Key Takeaways

  • Understand the key components required to enter into a contract, including legal capacity, authority, and clear terms.
  • Know the importance of written contracts versus oral agreements and the risks of informal arrangements.
  • Learn the role of good faith, transparency, and mutual understanding when entering into a contract.
  • Discover the significance of contract management practices such as record-keeping, reviews, and amendments.
  • Recognize when to seek legal advice to ensure enforceability and proper drafting of contracts.

When you enter into a contract, it is important to follow several rules to ensure the contract is valid and enforceable in a court of law. The first thing to know is who can legally enter into a contract. For a contract to be valid the persons signing it must:

  • Be the necessary age according to the law that governs the contract. If deemed a minor when signing, the contract will be considered void.
  • Be of sound mind and have the mental capacity to understand what is in the contract and what entering into the contract actually means.
  • Be able to enter into a contract.

Entering Into a Contract

Since only humans can legally enter into a contract, a company must assign an individual, who is authorized to act on behalf of the company to sign the contract. It is important when signing on behalf of the company that you indicate your ability to do so with your signature. For example, when signing on behalf of a company to purchase 500,000 units, you don't simply sign your name; your signature should include your name and title with the company.

Since a company is considered an artificial person and cannot enter into a contract on its own, the contract is actually binding between the two authorized individuals that signed. This makes having a well-drafted agreement vital. Your agreement should include:

  • The name of the company and address of its registered office.
  • The fact that the signatory is authorized to do business for the company.
  • A representation clause which gives the signer the authority.

When a company has a board of directors, either legal counsel or a vice-president-level employee will be designated with the ability to sign important agreements on its behalf. For lower-value agreements, a mid-level manager may be assigned to the task. All those who have this authorization should be aware of the written articles that a company has to abide by.

An example would be company articles that allow one board member present in a meeting to sign an agreement but not a mid-level manager. In this case, the agreement with the board member would be valid, but the one signed by the mid-level manager would not be.

If indoor or principal management is entering into contracts for a company, these individuals will not need to make any inquiry regarding the proceedings linked to executing a contract as long as they have followed the transaction in accordance with issued memorandums. Basically, any person in a company can sign if the articles for the company allows them to do so. Other individuals can be authorized to sign on behalf of the company if:

  • The board passes a resolution.
  • The board gives someone power of attorney.

In a company that is a partnership, any partner can enter into a contract. However, all partners could be held liable for breach of contract since partnerships are not legal entities. In a partnership, everyone one is the agent in the firm. This means it is impossible to limit any partner's ability to sign.

Why Written Contracts Matter

While some agreements can be verbal, written contracts provide clear evidence of the agreed terms, reducing misunderstandings. A written document serves as a reference point if disputes arise and makes it easier to prove the existence and details of the agreement in court. When you enter into a contract in writing, you also establish clarity on payment obligations, delivery deadlines, termination conditions, and liability limitations.

Written contracts are especially crucial for:

  • Business transactions involving significant sums of money
  • Employment relationships
  • Intellectual property licenses
  • Partnerships and joint ventures
  • Service-level agreements (SLAs)

Even if the law allows oral agreements, having a written contract strengthens enforceability and demonstrates professionalism.

Contracts and Agreements

There are many times throughout your life that you will be entering into contracts, sometimes without even realizing it. Some of the most common contracts you may find yourself entering into include:

Importance of Contract Management

Once you enter into a contract, managing it properly is essential. This includes tracking deadlines, payments, renewals, and obligations. Effective contract management reduces the risk of breaches, missed milestones, and misunderstandings. Best practices include:

  • Keeping signed copies securely stored (physically or digitally)
  • Reviewing contract performance periodically
  • Documenting amendments or changes in writing
  • Setting reminders for renewal or termination dates
  • Regularly updating contact details of the parties involved

Using dedicated contract management software can help businesses maintain compliance and improve efficiency.

Offer and Acceptance

For an agreement or a contract to occur, there have to be two components: an offer and acceptance. The party selling or providing the service is making an offer that the other party accepts when they receive the goods or services. In courts, it has been ruled that promotional displays and other advertising are an invitation to treat and not actually a valid offer. Only when the customer fills out an order or purchases the item are the terms of the offer laid out.

The acceptance is considered absolute consent and acceptance of the final terms of the offer. In the event that different or additional terms are offered at this point, it would be considered a counter-offer.

Good Faith and Fair Dealing

When you enter into a contract, both parties are generally expected to act in good faith, meaning they will deal honestly, fairly, and not undermine the other party’s rights. Good faith is especially critical in long-term relationships, such as leases or supply agreements, where circumstances may evolve. Violating the duty of good faith can lead to legal disputes, even if the specific behavior isn’t outlined in the contract.

Examples of good faith practices include:

  • Being transparent about potential risks or limitations
  • Avoiding hidden terms or deceptive practices
  • Promptly notifying the other party if issues arise
  • Making reasonable efforts to fulfill obligations, even when unexpected challenges occur

When to Seek Legal Advice

Entering into a contract may seem straightforward, but complex deals, high-stakes agreements, or unfamiliar terms warrant legal guidance. A qualified attorney can help:

  • Draft or review the contract language for clarity and enforceability
  • Identify potential risks or loopholes
  • Ensure compliance with local and international laws
  • Advise on dispute resolution mechanisms, such as arbitration or mediation
  • Negotiate more favorable terms

If you are unsure about the implications of entering into a contract, especially in cross-border, partnership, or technology-related deals, consider consulting an attorney. You can find experienced legal professionals on UpCounsel to assist with your specific needs.

Frequently Asked Questions

  1. What does it mean to enter into a contract?
    It means that two or more parties agree on legally binding terms and take on specific obligations toward each other.
  2. Are oral contracts enforceable?
    Yes, but written contracts are easier to prove in court and reduce the risk of misunderstandings.
  3. Who can legally enter into a contract?
    Individuals or entities with legal capacity, meaning they are of legal age, mentally competent, and authorized (if representing a business).
  4. Why is good faith important in contracts?
    Good faith ensures parties act fairly, honestly, and respectfully, supporting long-term relationships and reducing disputes.
  5. When should I hire a lawyer before entering into a contract?
    You should seek legal advice for complex, high-value, cross-border, or unfamiliar agreements to ensure your rights and interests are protected.

If you need help to enter into a contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.