Is a contract that you make with someone else enforceable in a court of law? Does it matter whether it is written or spoken? This article will explain to you the basic requirements needed for a binding contractual agreement.
The elements of a binding contractThe law recognizes that people make different kinds of deals each day and that a system that conforms to common custom is needed. These deals are generally written and oral, with both parties intending the agreements to be binding. A common myth is that a contract must be written to be enforceable, but this is not true. So long as there are three basic elements present, an enforceable contract exists according to common law whether written or oral. The required elements are an offer, an acceptance and consideration.
1. The OfferWhen party A offers to party B some terms to make a deal, that "offer" is the first element of a contract. By default, the offer remains open until party B accepts or rejects the offer. What if B, receiving the offer, wants to change the terms of the original offer by A? This is called a "counter offer" and makes the original offer invalid. Party B now has made an "offer" and party A has the option to accept or reject this new offer and deal terms. For example, if A offers to sell B his watch for $20 and B counter offers to pay $15, A's offer has expired and B's new offer to pay $15 for the watch remains open for A to accept or reject that counter offer.
An offer also requires definite terms that are not vague or ambiguous, such as the price, quantity, and the identification of goods being sold. For example, A has a car for sale and is asking a certain dollar amount - $5,000, payable in full at the time the car is to be transferred to B. If A makes an offer to sell this car to be for $5,000, this would constitute a valid offer. But if A stated that he intends to sell the car to B for an amount to be agreed upon, this is not a valid offer as there is no specific amount stated for the purchase of the car. If A offers to buy a few cars from B for a total of $10,000, the price is stated but the number of cars still remains unknown and the essential deal terms are uncertain.
2. The AcceptanceThe second element of a contract is the "acceptance" of the offer. The person receiving the offer must accept all the terms of the offer before a valid, binding contract exists. Using the above example, if A offers to sell his car to B for $5,000 payable at the time of the transaction. To accept the offer, B has to agree to buy the car and pay A at the time and place of the transfer. If B accepts A's offer but states that he can only pay the $5,000 in installments, this does not constitute a valid acceptance since B has not accepted all the terms of A's offer.
3. ConsiderationThe third element of a legally binding contract is consideration, the "bargained for" exchange of something of value between each party. Consideration differs from a gift, which occurs when one party gives something of value to another party without receiving anything of value in return. It is important to understand what "value" is. Even a small monetary value such as $1 can constitute "consideration" under contract law.
Consideration can exist in different forms and, more often than not, will constitute money, services or property. Consideration can be a legal "benefit" to another person or also as a legal "detriment" imposed by another party. For example, A offers $1 to use B's car for one month - this would constitute a valid contract. A gives B money in exchange for B giving up his car to A for one month. Consideration does not have to be such a straightforward exchange. For example, B offers C $1 if C refrains from driving for the remainder of the current month. C's agreement to refrain from driving, the "detriment" to C, can constitute sufficient consideration to form a valid contract.
Other RequirementsIn addition to the basic contractual elements, there are other requirements that most would think are "common sense" and the law recognizes them in order to ensure that binding agreements are fair and intended by the parties.
CapacityCapacity is the competence of a person's ability to make a contract. To be legally competent, both parties must be at least 18 years old and both must be mentally capable. Those who are mentally incompetent or disabled can "void" or break a contract when it can be proven that they did not understand the contract. Capacity does not only include insanity but also being fully intoxicated, where a person may not possess the ability to understand the terms of the deal.
A minor who enters a contract has the option to void the agreement. The law assumes that a young person doesn't fully appreciate the totality of the circumstances of the deal as an adult is capable. For example, a minor agrees to purchase music discs for one year from the ABC Music company paying $100 per month. This agreement is "voidable" by the minor, who could break the contract after the second month and having no further obligation to the ABC Music Company. Only the minor - the party without capacity - has the right to break such an agreement. The ABC Music Company must honor this agreement if the minor fulfills his or her obligations.
There is one exception to rule of a contract being voidable by a minor - contracts for “necessities” or essential items. A necessity is generally either food or shelter and not music or movies. State law may define a "necessity" to include more than just food or shelter, for example, an automobile.
ConsentConsent to the contract is given when the two parties agree to the terms by signing the contract with an intention to be bound. If one party doesn't read all the terms of the contract that party can still be bound by its terms, provided it generally represents the terms of the deal. Whenever you sign a contract, it is presumed that you are consenting to it so it is important to always read over the terms of any document that you sign.
LegalityOnly contracts for legal activities can be enforced by contract law. Any agreement for illegal activity cannot be enforced in a court of law and does not constitute a binding contract. For example, contracts to buy illegal drugs for a certain price can not be enforced by the courts. As opposed to contracts with a minor, these agreements are "void" by their nature and cannot be enforced by either party.
FormalityDepending on the type of transaction within a contract, a certain formality may be by law. State laws may require that a certain type of contract be in writing (for example, contracts involved the sale of real estate.) One or both parties may demand a certain formality to be adopted in writing up the contract before the contract can be made legal and binding.
ConclusionThe law makes it simple to understand basic contract law. As business contracts can become much more complex, there may be other requirements and formalities made necessary by the legislature in order to protect buyers and sellers. With larger deals, make sure to research the law and consult with an experienced contracts attorney. An attorney can help you draft your agreement and may spot problems or loopholes after conducting a review of all the terms of the deal. Some of the terms may not be as favorable as you might believe. Some questions you may want to ask your attorney include the following:
- How much do you charge? Is it a flat fee or by the hour?
- Do you have any experience in drafting or reviewing similar contracts?
- Are the terms fair? Do you have any changes you'd recommend?
- Are there any problems I might encounter in the future with this deal as written?
- Business, Corporate & Nonprofit Law:
Contracts How to Make a Legally Valid and Binding Contract
By Michael Wechsler |
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