There are certain legal criteria that contracts must meet to ensure they are legally enforceable. Here’s what to look for and what to include in yours.
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by Kathleen Crampton
Kathleen is a copywriter and certified copy editor with years of experience providing editorial services to clients a...
Updated on: September 6, 2024 · 7 min read
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.
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.
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.
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.
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:
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.
There are some instances in which contracts may be voidable, meaning that they may be found to be legally 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.
To protect your interests, it’s important to ensure that you have legally binding contracts. Here are tips for drafting an enforceable contract.
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.
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.
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.
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.
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.
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