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Formation of contracts | Formalities

Overview

Formal suitAs a general rule contracts do not need to comply with any sort of formalities. Thus, while it is more difficult to prove contracts that are entirely or partly oral, this is a matter of evidence and procedure only and is not relevant to the validity of a contract.

There are, however, some exceptions to the general rule, so that some contracts require essential terms to be recorded in writing and signed.  These requirements generally derived from the Statute of Frauds 1677 (UK) (which still applies in WA) and were principally designed to reduce fraudulent contractual claims. 

In some cases more modern statutes impose formalities to protect consumers by ensuring that they receive copies of their contract and all its terms or to make proof of certain contracts easier.

 

General rules

Land

Contracts for the sale of other disposition of an interest in land are required to be evidenced in writing and signed by the person against whom the action is brought. In Victoria, this is provided for in the Instruments Act 1958 (Vic) which provides, relevantly, that:

Section 126: "An action must not be brought to charge a person ... upon a contract for the sale or other disposition of an interest in land unless the agreement on which the action is brought, or a memorandum or note of the agreement, is in writing signed by the person to be charged or by a person lawfully authorised in writing by that person to sign such an agreement, memorandum or note"

There is now the possibility of satisfying this requirement electronically.

In other jurisdictions the requirement appears in the following acts:

Goods

Normally contracts for the sale of goods do not require compliance with any formalities. However, in Tasmania and WA there is a requirement for contracts of sale of goods that are valued above a specified amount to be evidenced by a written note or memorandum signed by the party to be bound.

Guarantees

Contracts of guarantee are generally subject to the same formalities rules as those relating to the sale of disposition of interests in land, discussed above - in Victoria, they are brought within s 126 of the Instruments Act 1958 (Vic).

Consumer

Consumer contracts do not normally require formalities - however, some contracts, like those falling within the consumer credit code, will require formalities (like a written and signed document) before the contract can be enforced against the consumer.

 

Complying with formalities

Hand shake with signature in backgroundThe following discussion is based on complying with the formalities required by s 126 of the Instruments Act 1958 (Vic). The easiest way to comply with the formalities requirements in this provision is simply to enter into a written contract signed by both parties. This is not, however, essential. It is sufficient if there is a memorandum or note of the agreement (this might, for example, be as informal as a diary note or letter) and it is only necessary for the party against whom action is being brought to have signed it. The note or memorandum must, however, contain all the material terms (eg, identity, subject matter, consideration).

It is also possible for more than one note or memorandum to be joined together; thus, if material terms are contained on one note and the signature on another, it may be possible to join the documents together to satisfy all required formalities. However, in order to do this the documents must - expressly or by implication - refer to each other.

'Signed', for purposes of s 126 can include any name or mark of the defendant any place on the document as long as it demonstrates the whole document was a recognised expression of a contract.

Any documents used to satisfy s 126 must come into existence prior to any action taking place to enforce the contract.

 

Consequences of non-compliance

Failure to comply with s 126 (or equivalents) renders a contract unenforceable; it does not render a contract void. As a consequence it is possible for property in land to pass if the parties choose to proceed with the contract. Even where litigation arises from a contract that has failed to comply with formality requirements, the parties can choose not to rely upon a defence of unenforceability.

 

Non-contractual common law rights

It is possible for non-contractual rights (like proprietary rights) to vest in parties to an unenforceable contract. An action in debt might also be possible where the debt has arisen pursuant to an unenforceable contract.  Alternatively, a remedy may be available in restitution.

 

Part performance

Although the formalities requirements are generally designed to prevent fraud (and this was, of course, the purpose of the original Statute of Frauds), strict adherence to these requirements might themselves facilitate fraud by enabling those who entered into such contracts to deny the existence of the contract or otherwise seek to avoid their promised obligations by relying on non-compliance as a defence to a contractual claim. This led to the development of the equitable doctrine of part performance. This doctrine provides that where the plaintiff has partly carried out the contract, relying on the defendant’s promise, equity may enforce the contract despite non-compliance with formalities.

In Australia, where part performance is established the court may order specific performance of the contract - this equitable remedy is discretionary, so courts will only order it where it appears to them to be equitable to do so.

The main difficulty, however, is determining what constitutes a sufficient act - or acts - of part performance.