Contracts are the foundation of any business – no matter how big or small that business may be or which industry it is in. Contracts can help avoid major risks that can affect your business and will outline the terms of doing business with you.
While contracts can be both verbal and written, as experienced contract lawyers, we believe the best form of a contract is a written one. It ensures there is documentation of the agreement that can be referred to, whether you need to clarify details or if you encounter an issue in your business dealings.
But, just because you have a written agreement in place, it might not actually be legally binding. So, today, we want to ensure you know whether your business contracts are valid.
Here’s what you need to know to ensure your contract is legally binding.
What does a Legally Binding Contract actually mean?
A legally binding contract means that it is a contract that will be upheld in court and the terms and conditions of the contract can be legally enforced.
This means that if either party that has signed the contract doesn’t obey their obligations, the other party could file a case against the party that doesn’t fulfill their obligation.
What makes a Contract Legally Binding?
In order for a contract document to be legally binding, there are certain criteria that must be met. This criterion includes:
1. Offer
The contract must clearly state what is being offered from one party to the other party, and the terms of that must be met by either party for that offer to occur. The offer is something of value, like a job, a product, or a service for example.
2. Acceptance
The terms of the contractual offer must be accepted by both parties for the contract to go ahead. Before these terms are accepted, negotiation of these details may occur.
3. Consideration
The consideration of a contract is essentially the value or benefit that each party of the contract receives. This value can be monetary, it can be an item or object, or it can be a service.
4. Intention
This means that every party to the contract has the same intention to create this legally binding contract.
5. Legality
For this, it means that the contract cannot actually include unlawful elements, as in benefits of the contract cannot be achieved through crime, nor can the benefits be illegal.
6. Capacity
Capacity refers to the actual ability of the person to enter into the contract in the first place. They must be legally able to, for example, if they are minors, they will likely be unable to enter into the contractual agreement. The legal age of when you can enter into a contract will be somewhat dependent on what the contract is for and the legal age in the particular state, region, or country.
When is a Contract not Legally Binding?
A contract that is considered to be a non-binding contract is one that fails to meet any of the above criteria we listed.
A contract can also be non-binding when the terms of the contract are not actually able to be lawfully enforced.
So, you’re probably wondering why anyone would use a non-binding contract. Well, sometimes those involved may not be aware that the contract is not legally binding. However, most commonly, a non-binding contract is used when parties are discussing what will potentially become a legally binding contract. It can include preliminary discussions and help get everyone up to speed with expectations and ideas before creating anything legally binding.
A Letter of Intent is an example of a non-binding contract. If you’re about to enter into a contract or need to create one for your business, why not talk to a contract lawyer beforehand. Early advice can lead to fewer headaches in the future.
Ayesha completed her Doctor of Philosophy in Biochemistry and started her career as a College Lecturer in 2013. Today, she’s a happy mom of 2 Kids in the field of digital marketing. She loves reading books, spending time with her family, and making delicious food for her husband.
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