Binding Contracts: Everything You Need to Know
Binding contracts are legal agreements between two or more parties, which are enforceable by law.3 min read
Binding contracts are legal agreements between two or more parties, which are enforceable by law. Binding contracts aren't always in writing. Sometimes, verbal statements can be legally construed as an offer or contract, even when the party never intended it as such. Sole proprietors and business managers should take extra caution and learn the nuances of what makes a statement a binding contract.
What are Binding Contracts?
Binding contracts have the same elements of a contract, but they require legal purpose and capacity. The courts can render judgments in the event one party tries to breach his responsibility as set forth in the details of the contract. There has to be offer and acceptance and certain terms and consideration. If those elements are lacking, or legal purpose and capacity are missing, the contract may not be binding.
When a Promise Becomes a Binding Contract
Essentially, if one party relies on the statement or promise made by another and suffers financial harm, the court will treat the statement as though it was a valid completed contract. The court isn't required to look for agreement or consideration when looking at whether to enforce a promise, but it can prove difficult to show a statement of promise was made without it. In the event the promisee did something that the promisor couldn't have foreseen, the courts won't hold the promisor accountable.
Be cautious of what you say during business meetings or interviews, as some statements may be construed as an offer. One example would be telling your business partner that you can sell your product for $10 each upon learning a competitor sells the same item for $15. If your partner relied on that statement and scheduled sales meetings only to discover there is no way you could sell them that cheap, it could cause legal trouble.
The biggest takeaway with binding contracts is to be cautious of what you promise to employees, business partners, or anyone else, because an innocent statement can result in a legal obligation.
Basic Contract Elements
The first basic element of a contract is offer. There must be a clearly stated offer. Acceptance can be verbal or in writing, depending on the terms of the contract. Some agreements must be in writing. For example, contracts that will extend beyond a year and ones related to real estate.
For contracts to be binding, there must be consideration, or "this for that." Consideration is often the exchange of services and money, but it is essentially a trust agreement for each other's promises. All parties must receive something of value otherwise it can be deemed a gift rather than a contract.
Setting forth terms and conditions of a contract is important. These can help settle disputes in court as it gives the judge something to refer to. If the terms and conditions were unclear, the court may determine the contract was incomplete.
In the event someone fails to keep their end of the agreement, it's known as a breach of contract. Breach of contract matters are typically decided in court and a judge will determine if there was indeed a breach and what the damages are to be awarded.
Boilerplate Provisions to Add
It's recommended that contracts contain some boilerplate provisions that work for the majority of situations:
- Arbitration Clause — Requires disputes be handled by an arbitrator.
- Entire Agreement Clause — Notes agreements set forth herein are the only valid ones, not anything that was decided earlier.
- Force Majeure Clause — Terminates the contract in the event something happens beyond both parties' control.
Capacity and Legal Purpose
One of the most important aspects of a binding contract is capacity. Parties must have the mental competence and legal authority to enter into a contract in the first place. Mental incapacity can be anything from alcohol intoxication to a mental impairment. Parties must have authority to enter a contract. If someone is acting on another's behalf, they need to have authorization.
Lastly, contracts must have legal purpose to be enforceable. If a contract requires someone commit an illegal act or the objective is illegal in nature, the contract is not binding.
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