When is a contract legally binding?
Not all contracts are traditionally written and signed; therefore, it is dangerous to assume that an oral agreement is not a legally binding contract. Whether a contract contains enforceable promises or not, affects whether it is binding or non-binding.
Binding vs non-binding:
A non-binding contract is an agreement in which the parties are not legally obligated to carry out its terms; this could be a letter of intent and should use language that reflects the non-binding nature of the agreement.
If a contract is binding, it can be enforceable either through state or federal court.
What makes a contract binding?
A binding contract includes several important elements, these are:
- Offer and acceptance: When someone offers something of value in exchange for something else of value, this is considered an offer. This offer can be either accepted or declined.
- Consideration: The benefit that both parties gain or receive. Examples of consideration may include money, goods or services.
- Intention: All parties involved in the contract must have intended to create a valid, enforceable agreement.
- Legality: In order for a contract to be valid, it must not contain unlawful promises (ie. things that are illegal).
- Capacity: A person entering into the contract must have the legal ability to do so. Examples of limited capacity may include minors or intoxicated individuals.
Void and voidable contracts
Written agreements are important as they record mutual understandings between parties, therefore it is desirable that all important contracts, such as a loan of money to a friend, are documented in writing.
A void contract is one that does not meet the above criteria that makes it binding in the first place. A contract would also be considered void if:
- The object of the agreement is illegal or against public policy
- The terms of the agreement are impossible to fulfill or too vague to understand
- There was a lack of consideration
- Fraud has been committed
On the other hand, a contract may be considered voidable if:
- A party was coercing or threatening the other party into signing the agreement
- A party was under undue influence (one party dominated the will of another)
- Mistakes are present in the contract that affect whether one or both parties can carry out their obligations
- A party breaches the terms of the contract
Think before you sign that dotted line
It is important for people to have a basic idea of the different elements that make a contract legally binding before they enter into one. If you end up in a contractual dispute, consult with a contract lawyer for guidance.