What Makes a Contract Legally Binding?

In any legal and business transaction, it is crucial to have proper, legally enforceable agreements in place to protect the interests of all parties. But what makes a contract legally binding? 

Before you draw up your next agreement, make sure to understand the differences between a legally binding vs. nonbinding contract, the key elements to include, and when to seek the help of an attorney.

Contracts are only legally binding if they include the necessary elements: offer and acceptance, consideration, legal intention, legal capacity, and legal purpose. Let’s break these down one by one.

1. Offer and acceptance

A contract begins with a clear offer by one party, which may include terms, conditions, services to be performed, detailed descriptions, list of responsibilities, duration, and so on, depending on the reason for the offer. The offer needs to be clear, spelling out the specific details pertaining to the topic at hand. 

Keep in mind that the details of an offer will differ depending on the type of contract. For example, a service agreement will include different offer elements than a real estate purchase agreement.

In addition to a clear offer, binding contracts must have an unambiguous acceptance by the other party, meaning that they must agree to the same terms and conditions. This acceptance must be communicated clearly to the person who made the offer.

2. Consideration

In the context of contractual agreements, consideration refers to the value that is exchanged between parties. Think of consideration as the impetus for the contract; in other words, what is one party receiving and the other party offering? 

Value can be money, goods, services, or promises. For instance, in a lease agreement, the property owner’s consideration is the property itself and the tenant’s consideration is the monthly rent. Another example is a corporate nondisclosure agreement (NDA), wherein the business offers a job and an employee promises to keep the company’s information confidential.

3. Intention to create legal relations

Both parties need to recognize that the contract can be enforced in court. Legal intent, often referred to as “a meeting of the minds,” is generally not spelled out in a binding contract; rather, it is presumed based on the circumstances of the agreement, the details included, and the language that is used. An attorney who specializes in contracts can help you interpret this language and determine that legal intent can be presumed.

4. Legal capacity

Another factor in what makes a contract legally binding is legal capacity, which essentially means that all parties have the legal capacity to enter into the contract. Typically this is measured by the following criteria:

• Being of sound mind, able to understand the offer and considerations and accept any potential legal consequences
• Being of legal age, typically 18 or older
• Having legal authority to enter into a contract, e.g., not being bound by another competing contract and having the appropriate signing authority

5. Legal purpose

The final element of a legally binding contract is its purpose has to be found legal in the applicable court of law—at the county, state, and/or federal levels. This is a fairly straightforward difference between a binding vs. nonbinding contract.

For example, any terms laid out in the contract—such as payment, activities, a goods or service exchange, etc.—need to comply with the law. If they don’t, the contract is not enforceable. 

Common causes of voidable contracts

There are some instances in which contracts may be voidable, meaning that they may be found to be legally unenforceable:

• Unclear language, inadequate detail, or a mistake. Contracts that lack clearly defined terms and language, don’t have specific details on how and when obligations will be performed, or contain a mistake about a fundamental fact which can lead to misunderstandings and disagreements about expectations. Therefore, these contracts may be voidable.
• A party to the contract was a minor. Typically, contracts entered into by someone under the age of 18 is voidable at the minor’s discretion.
• Any party was under duress, coercion, or undue influence. A contract signed under pressure may be voidable. This could involve being threatened or influenced by another party with significant power.
• Any party was of unsound mind or didn’t have legal capacity. If one of the parties was incapacitated or of unsound mind when they accepted the contract, or lacked the legal capacity to enter into a contract, it may be voidable.
• A lack of consideration. Without consideration (an exchange of real value), a contract may be considered a gift rather than a legally binding agreement. 
• Misrepresentation or fraud. False statements can impact the validity of a contract. For example, say you sign a contract for a job with a salary of $150,000 per year. Later, you find out that that salary is based on company performance and this was NOT disclosed in the contract. For another example, say you buy a used car at 60,000 miles with no history of accidents. Later, you find out the odometer has been tampered with and there was indeed an accident. Luring someone into a contract under false pretenses is fraud and makes a contract unenforceable.

You can avoid drafting or signing an unenforceable contract by enlisting the assistance of an attorney who is an expert in understanding the common causes of voidable contracts and pinpointing how to mitigate them.

How to ensure your contract is legally binding

To protect your interests, it’s important to ensure that you have legally binding contracts. Here are tips for drafting an enforceable contract.

• Avoid ambiguous language. Legally binding contracts need to include a clear offer and specific terms to ensure that things like obligations, duration, and descriptions are clear and indisputable. Similarly, make sure to include well-crafted and applicable clauses (such as indemnity clause), clearly define key terms, and use standard, clear language.
• Make sure that everyone fully understands the agreement. Have everyone review the terms and if the other party has questions about the contract, provide explanations or consider making revisions.
• Include all required elements. Refer to the above list of requirements for a legally binding contract, ensuring that all elements are included.
• Seek legal expert review. There’s no better way to make sure that your contract is ironclad than by having it reviewed by a legal expert. Protect your interests with a LegalZoom document review, where an attorney who understands contract law can check any type of legal document and provide their professional recommendations.

Now that you’ve learned what makes a contract legally binding, you can be confident when crafting future agreements. If you’re ever in doubt, consider writing a strong legally binding contract together with an attorney or using one of LegalZoom’s attorney-drafted templates.

FAQs 

Are oral contracts enforceable?

Both written and oral contracts are enforceable, though it depends on the type of agreement and the jurisdiction. Generally speaking, oral contracts are considered binding and legally enforceable, but many parties draft written contracts to ensure that terms of a verbal agreement are less likely to be disputed. 

Furthermore, some types of contracts are required to be in writing, such as real estate property contracts, agreements to take on an individual’s debt, and those that include the sale of goods or services. For example, California law stipulates that a contract including the sale of goods for more than $500 isn’t an enforceable or legally binding contract unless there is a record indicating that the sale has been made and signed by the necessary parties.

What happens if one party fails to fulfill their obligations under a contract?

If a party fails to fulfill their legal obligation under a contract (also known as a breach of contract), and that party is sued, the court will first verify that there is a legally binding contract, then seek proof of the breach of contract. If it is determined that one of the parties did indeed fail to hold up their end of the bargain, then damages may be awarded. 

It’s important to note that not all breaches of contract necessitate a lawsuit. For example, some contracts include provisions for potentially unfulfilled requirements, such as late rent payments or overdue services. In these cases, the issues are often discussed and resolved between the parties.

What is “mutual assent” in a contract?

Mutual assent refers to the ability of all parties to agree to contract terms, meaning that they haven’t been coerced, are of sound mind, and understand the terms. Mutual assent, whether expressed verbally or in writing, is essential for an enforceable, binding contract.

Do I need to get my legally binding contract notarized?

Some contracts need to be notarized, such as real estate contracts, wills, trusts, or debt agreements. If this type of contract isn’t notarized, it may be considered an unenforceable contract. 

Business-related contracts, on the other hand, typically don’t need to be notarized. However, it’s a good idea to consult an attorney to determine if the contract could benefit from being notarized.