Most Read Contributor in Australia, September 2016
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
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
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
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
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).