Key Takeaways

  • A legal agreement requires mutual consent, consideration, capacity, and legality.
  • Binding contracts differ from non-binding agreements based on enforceability and intention.
  • Agreements become contracts only when they meet specific legal criteria.
  • Written contracts offer greater clarity and enforceability than oral agreements.
  • Common legal remedies for breached agreements include damages, mediation, or arbitration.

A legal agreement is when all parties involved with a legal contract have reached a "meeting of the minds." This means one party must have extended an offer to another party who then agrees to the terms of the offer. In other words, they are in mutual agreement.

Characteristics of a Legal Agreement

To have a legal agreement, each party must agree to give up something of value in exchange for a benefit. For example, a contractor is hired to repave the driveway. He performs the work and you pay his fee. Both you and the contractor have agreed to give up something of value.

All parties to a contract must be competent. This means both parties must be:

  • Of legal age.
  • Of sound mind.
  • Not impaired by drugs or alcohol.

If either party enters into a contract with someone deemed incompetent, the contract will not be enforced. 

All parties involved in the contract must engage in the agreement freely. It will not be enforced if it is signed under duress. Likewise, a contract entered into where one party has committed fraud or exerted undue influence over the other party is not valid. 

Binding vs. Non-Binding Agreements

Not all legal agreements are enforceable. A legally binding agreement is one in which both parties intend to be held accountable for their promises. These typically meet the key contract elements of offer, acceptance, consideration, and legal purpose.

In contrast, non-binding agreements reflect an intent to negotiate or document a mutual understanding without legal enforcement. Examples include letters of intent or term sheets, which signal agreement in principle but often lack enforceable commitment unless certain conditions are met.

When determining whether a document is binding or not, courts will consider:

  • Language indicating obligation versus intent
  • Presence of signatures and specific terms
  • Whether consideration has been exchanged
  • The context in which the agreement was formed​

Types of Contracts

Real Estate

An example of a contract that must be in writing is when someone agrees to sell his property to someone else. A real estate sales contract must be written for it to be enforceable. 

Bilateral

Bilateral contracts are the most common and considered traditional contracts. A bilateral contract is created when each party has made a promise to the other. It is a mutual exchange of promises among the parties. 

Unilateral

A unilateral contract is created when one party makes a promise in exchange for an act by the other party. An insurance policy is an example of a unilateral contract.  One party pays a premium (act) and the other agrees to pay future claims (promise).

Express

When explicit written or spoken language is used to express an agreement and its terms it is considered an express contract. 

Implied

When no offer and/or acceptance of an offer is expressed in words or in writing, it is an implied contract, which is based on the behavior of the parties that show intent to enter into an agreement. 

Breach of Contract

Under the law, if one party fails to fulfill their obligations stated in the contract it is considered "breaching" the contract. 

When a breach of contract occurs, it is possible that one or both parties will pursue having the contract enforced based on the agreed terms or choose to recover money due to the financial harm caused by the alleged breach. 

The most common method for resolving contract disputes and enforcing the terms of the contract when attempts at resolution fail is using the court system by filing a lawsuit. 

An alternative to a lawsuit is for the parties involved to agree to assign a mediator to review the contract dispute. The parties may also agree to binding arbitration during a contract dispute. 

Common Legal Agreement Formats

Legal agreements come in various formats depending on the purpose of the contract and the relationship between parties. Some of the most common include:

  • Confidentiality Agreements (NDAs): Protect sensitive information by legally prohibiting its disclosure.
  • Service Agreements: Outline the terms under which services will be performed, including timelines, payment, and responsibilities.
  • Employment Contracts: Define the terms of employment, including duties, compensation, and termination conditions.
  • Partnership Agreements: Establish responsibilities, profit-sharing, and dispute resolution mechanisms for business partners.
  • Licensing Agreements: Permit the use of intellectual property under specific terms.

Each format should be tailored to reflect the specific relationship and legal goals of the parties involved​.

Elements of a Valid Legal Agreement

For there to be a valid legal agreement, along with both parties being legally able to enter into a binding contract, the contract must not be considered as:

  • Insignificant.
  • Vague.
  • Unfeasible.
  • Against the law.

In everyday life, contracts can be and are made orally. An oral agreement between two parties can form a legally binding contract as long the product or service is legal. It can be difficult to have an oral contract enforced in court. In some situations, an oral contract is not enforceable under any circumstance. 

It is recommended that businesses should have all agreements in writing. A written contract clearly outlines the rights and obligations of each party, which eliminates any confusion or disagreement.

When Is an Agreement Legally Enforceable?

An agreement becomes a legally enforceable contract when:

  • There is a clear offer and acceptance.
  • Consideration (value) is exchanged.
  • The parties have the intention to create legal relations.
  • The agreement abides by public policy and does not require illegal actions.

It’s also important to distinguish between agreement and contract. While every contract is an agreement, not every agreement qualifies as a contract. Social or moral agreements (e.g., agreeing to meet for lunch) generally lack legal enforceability due to the absence of intent to form legal relations​.

Contracts and the Law

A business contract is a common legal transaction a company uses to enforce an agreement. The contract is usually governed by the state laws where it was created.

Contracts involving the sale of goods are controlled by the Uniform Commercial Code (UCC). The code is a standardized set of guidelines used by most states to govern commercial transactions. 

Under the law, a contract is formed when several elements are in place: an offer; acceptance of the offer; and sufficient "consideration" exchanged from one party to the other. 

Enforcement and Remedies in Legal Agreements

When one party fails to meet their contractual obligations, the non-breaching party may seek remedies such as:

  • Compensatory damages to recover financial losses.
  • Specific performance, where the breaching party is compelled to fulfill their contractual duty.
  • Rescission to cancel the contract and restore the parties to their original positions.
  • Reformation to correct mistakes or misrepresentations in the written contract.

Parties may also include dispute resolution clauses in their agreements, specifying that any disagreements will be handled through mediation or arbitration, which can be faster and less expensive than court litigation​.

Frequently Asked Questions

  1. What makes a legal agreement binding?
    A legal agreement is binding when it includes offer, acceptance, consideration, and intent to create legal obligations, and complies with applicable laws.
  2. Can a verbal agreement be legally enforced?
    Yes, but it depends on the subject matter. Verbal agreements may be enforceable unless a written form is required by law (e.g., real estate contracts).
  3. What is the difference between an agreement and a contract?
    An agreement is a mutual understanding, while a contract is a legally enforceable agreement that includes all essential contract elements.
  4. Is a signed document always legally binding?
    Not necessarily. The document must meet legal requirements and show an intent to be legally bound to be enforceable.
  5. Can you back out of a legal agreement after signing?
    It depends on the contract terms. Some contracts include cancellation clauses or cooling-off periods, while others may require legal justification to exit.

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