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What Is A Formal Contract?

What Is A Formal Contract?

A formal contract may be required in certain situations. Read about what a formal contract is and when it's required in this article.

26th August 2019

We are entering into contracts everyday. Whether it is haggling with someone at the markets or purchasing a car from your local car dealer, some type of contract is being made. If you have a business, it is especially important for you to understand what a formal contract is. Otherwise you may find yourself stuck with an unenforceable contract later down the track.

Formal And Informal Contracts

A contract is a legally binding agreement between two or more individuals. There are broadly two types of contracts, formal and informal. A formal contract is a written contract that contain several elements, including:

  • An offer made by one party to another party in exchange for goods or services
  • Acceptance of the offer by the other person
  • Consideration, which is something of value to be provided by both parties either in the form of goods, services or money
  • Parties have to have legal rights to contract
  • Parties have the capacity to enter into the contract
  • The intention of forming a legally binding agreement

An informal contract is a verbal contract. It is a contract that only works if the other party can be trusted to perform their contractual duties.

The difference between a formal and informal contract is with its enforceability in the court. A written contract provides more certainty for both parties than a verbal contract, because it clearly sets out the details of the agreement. If a party does not fulfil their contractual obligations, then the other party may seek an order from the court to enforce the written agreement. However, where a verbal agreement is not fulfilled, then it may be difficult to enforce the agreement without any written proof of its terms.

Formal Contract Situations

It is always better to have your contract in writing, even when working with friends or family and no matter how small the job is. A written contract is essential in situations that involve:

  • Specification or requirements
  • Contracts containing essential terms, such as date of completion or date of payment
  • Keeping a degree of confidentiality between you and the other party
    Large sums of money that could make or break your business
  • Employee agreements, so that the employees understand their rights

Conclusion

If you are planning to enter into a legally binding relationship with another party, then it would be a good idea for you to evidence the agreement in writing. This will prevent future arguments over the agreed terms and any strain to your existing or future relationship with them. If you are unsure of where or how to start a formal contract, then it is best to contact a contract lawyer.

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Author
Lola Chang

Lola is a Legal Tech Intern at Lawpath as part of the Content Team. She is in her final year of a Bachelor of Laws and Bachelor of International Studies (Major in China) at the University of Technology Sydney. She is interested in understanding the future of law and innovations in the legal industry.