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As a business owner, you must ensure that your contractual agreements contain all necessary elements to be legally binding. Indeed, by signing an arrangement that is not legally binding, you may be unable to enforce the contract in the event the other party breaches the contract. Consequently, this can prevent you from claiming against another party for damages if they do not perform their contractual duties. Your agreement must have five key components to be legally enforceable. This article will explain those components and how you can ensure all your contracts have them.
The Five Elements of a Legally Binding Contract
A legally binding contract is enforceable by law. That means if a party breaches the terms and conditions of a contract, you can claim damages against them. To have a legally binding contract, your agreement must include:
- an offer;
- acceptance;
- consideration;
- an intention to create legal relationships; and
- certainty.
Offer and Acceptance
Offer and acceptance are the cornerstones of any contractual relationship since it initiates the formation of a contract. One party must first make an offer to another party. Essentially, an offer is a promise to do business with the other party, provided they accept their offer. Additionally, offers need to contain the base-level terms of the contract.
The next step requires one party to accept the offer they receive. When the offer is accepted, the contract may become enforceable. You can consider the acceptance requirement as your ascent to the proposed offer. A party can accept an offer in writing, verbally or even through your conduct. Acceptance can signal your intention for the contract to bind you.
For example, without verbally accepting an order, a supplier can deliver goods to another party and request payment. The performance of those functions signifies that they have accepted the original order and intended to be bound by the contract.
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Consideration
Consideration is the third step to creating a legally enforceable contract. This requires you to pay or transfer something of value in exchange for a service.
Consideration does not need just to be money. It can be anything of value, including goods, services, or promises to provide these things.
For example, a hotel might offer a room to a customer who pays for their stay by working and making up other rooms in the hotel. In that instance, consideration in the contract would be the customer’s work around the hotel.
Clarity of Contract
Additionally, for a contract to be legally enforceable, the terms of the contract must be clear and not lack any essential clauses.
For example, a contract with uncertain clauses may indicate that you or any other party to the contract did not intend to enter into legal relations. Furthermore, if clauses are uncertain and give rise to ambiguity about what they intended to achieve, that contract may not be legally enforceable.
Intention to Create Legal Relationships
As mentioned above, having an intention to create legal relationships is a vitally important component of creating a legally binding contract. Indeed, you cannot have a legally enforceable contract if both parties do not show their intention for the agreement to bind them.
It can be difficult to prove an intention to create legal relationships. One common method of demonstrating this mutual intention is using a heads of agreement (also known as a term sheet). This outlines the key terms of the contractual relationship between the parties before the main contractual documents are signed.
Written Agreements Without Signature?
Generally, a contract is only binding when all parties to the agreement sign. However, in some cases, you can still enforce an unsigned written contract. In such scenarios, if a party shows that they intend for the agreement to bind them, the contract can be legally binding and enforceable.
For example, consider a supplier of goods who does not sign a contract but still performs their contractual obligations by delivering an assignment of goods. In that case, their conduct will likely demonstrate their intention for the contract to bind them.
Key Takeaways
For a contract to be legally binding, there must be:
- an offer;
- acceptance of that offer;
- consideration between contracting parties;
- an intention to create legal relationships shown by both parties; and
- clarity in the contract’s terms.
Furthermore, you must sign a contract for it to become legally binding and enforceable. However, there are occasions when an unsigned contract can become binding if either you or your business partner can show an intention to be legally bound. This typically occurs by performing the functions of the contract. Finally, getting a lawyer’s advice is advisable to ensure you are creating legally binding contractual documents.
If you need help with your contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Verbal agreements are legally binding contracts in the same way as written agreements. However, since verbal contracts are not documented on paper, it can be harder to prove its terms were certain.
Typically a contract will become legally binding the moment that it is signed. However, many contracts include an effective date in their opening clauses. The effective date indicates when the contract technically becomes live.
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