A contract is an agreement between two people that creates mutual rights and responsibilities. Not all contracts must be in writing to be legally binding. In addition, not all written agreements are legally binding. For an agreement to constitute a legally binding contract, a number of criteria must be met, such as offer, acceptance, and consideration. In some instances, the criteria may be met, but the agreement will not be enforced by a judge because the contract is invalid.
A contract can be invalid because it is not in writing, when it needs to be. A contract can be invalid if it calls for an illegal act, or was entered into fraudulently, or by mistake, or by someone who lacks mental capacity, or is a minor. A validly formed contract that contains none of these errors, is enforceable in a court of law.
What Criteria Makes a Contract Legally Binding?
For a contract to be legally binding, specific requirements must be met. The first of these is that an offer must be made by one party to the other. The offer must be sufficiently specific. For example, an offer to sell a “set of action figures,” without a price or description of the figures, is insufficient. In addition, the person making the offer, called the offeror, must specifically intend to enter into a contract.
This intent is demonstrated by the offeror’s communicating the offer to a specific offeree (the would-be-buyer) or a group of offerees who can be identified. A grocery store circular, under this rule, is not considered an offer, since it is not communicated to a specific offeree. Rather, a grocery store circular not aimed at any person or group is called an “offer to offer.” It does not create a contract. Communication of an offer to a specific person (“I hereby make this offer to you, John Smith”), or to a group of people, satisfies the “offer” requirement.
An offer must also contain a time by which it is accepted.(e.g., two weeks from today”). If an offer does not specify a deadline, the law will infer a “reasonable time.” What is reasonable depends on the circumstances. Consider an offer to John Smith “to buy my 1986 used vehicle for $1,000.” A court would find that offer to be “open” for a reasonable period of time. There is no precise definition of “reasonable,” but a court would likely hold that the offer is not good for, say, months or for years.
The next component required to form a contract is acceptance. Acceptance is an unambiguous statement to be bound by the terms of the offer. The law looks at what an objectively reasonable person would view as an acceptance. “Objective” means a person looking at the facts objectively, without bias.
The next required element for contract formation is called “consideration.” Consideration must be given by both sides. Consideration is a promise or act by one party to perform under the contract. The phrase “In consideration of $200, I agree to sell my model train set” captures the concept. The consideration on the part of the seller is the offer to sell the set. The consideration on the part of the buyer is the payment of the $200.
The next element required for contract formation is the terms and conditions for the performance. Terms and conditions include matters such as how the item is to be delivered, where it is to be delivered, whether payment must be in cash, and whether the buyer may seek a refund.
Once all of these elements, offer, acceptance, consideration, and terms and conditions, are present, a legally enforceable contract has been formed.
How to Create a Legally Binding Contract?
The process for writing a legally binding contract involves negotiating the offer, acceptance, consideration, and terms and conditions. When the parties are writing the contract, they must ensure that the terms of the offer meet the requirements for an offer. The terms of acceptance must also meet the requirements for acceptance (e.g., “buyer agrees to pay seller $100 in exchange for seller’s 2015 encyclopedia set).
The contract should recite the consideration from each side, meaning each side’s promise to act (buy or sell) should be included in the contract. Writing a legally binding contract also requires inserting terms and conditions. Terms and conditions include how the item is to be delivered, when it must be delivered by, when the buyer must pay by, and how the buyer must pay.
What Factors May Render a Contract Invalid, and Not Legally Binding?
A contract will be rendered invalid under certain circumstances. An invalid contract has no force or effect. It cannot legally bind the parties.
One instance in which a court will find a contract invalid, is when the subject matter of the contract is illegal. Say the contract calls for the offeree (person to whom the offer is made) to kill someone, or to smuggle illegal narcotics. The offerree performs their part of the bargain. If either party attempts to enforce this agreement (to ask a court to require the other side to perform its part of the deal), a court will refuse to enforce the contract. The contract calls for murder, an illegal act. Courts will not enforce illegal agreements.
Other times, a contract may be invalid, and not legally binding (enforceable in court) because there is a defect in contract formation. For example, some contracts, such as those for the sale of land, or the sale of goods in the amount of over $500, must be in writing. A court will not honor an oral agreement made by the parties for these sales.
In addition, all states have what is called a statute of frauds. The “statute of frauds” requires certain contracts, such as those that cannot be performed within a year, to be in writing. For example, two parties may enter into an employment contract that requires “review of discrimination cases for a period of two years.”
Since this agreement is not capable of being performed within a year, the statute of frauds requires it to be in writing. The person who is being sued for breach of the contract, must sign their name to the contract in order for the non-breaching party to enforce it.
Mistakes and ambiguity are additional examples of defects in contract formation. The parties incorrectly enter the name of the item to be sold. Ambiguity may exist as to what a term means. A court will declare such contracts invalid. The role of a court is to give effect to a contract’s terms. If the court attempted to resolve the mistake or ambiguity, the court would be writing or rewriting the contract. This is not permitted.
Sometimes a contract may be invalid because the exchange was not freely bargained for. If one party commits duress by forcing the other party to sign the agreement at gunpoint, the other party has not freely consented to formation. The contract is invalid. Sometimes, a buyer or seller may induce someone into signing a contract, by means of fraud. If a buyer or seller misrepresents important facts about the contract, luring the other party into signing, fraud has taken place. The agreement is invalid.
A contract may be unenforceable because of a person’s status. Generally, an agreement requiring a minor to buy or sell something (other than an agreement for basic necessities) is voidable by the minor. This means the minor can cancel the agreement, thereby invalidating it. Different states have exceptions to this general rule.
An agreement in which one of the parties is mentally incapacitated may render the contract invalid. Contract formation requires intent to buy or sell, and intent to be bound by the agreement. If one party lacks the ability to consent because of mental incapacity, the contract is invalid.
Do I Need an Attorney for Legally Binding Contracts?
If you seek to create, enter into, or enforce a contract, you should contact a contract lawyer. An experienced contract lawyer near you can advise you as to how to create, form, or enforce a contract. The attorney can also represent you in the event the other party breaches the contract by violating one or more terms.