"Lets make a deal"

21 April 2010

The Do’s and Don’ts of Commercial Contracts.

Can a US baseball player successfully finalise his playing contract on the back of a Denny’s Restaurant napkin?

Yes - the law states that so long as the courts can decipher the intent of the parties, it doesn’t matter what the contract was written on.

Can a restaurant owner sell his Chinese restaurant to a prospective purchaser for $750,000 by scrawling disjointed phrases on the back of a serviette?

Unfortunately not for this restaurant owner (and not because Denny’s napkins are more favourable when it comes to writing contracts), but because a US court found that all of the essential terms of the contract were not clear.

Although we wouldn’t recommend a prudent business person to draft a contract in this fashion, it’s important to understand that the law doesn’t usually discriminate as to the method used to immortalise the particular contract in question (whether it be on the back of a napkin or otherwise), so long as all the critical elements are expressed – to make sure that they are worth the paper they’re written on!

Elements of a Contract

In order for there to be a contract, there needs to be a basic offer and acceptance – that is, a clear indication by one party to be bound on certain terms and an unqualified assent to that offer.

The essential terms of the contract need to be decided. What the ‘essential’ terms of a contract are will vary from contract to contract, and would need to be negotiated thoroughly so you don’t miss anything vital!

Consideration also needs to be provided – for example, the value given in a contract may be the price paid by one party for goods or services.

Cautionary Note
A contract doesn’t need to be in writing to be enforceable. That being said, purely relying on a verbal contract is extremely unwise for both evidentiary reasons and preservation of terms. If you are faced with a verbal contract, we would always recommend to have this agreement finalised in writing by a legal professional as soon as possible to safeguard your position. After all, you don’t want to put all your faith in a ‘gentleman’s handshake’ which could leave you exposed.

An important point to keep in mind is that you can be found to be contractually bound to another through your conduct without ever formally expressing in writing or orally your contractual obligations towards another, and the law can imply terms into such a contract where necessary to ensure business efficacy.

Negotiating contracts

There are also many requirements under the law for parties negotiating a contract. Here are some:

  • a party is not permitted to exert duress, mislead, or deceive another into entering into a contract;
  • a party is not permitted to take advantage of another’s inability to properly understand or recognise the circumstances of a contract;
  • a party is not permitted to improperly influence another into entering into a contract – arises in situations where a person abuses his or her position of trust;
  • a party is not permitted to engage in unconscionable conduct.

A failure to adhere to these principles may lead to a Court invalidating a contract.

Breach of contract

Where there has been a breach of a contract’s terms, the available legal avenues can vary. Certain breaches may permit the contract to be treated as coming to an end, and will allow the innocent party to sue for damages for the profit lost on the contract. Minor breaches may simply permit a party to sue for damages, and the contract will remain on foot.

Where a party is keen to ensure that a contract goes forward, but the other contractual party refuses to perform its obligations, an Injunction requiring the performance of the contract may be available.

The consequences flowing from a breach of a contract will depend on how the terms of a contract have been drafted. Accordingly, if you want to ensure that your position is safeguarded, it is important that legal assistance is obtained during the contractual drafting phase and not just when things become critical with a breach of contract arising.


What you may think to be a solid and fully documented deal with another, might not actually be worth the paper its written on! The law has many requirements for an enforceable contract to be established, and it is important to seek legal assistance early, as at the contractual negotiation and drafting stage.

Although not discussed at length above, the law does require that certain standards of conduct be complied with when a contract is being established. Accordingly, if you believe that you have entered into a contract in circumstances which you believe to be unfair, you may possibly have a remedy under the law.