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Contracts are fundamental for businesses, forming a critical commercial relationship and transaction framework. Ensuring legally binding agreements are in place is crucial to protecting your business from various risks. Without a binding contract, your company could face significant challenges and risk issues. This article explores why having a legally binding contract is essential and the risks you could face if your contracts are not binding.
What Is a Contract?
A contract is an agreement between two or more parties that creates obligations each party must fulfil. It acts as a legal framework for the agreement to ensure that the agreed-upon terms between parties are clear, specific, and enforceable. Contracts can be written or oral, but having a written document provides greater clarity and proof of the terms you and the other party have agreed to.
Why Is a Contract Important?
As a director or business owner, you will likely sign numerous contracts throughout your business journey. Contracts are integral to nearly every aspect of running a company, making it vital to get them right from the outset.
Legally binding agreements provide several key benefits:
- a legal basis allows you to enforce the terms of the agreement;
- ensuring there are clear rules to encourage the parties to fulfil their commitments; and
- establishing remedies if one party breaches the agreement.
Further, contracts often include clauses that limit liability, which can protect your business from excessive financial claims.
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What Makes a Contract Binding?
Under English law, several key elements must be present for a contract to be legally binding.
There must be a clear offer by one party and acceptance by the other, forming the basis of the contractual relationship. Both parties need to intend to enter into a legally binding agreement. Consideration is also essential, meaning something of value needs to be exchanged between the parties. The parties involved must have the legal capacity to enter into a contract, and the terms of the agreement must be clear and definite. If terms are too vague or ambiguous, a court may not consider them enforceable, rendering the contract void.
Additionally, the purpose of the contract must be lawful. Further, under specific laws, contract terms can be non-binding if they are deemed unfair to one of the parties. As such, several criteria require fulfilment to make a contract binding, and various risks could impact their enforceability.
Why Might a Contract Not Be Binding?
A contract may not be binding or enforceable for several reasons. For example, if you cannot demonstrate that all the required elements to form a contract were present. This also includes scenarios where the terms are too vague or ambiguous or if the contract’s terms breach specific legal rules.
Additionally, disputes can arise over whether a contract was binding if, for instance, a supplier’s customer claims they did not agree to the supplier’s standard terms and conditions because they were not provided a copy.
Download this free Supplier Contracts Checklist to ensure your contracts will meet your business’ needs.
Other factors include if the parties lack legal capacity or if the contract was improperly executed or authorised. An example may be when an employee signs a business contract without proper internal approval from the company’s directors.
What Are the Risks of Not Having Legally Binding Contracts?
You must ensure your contracts are legally binding to avoid exposing your business to significant risks.
Various risks to watch out for include the following:
- holding the other party accountable for their obligations without a legally binding agreement can be more challenging for you. Legally binding contracts provide a framework for seeking remedies if the other party breaches the agreement. Without a binding contract, you may have limited or no recourse to these remedies, leaving you without a remedy. For instance, you may not be able to sue a supplier for failing to deliver on their obligations if it is found that no binding contract is in place which they breached;
- contracts often include robust clauses that limit liability. Without these clauses, you could face uncapped liability, meaning you might be held responsible for significant financial losses and must pay huge damages. This is one of the most critical and dangerous risks of trading without a contract, particularly as a supplier; and
- without a clear, written, and enforceable contract, your project’s terms may be open to interpretation, leading to mismatched expectations. In the worst case, this could escalate into costly disputes.
How Can a Lawyer Help You Ensure Your Contracts Are Binding?
Understanding the legal requirements for a valid contract can take time and effort. Experienced commercial law solicitors can help ensure your contracts are binding, watertight and precisely tailored to suit your unique business needs. A lawyer can help draft legally binding agreements and guide how to enter into enforceable contracts.
Key Takeaways
Legally binding contracts protect your business from risk, and you should not overlook this. These documents can help protect your business, establish remedies, limit liability, and encourage smooth working relationships between parties. Without a legally binding contract, your company could face several risks, including the inability to enforce its rights, lack of remedies, uncapped liability, and an increased likelihood of disputes.
You should, therefore, ensure their contracts are legally sound and enforceable. If you need support to ensure your contracts are legally binding, you should seek assistance from a commercial contracts lawyer.
If you need help with contract documentation or understanding how to make your contracts binding, LegalVision’s experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A contract is an agreement between two or more parties that gives rise to obligations that each party must fulfil. It acts as a framework that clearly defines the terms and expectations of the parties and helps avoid disputes.
Verbal agreements can legally bind under English law, provided they meet the relevant criteria. However, proving the terms of a verbal contract can be more challenging than a written one, meaning written contracts are more reliable and far easier to enforce.
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