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WHAT MAKES A CONTRACT BINDING?

We all enter into contracts, probably more often than we realize. While a contract will commonly be in writing, you can also enter into a binding contract verbally.

Further, with the rapid development of internet capabilities, contracts can be entered simply by ticking an "I accept" box electronically, such as when making a purchase from an online store.

So what makes a contract binding?

At its simplest, there are five essential elements that need to be present in order for a contract to be binding:

1. Offer. There must be an offer that is communicated and open for acceptance without further negotiation. e.g I put a classified listing on Trade Me to sell you my car for a Buy Now price of $1000.

2. Acceptance. There must be a communication that the offer is accepted. This can be in writing, oral, or inferred by conduct. Using the Trade Me example, hitting the "Buy Now" link is a communication of acceptance.

3. Consideration. There must be an exchange of promises involving the giving of value in support of, or in return for, a particular promise. e.g You pay me $1000 and in return I will give you my car.

4. Certainty. The contract must be clear on the key terms, such as who the parties are; the subject matter; and the price. e.g When selling my car, I need to state in my classified listing, what type of car I am selling.

5. Intention to Create Legal Relations. Often intention will be presumed, especially where the other elements are all present. However, this is not always the case. The basic test is whether a reasonable person looking at the contract would conclude that both parties intended that the contract be binding upon them.

The above five essential elements are not the be all and end all of determining whether a contract is valid and binding as there are various other aspects that might be relevant, e.g if the contract was entered into by a child; if the contract is illegal; or if the contract contained a clear misrepresentation of fact. However, making sure any contract you enter has the five key elements above is a really good place to start.

Also, it is important to remember that you might need to prove a contract exists. Therefore, make sure you keep records of what you sign, copies of emails, website confirmations and the like to ensure you have a paper trail to show what was agreed, or what was not agreed.

Written by Kylie van Heerden at 09:00

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