has provided false statements, a contract will most probably be deemed illegal. The same will happen if the subject of the contract (what it is about) is something illegal.

How should you protect yourself?

When you draft, copy or read a contract the clauses you need to look for are the ones that oblige the other party to complete the contract. There need to be clauses that precisely describe what happens if the contract obligations are not fulfilled. For example, what happens if the painting of your new office is not done in 3 days? Or if you fail to deliver your service to clients? Or what happens if at the end of the month prices of raw materials are different than what you agreed upon?

Obligations must go hand in hand with consequences if you want to have a successful strong contract.

You should know that a contract clause is binding only if the person signing or agreeing is aware of all the clauses and limitations of the contract. They might provide incomplete information and that won’t be a reason to break the contract if they were not aware of that.

For a contract to be breached, one of the considerations must be incomplete or there should be intentionally misleading of one of the parties.

Contract law is complex because individuals and businesses are free to enter into contractual relationship almost without limitations. Of course, those relationships should be legal and that’s why contract law falls under general common law. However, many business relations and business contracts fall under Australian consumer law especially when it comes to guarantees, privacy and ‘significant imbalance’ of consideration.

We strongly advise you to consult both consumer and common law regulations for unfair contract law practices if you feel that the contract you are about to sign is not lawful. Domestic arrangements are usually not considered part of contract law unless there is a strong indicator that the relationship was commercial in its nature.

To make your contract law life easier you have two options:

  1. Hire a lawyer and have her draft basic business contracts for you. In this way you can have ready contracts whenever you need to start a new business relationship. You can insist that partners, customers and employees sign your contracts.
  2. Learn the basics of contract law yourself. In this way you will use the contracts drafted by your lawyer where possible but will be able to know if contracts provided by your counterpart are beneficial for you when they insist to use their own contracts.

It’s up to you to decide what works best for you. The only thing you shouldn’t do is ignore contract law and assume that anything or everything is in a contract. The laws are important but they can be bent in many ways by sneaky clauses. Know contract law to protect your company and always negotiate a win-win relationship.

What next?

Any questions about contract law? If you need your business contract templates drafted or are unsure about a contract issue, contact us here immediately before it gets too late.

Want to Learn More About Making Business Law Work In Your Advantage? 

And I want to give you a FREE eBook that will help you start off on the right foot with business law, save money on legal fees, avoid legal trouble and create a legally sexy business.

Want it? Get the ebook here.