Legally binding contracts

Not all agreements form legally binding contracts. A valid contract needs the following elements:

  • People entering the contract must intend the contract to be binding.
  • One person makes an offer and is freely accepted by another.
  • Some consideration (Money) is paid in return for a promise.
  • People making the contract have the legal capacity to form a contract.

Contracts can't be enforced if they:

  • Are agreements to do illegal things
  • Breach other legal requirements
  • Are made between family members and were never intended to be enforced, for example, an agreement between parents and a child for pocket money.

Contracts can be written or spoken

For many contracts it does not matter if you made the agreement in writing or just spoke about it.

However, the law says that some contracts must be in writing, including:

  • Agreements about buying, selling or mortgaging land and houses
  • Consumer finance or credit agreements
  • Agreements to buy a car from a licensed motor car trader
  • Door-to-door sales agreements
  • Agreements for things to be done more than one year from the date of the agreement being made.

Any agreement that is important to you should be put in writing. Disputing a contract

There are several options if you have a dispute about a contract that you can’t resolve by talking with the other people involved.

You can go to court to try to get a court order stating that:

  • The contract must be kept (enforcing the contract; also known as ‘specific performance’)
  • The contract has been legally cancelled (legal cancellation is also known as ‘rescission’), or
  • Money must be paid as compensation for breaking the contract (also known as paying ‘damages’).

Taking a dispute to court costs money, so a contract worth only a small amount may not be worth going to court over.

There are quicker and cheaper ways of resolving contract disputes, without going to court. If you are in dispute with a business, trader or a professional, they may be a member of a professional association that offers an alternative dispute resolution service.

Going to court

image     The Magistrates' Court can deal with disputes involving up to $100,000. Unfair contract terms

image    Consumer contracts must not contain unfair terms. These are terms that create an imbalance in the rights of the parties to the consumer’s                       disadvantage.

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    Make sure you have all the information


    Read and check the documentation

The seller must provide you with:

  • The contract of sale
  • A copy of the lease
  • A vendor's statement or Section 52 statement (if the business costs less than $450,000)
Be wary of a seller who doesn't disclose important information, such as why they're selling, the lease, licences, permits and staff.

Check the financial records carefully

image Read and check the documentation

Be wary of sellers who:

  • Are subject to pending litigation
  • Have a record of customer complaints
  • Talk up the cash trading
  • drop the sale price of their products or services to bump up gross sales before selling the business
  • Verify the seller's claims
  • Insist on the right to work on the business before you enter into a binding contract, or at least before settlement. This way you can assess the truth of the seller's claims.

Watch out for sellers who:

  • Won't allow a trial period
  • Won't introduce you to suppliers, the landlord or estate agent
  • Make the deal seem too good to be true
  • Are keen to close the deal quickly
  • Give in too easily to an offer
  • Insist on the right to work on the business before you enter into a binding contract, or at least before settlement. This way you can assess the truth of the seller's claims.

Read and check the contract

Get your lawyer to look over the contract of sale. Check to see if they can add the following to the contract:

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    A performance clause that specifies the minimum takings of the business over an appropriate period leading up to settlement

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    A condition that guarantees any representations made by the seller are correct (whether written or otherwise)

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    A restraint of trade clause that restricts the previous owner from operating a similar business within a certain distance for a number of years

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    A condition that transfers important existing contracts to you


When you sign the contract

When you're ready to sign the contract:

  • Ensure the seller provides you with the signed contract.
  • Return a signed copy of the contract to the seller.
  • Pay the preliminary or full deposit.
  • Receive a receipt for the deposit from the seller

There is far more than what is stated here in buying or selling a business. It is always advisable to speak to an expert lawyer when buying or selling your business. Speak to out team to assist you in buying or selling your next business.