Handshake agreement versus written contract - are they both legally binding? While handshake deals are enforceable in many day-to-day transactions, some contracts must be made in writing to be legally recognised.

So, what is a contract? When do you need it in writing and what constitutes a legally binding handshake agreement?

Evolution of Australian contract law from English common law

Our legal system in Australia has evolved from the British legal system, which has its foundations in the English common law. Entire books are written about the common law, but essentially this law was not handed down by parliament. Rather, it was developed by judges to meet their dispute resolution needs at the time.

The genius of the common law is that its gradual and organic development resulted in legal concepts that were adopted by a wide range of countries across the globe, Australia included. One of these developments was the contract.

Legally enforceable arrangements established in England in 16th century

Now an integral part of our everyday life, both verbal and written contracts were originally brilliant tools for the development of society and commerce as Britain extended its influence across the world.

Of course, contracts did not suddenly appear, fully developed, in the form with which we are now familiar. It was during the reign of Edward III that English courts began to recognise the notion of enforcing agreements. From the beginning of the 16th century, the courts enforced arrangements that we now recognise as contracts.

What are the two fundamental elements of a contract?

Like all good inventions, verbal and written contracts are not necessarily complex. They both have two fundamental elements; agreement and consideration.

In most cases, the element of agreement in a contract is easy. Providing each party agrees on what is required of them, the agreement is genuine and voluntary, and it's clear exactly what each party has promised to do, the element of "agreement" is present.

"Consideration" relates to the value or benefit which must be bargained for between parties. Each party promises to do something for the other and to receive a reward of some kind. For example, one person agrees to sell their bicycle to their neighbour for $50. The seller relinquishes the bike but gains $50.

Important to note, consideration does not have to be adequate or of some commercial consequence, as long as it exists.

All contracts must have a form of offer and acceptance

Whether a contract is made verbally or in writing, a court must be able to identify that an offer has been made by one party and accepted by the other.

Sometimes the rules around offer and acceptance can be counterintuitive. For example, the shiny new set of saucepans displayed in a shop window for $200 do not constitute an offer. Rather, it's an "invitation to treat"; an old-fashioned phrase that describes the start of a bargaining process. The offer arises when you go into the shop and state that you'd like to buy the saucepans for $200. Acceptance occurs when the shopkeeper agrees to your offer. A verbal contract is then formed, it's enforceable and, guess what, there is nothing in writing!

There are also millions of informal consumer contracts that take place across the globe every day. For example, when you buy eggs from the supermarket, you select the eggs and take them to the checkout (the offer). The checkout operator takes your money (the acceptance) and you walk away with the eggs. Neither of you has spoken a word to the other, however, under these types of everyday informal contracts you are protected by consumer law.

Certainty another key component in legally binding contract

Courts will only enforce an agreement or contract when it is clear that both parties have agreed upon a set of terms. This is why written contracts are very important.

For example, suppose two parties have signed a written contract for the construction of a shed. The contract should include all details such as the design, dimensions, materials, foundations, location, price and delivery date.

Now, if the parties had formed a handshake agreement to build the shed, it might not be enforceable. This is not because of the handshake deal itself, but because the court is unable to identify that both parties were sufficiently in agreement about the contract details. The element of certainty is missing.

How do you know when a written contract is required?

Many retail transactions that occur daily are not put in writing. Why? Because the parties know exactly what the deal is and it would be pointless to have a written contract in place for every agreement.

At the other end of the spectrum, real estate transactions cannot occur without specifically detailed written contracts.

A written contract can save you from needless disputes

Whether a contract is verbal or written, it's critical that there has been a genuine agreement between the parties, and the terms of the agreement have been clearly stated. This is where a written contract is useful, or maybe even essential.

Some people understandably feel genuinely affronted or deterred by written contracts (especially the 50-page plus variety) and some believe a written contract signals a want of trust. However, if there's any chance there might be an argument over what was agreed, or if the law requires a written contract, then the contract should be in writing. If the other party is reluctant to comply, it's useful to point out that a written contract is beneficial to both parties and could help avoid unnecessary disputation and conflict.

Geoff Baldwin
Commercial law
Stacks Champion

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.