There is often a confusion between deeds and agreements and their use for a business. This is because in some situations, they can be used in place of each other or even in a combination. It is important to understand how each one is formed as they are separate legal documents. Using the appropriate one requires a clear understanding of the consequences that flow from each and the legislative background that gives effect to them.
In its most basic form, an agreement is created between two or more parties for the purpose of buying/ selling goods or services for a sufficient ‘consideration’. The consideration is the value received by one party from the other. Monetary remuneration (cash, bank transfer, etc) is the most common form of consideration. Agreements do not need to be in writing, they can be formed verbally as well. Although, as you can anticipate, having an agreement in writing makes it much easier to prove the agreement. It is important to note that not all agreements are valid and enforceable.
A valid agreement must have the following elements:
1. Offer and Acceptance
This simply means that one party must offer an agreement to another party/parties who then either accept, reject or send a counter-offer. Until there is an acceptance, there can be no agreement formed.
2. Intention to be legally bound
Not all offers and acceptances create binding agreements that can be legally enforced. This is because sometimes people agree to certain things without wanting to create legal obligations. As an example, if your friend invites you to their house for dinner and for some reason you’re unable to make it, there are no legal consequences to this because there was never an intention to be legally bound. All such social arrangements lack the requisite intention to be legally bound. However, commercial agreement at arm’s length would most likely fulfill this requirement.
The goods/ services that are being exchanged by parties need to be ‘bargained’. This means that they need to be bought or purchased for a price. There is case law and legislation around what can constitute sufficient consideration.
Commonly Used Agreements by startups and SMEs:
- Employment Contacts;
- Sale Contracts (sale of goods);
- Service Contracts (providing services);
- Shareholders Agreements;
- Lease Agreements;
- Vendor Contracts;
- Distribution Agreements; and
- Franchise Agreements
A deed is a special type of promise that signifies a commitment to do the promised acts. By executing a deed, there is a legally enforceable binding promise in place. Unlike an agreement, there is no requirement for any consideration to execute a deed and additionally, there are some other requirements imposed by legislation and by case law/ common law. The legislative limitation period to file a claim for breach of a deed is usually longer than what is allowed for a breach of an agreement.
A valid deed must have the following elements:
- Should be in writing, signed and delivered to the other party (NSW)
- Witnessed by another person (not a party to the deed)
- Clearly expressed to be a deed and not anything else.
A Deed Is Commonly Used For:
- Deed Poll to bind a builder, working on a property, to the terms of the lease.
- Letter of Credit;
- Settlement Deed confirming the terms of the settlement following a dispute;
- Assigning intellectual property rights;
- Confidentiality Deed to ensure non-disclosure to a third party or the public;
- Deed of Termination; and
- Transferring property
As you can see, deeds can be varied and industry specific. Using a standard template may not comprehensively cover individual requirements. You should get legal advice before executing a deed as it can have consequences to you or your business.
- Consideration is a must for an agreement and not required for a deed.
- An agreement may be oral or in writing whereas a deed needs to be in writing (for NSW).
- Unlike agreements, deeds also need to be signed and delivered.
- The usual limitation period is 6 years for an agreement compared to 12 years or more for deeds depending on the jurisdiction.
The process and requirements for deeds and agreements is different because of their distinct legal nature. As such, these terms cannot be used interchangeably. This means that special care must be taken to ensure that your deeds and/or agreements are valid and enforceable. Disputes and differences with vendors, clients, employees, contractors etc. are a part of running a business and you will have to rely on your agreements/ deeds to enforce a legal right. While there are many templates available online, it is advised that you get your documents reviewed from a legal professional before executing them.
If you need help with any contracts, agreements, or deed, get in touch with our commercial lawyers via the contact form or by calling 1300 337 997.