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When is an Agreement Legally Binding?

When does a contract form?

For a contract to be legally binding and enforceable on the parties, 5 key elements must be in place:

  • Offer: This is a promise by one party to the other party to fulfil an obligation. The promise must be specific, complete and capable of acceptance.
  • Acceptance: This has to be with regards to the exact terms of the offer. There can be no variation as this will be deemed a counter-offer, which, if accepted by the other party, will form the contract terms.
  • Consideration: This is some form of payment of any value.
  • Intention to create legal relations: This is self-explanatory and can be presumed in certain circumstances – for example, in commercial situations, this is the case unless the parties make it clear they do not intend to be bound by the contractual terms.
  • Certainty: As long as all the essential terms are agreed in non-ambiguous and clear terms. this will be sufficient. As such, the courts can find that the parties have entered into a binding contract even if there are some terms to still be agreed. However, it is always preferable to try and agree as many terms as possible before the contract is entered into to avoid disputes arising in the future.

Does a contract need to be in writing?

No – it can be made in writing, orally, inferred by conduct or formed using a combination of all the above.

Key Benefits of a Written Contract - ALBURO ALBURO AND ASSOCIATES LAW OFFICES

WHEN IS AN AGREEMENT VOID?

Despite the 5 elements above being satisfied, the parties negotiations could be flawed resulting in the contract becoming void or voidable.

VOID CONTRACTS

An Agreement is VOID when it lacks contractual force – it never came into legal existence.

As the contract is not enforceable by law, neither party can take the matter to court to try and obtain a remedy.

Examples of void contracts include:

  • A contract for illegal services (e.g. arranging prostitution);
  • A contract which requires a party to perform something that is impossible;
  • A contract that is contrary to public policy/restricts certain activities
  • A contract where one party has taken advantage of another when entering into the contract – does the other side have the necessary mental capacity?

VOIDABLE CONTRACTS

An Agreement is VOIDABLE when a legal agreement has come into existence at the time of formation but can be voided at a later point in time by one or both parties if certain conditions are satisfied/defects take place. Therefore, these contracts will be binding and valid on the parties until one decides to rescind.

A contract is voidable if it was entered into when one of the parties was a minor. This is because the law treats minors as not having the necessary capacity to enter into contracts. However, the contract can be ratified at a later stage. In this instance, the parties would agree to proceed on the basis that the terms of the contract would come into effect once the minor is of age and gives their approval.

Below, I have outlined just some of the grounds I relied upon in court:

MISREPRESENTATION

WHAT IS IT?

A contract is voidable on the basis of misrepresentation if one party has made a false statement that has induced the other party to enter into the contract.

There are 3 different types of misrepresentation:

  1. Innocent misrepresentation;
  2. Negligent misrepresentation and
  3. Fraudulent misrepresentation

Innocent misrepresentation is one where the party is entirely without fault.

Negligent misrepresentation occurs when a statement is made carelessly or without reasonable grounds for believing in its truth.

Fraudulent misrepresentation occurs when a false representation is made knowingly or without belief in its truth.

REMEDIES

The most typical remedy for misrepresentation is rescission and/or damages – to put the parties back into their original positions before the contract was entered into.

For fraudulent and negligent misrepresentation, the claimant can claim for both rescission and damages but for innocent, the court can only award one or the other. The standard remedy for innocent misrepresentation is rescission but the court has the discretion to award damages in lieu.

ARE THERE ANY RISKS?

The important thing to remember is NOT to continue to carry out your promises under the contract without raising an issue first because you will then have difficulty seeking a remedy of rescission of the contract. My landlord tried to say that I never once raised any issued – again, this goes back to my point about how essential it is to keep all your evidence.

Therefore, the risks are that, unless you have substantial evidence to justify your claim for misrepresentation, the risk is that the court will find that the contract is still legally binding and you will be required to continue paying your rent until the end of the term – (unless you have provision for a break clause) even if you have moved out of the property.

Even if you have all the evidence in the world and you think your case is very strong, if your landlord takes you to a small claims court I would suggest going to see a barrister first. Have them represent you at the hearing. Yes, it will be expensive but the alternative is that you may well lose. There are no guarantees in the small claims court – I learned that the hard way.

WHAT IS AN UNCONSCIONABLE CONTRACT?

This is one argument that I relied upon in court. I felt like there was a lot of confusion surrounding this area (even the Judge didn’t sound 100% sure). So, without the pressure of a hearing, I’ll try and explain this as best I can in case any of you need to rely on this too:

If a contract is one-sided to such an extent that it is unfair on the other party – for example, my landlord was charging me a monthly bill (that kept increasing for no reason) for service that were never provided to me, the court may find that the contract is unconscionable. In such instances, the contract will typically be declared void. This is because it is a type of contract that leaves one party with no real, meaningful choice – usually due to major differences in bargaining power between the parties.

WHAT MAKES A CONTRACT UNCONSCIONABLE?

1. UNDUE INFLUENCE

This arises when there is a relationship of trust and confidence between the parties – a landlord and tenant relationship would suffice.

If that relationship is abused (one of the parties exercises their influence over the other and takes unfair advantage of them) – then the contract may be voidable.

For example, if your landlord charges you a holding deposit and then deliberately delays giving you a copy of your agreement (not only may this be a breach of the Tenancy Act – see here) – this may be sufficient.

For example, if your landlord charges you a holding deposit and then deliberately delays giving you a copy of your agreement (not only may this be a breach of the Tenancy Act – see here) – this may be sufficient.

2. DURESS

This is where one party uses threats (physical or otherwise) to get the other to agree to the contract.

3. UNEQUAL BARGAINING POWER

This occurs where one party has an unreasonable advantage over the other.

This can usually be proved if the other party is aware that the other obviously did not understand the contract terms

4. UNFAIR SURPRISE

This occurs when the party that created the contract includes a term without the other’s knowledge and it is not within the other parties expectations.

5. LIMITING WARRANTY

If one party tries to limit their liability, the contract may be deemed unconscionable.

REMEDIES

If the court upholds this argument, damages or specific performance will not be awarded. instead, the parties will simply be released from their contractual obligations.

MY EXPERIENCE

I terminated my agreement based on both of these claims. I was convinced I had a strong case – everyone I spoke to told me the same thing. I’d never been to a small claims court before, no one had ever told me that on the day of your hearing, your evidence is not the only thing that matters. Maybe the Judge just doesn’t like you? Be prepared for this possibility and make sure that if you do terminate your agreement, you can cover yourself in the eventuality that you will be made to pay for the remainder.

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