Unsigned contracts are more common than you might think. As a small business, managing all the moving parts from manufacturing, stock, distribution, retailing, admin and marketing can be overwhelming. When trying to establish deals with other businesses, it is not uncommon to accidentally overlook proper documentation. For example, relying on handshake deals or verbal agreements.
Of course, as lawyers we always recommend having a proper legal contract in place so that there is clarity about what each person is expected to do. However, what happens when you are in a situation where a problem arises under a verbal contract or handshake deal? Can you still enforce it?
In this article, we’ll go over what the courts in Australia consider when deciding whether an unsigned contract is still enforceable.
What makes a contract?
Generally, a contract needs three things:
Agreement. One party will ‘offer’ to enter an agreement with another party, and the other party will ‘accept’ this agreement. Without ‘acceptance’, there is no agreement, and with no agreement, there is no contract. A signature is concrete evidence of acceptance, which is why it is so important for enforcing a contract – when it is a verbal or handshake arrangement, this line can become blurry.
Consideration. Consideration refers to an exchange between the parties when making a contract. What are you doing for or giving to the other party in exchange for them giving or doing something for you?
Intention. The parties to a contract must have an intention to be legally bound by the contract. Compare this to a promise to buy a meal for a friend if they help you move house. There is an agreement and an exchange, but probably no intention to enter a contract for that. A signature is not only evidence for an agreement, but also for intention.
Which unsigned contracts might be enforceable?
Whether the agreement was arranged verbally, by email, or through instant messaging, there are several reasons why an agreement may not have a formal contract. If you’re looking to enforce an unsigned contract, consider:
Actions of the parties
If the parties have not signed a contract but are still acting as if there is a signed contract, it may be enforceable, even without a signature. For example, imagine you hire some people to renovate your store. They haven’t signed a formal contract, but they still come in at the arranged time and help you renovate. In this scenario, they are still carrying out the terms of the contract without having signed it. The courts might consider this as an indication of acceptance.
Words of the parties
Is there enough clarity to the arrangement?
Clarity of terms can point towards an intention to enter a contract. Consider any emails, instant messaging, or verbal exchanges. How much detail is in these conversations about the arrangement? Is there enough for an objective third party to say that there is an intention to enter a contract? If there is still a term that hasn’t been finalised, the courts are less likely to enforce the agreement.
Does the contract mention anything about actions before signing?
Sometimes, parties will include a clause in a contract that essentially means ‘anything we do before signing is not part of fulfilling the contract’. Therefore, the actions of the parties that we discussed earlier may not help to prove acceptance or intention.
What do I do about an unsigned contract?
You should obtain qualified legal advice if you are looking to enforce an unsigned contract. Whilst providing details of the above items may help your lawyer establish your case, aside from these basic elements, there are still many other things to consider. The topic of your agreement, what business structure you have, as well as the industry you and the other party work in, can affect what legislation is applicable to your case.
Best practice is to always have a signed contract reviewed by a lawyer before carrying out the agreement to reduce risk of dispute about existence of a contract in the first place. For help with your business contracts, contact us for a free, no-obligation chat.
