What is a Legally Binding Contract?

Examples of legally binding contracts include any agreement that adheres to the rules that govern a contract, which technically can range from a rental lease agreement to buying gum at a gas station. Legally binding contracts are contractual agreements that are considered valid under both federal and state contract law. In them, both parties agree to honor the terms set out in the contract, with such terms including a valid offer being made and accepted and both parties exchanging items of value. A written document is also often required. Failure to meet the terms of any legally binding contract could result in legal action.

Formation of a Contract

Legally binding contracts are governed by two main rules of contract formation, which are those of offer and acceptance. In the first—offer—a party offers to provide a product or service if certain conditions are met. In the second—acceptance—another party agrees to meet these conditions in exchange for the product or service, and so the offer is accepted and a legally binding contract is made. If such an agreement is broken, then legal action can be taken against the party that broke—or breached—the contract.

Intent and Consideration

Intent and consideration are two more factors that are part of a legally binding contract. Intent refers to both parties creating a contract with the intent that the contract should bind them legally. Consideration refers to the agreement that something should be exchanged in the contract, like wages in exchange for work in a contract of employment. If the contract is broken and it goes to court, the intent and consideration will be two factors under scrutiny before a judgment is rendered.

Examples of Legally Binding Contracts

Although legally binding contracts are commonly thought of as official documents requiring signatures and perhaps legal consultation, in truth legally binding contracts can include anything from buying food at a grocery store to having dental work done to having someone cut your lawn in exchange for payment. What matters is not the items exchanged or (in most cases) whether a document is involved, but that the exchange meets the previously stated definition of a contract. That said, certain contracts do require a written agreement, such as sales of intellectual property, shares, or land.

Forms of Legally Binding Contracts

Legally binding contracts need not be traditional signed paper documents, although in some cases they are still necessary, and having a contract in writing is still generally recommended. Nonetheless, contracts can also be made through phone call agreements, faxes, email exchanges, and even, in some states, texts. What matters is not so much the form the contract takes, but that an offer is made by one party and accepted by another and both parties agree to it. If this occurs, then a breach of contract can be disputed in court.

Certainty of Contract

Although a contract only needs an agreement between two parties to exist, if a dispute involving a contract reaches a court of law, certainty of contract must exist for the dispute to be resolved. What this means is that there cannot be vagueness insofar as the contract is concerned for the parties to be legally bound by it. The conditions and terms should be clearly set out—a judge may try to clarify unclear terms, but a judge may also find an unclear contract unenforceable. For this reason, it is best to have any contract in writing, with the terms clearly set out.

Unfair Contract Terms

Just as having clear terms is important for the validity of a contract, so too is it important that any terms be considered fair and set forth in good faith. If not, a court may find the contract to not be legally binding. Terms will be considered unfair if there is an immense imbalance in how favorable the terms are to one party with respect to another. In respect to these terms being set out between a trader and a consumer, the unfair terms usually favor the trader, and usually, there will have been a lack of good faith—or open, fair dealing—on the part of the trader, as well.

Factors That Could Invalidate a Contract

In addition to unclear or unfair terms, factors that could invalidate a legally binding contract include:

  • Illegal subject matter. Legal contracts cannot deal with illegal activity.
  • A lack of writing. Some contracts, like those dealing with real estate sales, must be in writing.
  • Contract fraud or coercion. Using the threat of force or any other kind of harm to bring a party to agree to terms is illegal.
  • Mistakes. If there is a mistake in the terms or language of the contract, the contract could be invalidated on technical grounds.

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