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A legally binding agreement is the primary legal mechanism through which our interactions take place. As a business owner, your engagements with customers, clients, suppliers and employees all involve entering into agreements. Therefore, it is crucial to understand how to best draft your business agreements so that they can adequately protect your interests. This article will detail what a legally binding agreement is, and walk through the critical elements of a contract. 

What Is a Legally Binding Agreement?

A legally binding agreement is any contract that is valid and is therefore enforceable. In New Zealand, to prove that you have formed such an agreement, you must demonstrate the 

following elements:

  • a clear offer;
  • unequivocal acceptance; 
  • adequate consideration; 
  • an intention for all parties to enter into legal relations; and 
  • certain terms. 

A Clear Offer

An offer is the first step in forming a legally binding agreement. It is an expression of willingness to enter into a contract with another person or company. You can give an offer in writing, through a document or an email, or verbally. 

When making an offer, your intention to enter into a contract is important. Your offer must be made with the intention that it will become a binding agreement once, or if, it is accepted. Otherwise, the offer is not valid in the eyes of the law. A court may infer your intention from your words or conduct. An offer will be sufficiently clear if the contract would be valid upon acceptance, without any further negotiation between the parties. 

Acceptance 

For this offer to become a contract, the recipient of the proposal must provide unequivocal assent. This means that they unambiguously agree on all of the essential terms of the offer. The essential terms of a contract for the sale of land, for example, would include who the contracting parties are, the property to be sold, the price that will be paid, and the date that the transfer of possession will occur. This acceptance may be expressed or implied. 

For written contracts, acceptance is mainly indicated by all parties providing their signature on the document. 

Once acceptance has been provided, and all other elements are satisfied, a legally binding contract will be formed. Before acceptance, you (as the offeror) can revoke your offer. If you revoke your offer before the other party accepts, there is no legally binding contract.

To enter into a contract, you must have the capacity to do so. If not, your contract may be invalid (even if there has been offer and acceptance). There are certain instances where a person is incapable of entering into a legally binding agreement. You have a restricted capacity to contract if you are:

  • under 18;
  • of unsound mind, for instances, if you are too drunk to know what you are doing; or
  • subject to a property order (unless the contract is for necessaries). 

Consideration

An agreement is not legally binding unless it is supported by consideration. However, this is not necessary when you make a contract through a deed

Consideration means something that is of value. You can think of this as buying the promise expressed in the offer. Sufficient consideration may be:

  • a promise to provide goods or services, such as providing your services as a chef in exchange for payment;
  • a promise to pay for goods or services, such as paying someone to come and work as a chef in your restaurant; or
  • refraining from doing something, or suffering a benefit. For example, refraining from providing your services as a chef to other, nearby restaurants for a certain period, in exchange for payment and employment in a restaurant. 

As it is an exchange for the promise, the thing of value must pass from the individual that made the offer to the recipient. As it is an exchange, it cannot be something that occurred in the past. 

Intention to Create Legal Relations

A court will distinguish between agreements that carry an intention to create a legally binding relationship and those that do not. An example of this is where parties have expressly stated that their agreement will not be binding until it is expressed in formal terms or a written document. Consequently, until the agreement is written in a formal document, no intention exists. 

Usually, in a commercial context, parties will intend to create legal relations. The provision of sufficient consideration will tend to be enough to indicate this. However, it is a question of fact in each case whether there is such intention. 

Certainty of Terms

The terms of the agreement must be certain. If the provisions are incredibly vague, for example, then one cannot say that the parties to the contract have both agreed to them. More importantly, the courts cannot enforce them as they would effectively need to rewrite the contract to do so (which they will not do).  A contract that is too uncertain will, therefore, not be enforceable. 

Key Takeaways

As you enter into many agreements in the course of running your business, it is vital to understand what elements make a legally binding agreement. A legally binding agreement in New Zealand will have five elements: 

  • a clear offer;
  • unequivocal acceptance; 
  • adequate consideration; 
  • an intention for all parties to enter into legal relations; and 
  • certain terms. 

Although such agreements can occur verbally, it is usually best practice to put them into writing. Doing so will ensure that all elements have been satisfied and that you and other contracting parties are clear on what obligations you may be taking on. If you require assistance with drafting a legally binding agreement, LegalVision’s contract lawyers can help. Call us on 0800 005 570 or complete the form on this page. 

FAQs

What is a binding agreement?

A legally binding agreement is any contract that is valid and is therefore enforceable.

What is a non-binding agreement?

A non-binding agreement would be an arrangement that does not have the five essential elements of a contract. Therefore, it will not be enforceable.

What are the elements of a valid contract?

There are five key elements of a valid contract; a clear offer, unequivocal acceptance, adequate consideration, an intention for all parties to enter into legal relations and certain terms.

What is the difference between a contract and an agreement?

The terms ‘contract’ and ‘agreement’ are interchangeable – both refer to a valid and legally enforceable arrangement.

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