Written agreements are commonly referred to as a contract or a deed. While they may appear similar, there are several key differences that may influence how you structure your business transactions. Therefore, it’s important you’re aware of these differences and their specific legal ramifications, to protect you from future legal issues.
Consideration
Consideration is the primary difference between a deed and a contract. All contracts require consideration. However, deeds do not, as they are a type of promise that does not necessarily require anything in return.
Consideration refers to promises made by each party at the time of the agreement. The promise is for each party to exchange something of value to the other party in return for the performance or promise of performance by the other party. That is to say, the exchange of promises is what makes contracts legally binding.
If there is nothing of value promised to be given to the other party, it may be more appropriate to structure your transaction by way of a deed. This is because deeds do not require something of value to be exchanged between parties.
Limitation period
Refers to the prescribed period of time that you are eligible to initiate a claim in Court. Failure to start the claim within that time period may mean that no action can be taken. However, it is not common knowledge that deeds and contracts actually have different limitation periods. The legislation states that the limitation period for contracts in NSW is six years from the date of the breach. However, there is a twelve-year limitation period for deeds. Therefore, it is important you ensure that the limitation period does not end before bringing a claim to court.
A major advantage of engaging in contractual negotiations for businesses providing goods or services is that contracts mitigate the period of risk exposure to six years. Conversely, buyers transacting by way of deed benefit from this. The limitation period provides a greater amount of time to uncover any latent defects in the product. This maximises the period of time you have to begin proceedings against the seller.
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Signed, sealed and delivered
Deeds are considered binding on a party once they have been signed, sealed and delivered to the other parties. This occurs even if the other parties have not yet executed the deed document.
Parties can infer the intention of delivery by looking at any fact or circumstance, including words or conduct. Unlike deeds, contracts will only be binding once one party agrees and accepts the other party’s offer.
Final thoughts
It’s important you understand these differences and how they may impact your future business decisions.
If you think a deed is preferable for your business, it is crucial your deed clearly states itself as one to avoid it being construed as a contract. Make sure you check out the legislative requirements of deeds to ensure they are executed correctly.
If you wish to learn more about the differences between contracts and deeds, speak to one of our contract lawyers today to assist you in structuring your transactions to best suit your business.
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