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When is an agreement legally binding in Australia?

An Overview on Legally Binding Agreements

Agreements are often reached between parties in commercial arrangements and environments. In summary, for an agreement to be a legally binding in Australia, it should have the following legal elements: offer and acceptance, consideration, capacity, certainty, an intention to create legal relations and formalities.

In this article, we address the frequently asked questions on what makes an agreement, legally binding. These include:

Why are agreements important in private law?

Legal academics have broadly defined contracts, in general terms, as “an agreement or promises that the law will enforce” (Paterson & Robertson, 2020, p. 41). Similarly, others define contract as “an agreement giving rise to obligation which are enforced or recognised by law” (Treitel, 2007, p. 1). There are commonalities shared, including legal recognition and enforcement, such that “in essence, a contract is a promise or undertaking in respect of which legal contractual obligation has been assumed by means which the law recognises” (Coote, 2010, p 42).

With the development of contract law theory as a distinct separate body of law during the 19th century, this reflected a liberal or laissez-faire approach that parties should be given freedom in contract-making and be encouraged to voluntarily adopt their own contractual obligations in private law.

Contract law benefits parties by assisting with creating an efficient system that defines boundaries and expectations when parties assume contractual obligations. Contract law also regulates conduct by adopting normative standards for the performance, interpretation and creation of contracts that is maintained by the legal system.

Read More: What is Contract Law?” provides a broad overview of legal theories that explain the nature of contract law.

What is a legally binding agreement?

For an agreement to be legally binding, it comprises the following elements: offer and acceptance, consideration, an intention to create legal relations, capacity, certainty and formalities.

Each legal element is discussed in the following paragraphs.

What is Offer and Acceptance?

An important element in the formation of a legally binding agreement is that an offer is made by one party, and that offer is accepted by another party.

Offers may be made to the world at large, ranging from an individual to groups of people. However, an offer may cease or not be made available if the following events occur:

EventsSummary
WithdrawnThe offer is withdrawn by the offeror.
RejectionThe offer is rejected by the person being offered.
LapsesThe offer lapses after the period of time that it is made available expires.

Offers may also be accepted, either verbally or by conduct. This may include, acting in accordance with the offer or signing an agreement.

An important difference to highlight is the concept of Offer and Invitation to Treat. Different from an Offer, an Invitation to Treat is an invitation to others to make an Offer. An Invitation to Treat is quite common, and may include: a Shop Sale, an Auction, and a Tender.

Read More: What is Offer and Acceptance in Australia?” explores the meaning of offer and acceptance, and its relevance to a legally binding agreement.

What is Consideration?

In summary, for an agreement to be legally binding, there must generally be a price that must be given in return for a promise. This is generally known as consideration. More specifically, there are two elements or parts to a consideration:

  • the promise must either provide a benefit to the promisor, or have a detriment; and
  • the benefit or detriment, is in exchange for the promise.

Read More: What is Consideration in Australian Contract Law?”, explores the history of consideration and its application in contemporary contract law.

For an agreement to be legally binding, the parties must have an intention of create legal relations. Historically, it was generally presumed that parties in a commercial context do intend to create legal relations. Since the High Court decision in Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 (“Ermogenous“), the role of presumption has transformed to identify the relevant party that carries the burden of proof in showing an intention to create legal relations.

For example, certain situations and contexts historically raised different presumptions:

ContextSummary
CommercialHistorically, in commercial environments, agreements such as leases, contracts for the sale of land, distribution agreement, and licences, were likely to attract a presumption that there was an intention to create legal relations.
DomesticHistorically, agreements made between family members were likely to not attract the presumption of an intention to create legal relations.

Before the decision in Ermogenous, agreements made in a domestic setting were not likely to attract the presumption. However, post-Ermogenous, the Court assesses each case on its facts to determine whether there is an intention to create legal relations. It is encouraged that as much documentation is prepared beforehand, and to seek legal advice when entering into agreements with family members. If there is an objection to an intention, then it is recommended that materials should be prepared to show otherwise. Generally, if the evidence shows that a party intends to be legally bound, it generally does not matter if a party subjectively had intentions to not be legally bound.

Read More: What is an intention to create legal relations?” provides an overview on intention to create legal relations, in contemporary contract law.

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What is Capacity?

To enter into a legally binding agreement, all the relevant parties should have capacity. Generally, the types of capacity issues include:

  • whether a party is a minor; or
  • whether a party has mental incapacity or is intoxicated.

What happens if an agreement is entered with a person that is a minor?

In Victoria, generally, proceedings cannot be enforced against:

  • a person to pay a debt if they entered into a contract when they were under the age of 18.
  • a person to ratify a contract that was made when that person was under the age of 18.
  • repayment of money lent, or supply of goods, other than necessities and accounts stated by a minor.

What happens if an agreement is entered with a person that has mental incapacity or is intoxicated?

An agreement made with a person who has mental incapacity, may include person who have intellectual disability, or a significant mental illness. If that person lacks mental capacity, then the agreement may be voidable because of unconscionable conduct arising from the lack of capacity.

What is Certainty?

For an agreement to be legally binding, it must be sufficiently clear and be complete as to its essential terms. Generally, this will involve assessing the commercial issues to determine whether the parties have reached consensus on all the essential terms.

In determining certainty, we recommend that legal advice is sought, as an agreement that is not certain may not be binding.

Read More: What is Certainty in Australian Contract Law?”, summarises the legal concepts of certainty and completeness in contract law.

The question of certainty also relates to other legal topics, including:

What are Formalities?

In Victoria, there are specific types of contractual documents that are required to be in writing for the documents to be legally binding. Relevantly, section 126 of the Instruments Act 1958 (Vic) sets out that agreements involving dealings with land, and guarantees are required to be in writing. Section 126 specifically states:

Certain Agreements to be in Writing

(1)  An action must not be brought to charge a person upon a special promise to answer for the debt, default or miscarriage of another person or upon a contract for the sale or other disposition of an interest in land unless the agreement on which the action is brought, or a memorandum or note of the agreement, is in writing signed by the person to be charged or by a person lawfully authorised in writing by that person to sign such an agreement, memorandum or note.

(2) It is declared that the requirements of subsection (1) may be met in accordance with the Electronic Transactions (Victoria) Act 2000.

Read More: What is an enforceable contract in Australia” summarises the structure of a contract and its content, including: express terms, implied terms, and when contracts may be voidable.

Bibliography

  • Coote, B. (2010). The Essence of Contract. In Coote, B., & Bigwood, R (Ed.), Contract As Assumptions: Essays on a Theme. Bloomsbury.
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.
  • Trietal, G. (2007). Law of Contract (12th ed). Sweet & Maxwell.

Implied Terms | Express Terms | Frustration | Enforceable Contract | Termination | Consideration | Intention To Create Legal Relations | Offer and Acceptance | Legally Binding Agreement | Certainty | Repudiation | Privity | Classification of Terms | Contract Law (Theories) | Causation | Remoteness | Damages |

If you are looking for legal expertise and have any questions, connect with an author or a member of our litigation and dispute resolution team.

Do you need legal advice? Call us on (03) 5331 1244 to get in touch and arrange an appointment with one of our lawyers.

You can also connect with us by filling out your details and telling us about your information for legal advice below:

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Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

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