Legal Binding Contract: Everything You Need to Know
A legal binding contract is a formal agreement, mostly in written form, between two or more parties that clearly defines expectations and responsibilities.3 min read
2. Contract Element No. 1: Agreement Between the Parties
3. Contract Element No. 2: Exchange of Things of Value
A legal binding contract is a formal agreement, mostly in written form, between two or more parties that clearly defines expectations and responsibilities on all ends to fulfill the contract.
What Are Legally Binding Contracts?
A contract is a written acknowledgment between two parties that explicitly defines their responsibilities.
- The details of the contract define what specific obligations each party has within the scope of the agreement after they have been discussed and negotiated.
- When a contract is valid, it means that it can be enforced, and each party has to stick to the written agreements.
- The purpose of a contract is to clearly define expectations and responsibilities for each party as they both strive to fulfill their promises.
- A contract that is valid and, hence, legally binding is enforceable under state and federal law.
- There is no specific language needed to set up a contract, yet it should be as detailed and understandable as possible to avoid misunderstandings.
In most cases, written agreements only need to consist of two essential elements:
- All parties involved in the contract must agree to it after they have negotiated its terms and conditions, and one party has made an official offer that was accepted by the other party.
- The contract must state an exchange of value on both sides, whether it be of monetary matter, a service, or product, in return for something else of value by the other party.
Contract Element No. 1: Agreement Between the Parties
The most important is that all parties involved have to accept and agree on all the points in the contract.
There are, however, blurred lines when it comes to agreements and whether they are legal or just a preliminary negotiation. To help with those cases, there are rules that define at what point an agreement has become valid and, hence, legal.
- The contract needs to clearly identify an offer by one party and a counteroffer by the other, as well as the so-called "meeting of the minds."
- A contract can take effect in written or even oral form.
- Generally, agreements in the real estate field, as well as contracts lasting more than a year, are required to be in written format.
- For example, when getting into a taxi, you agree to paying the driver, and there is no written agreement needed for this.
Some offers have expiration dates; those are called options and are not free.
- As an example, someone is offering a forklift that has a value of $10,000. However, you want to think this offer over but not have to worry about the offerer selling it in the meantime.
- In this case, you and the offeror could agree for the offer to be valid for a certain amount of time within which you have to make a decision.
- This seller might ask you to pay for this certain amount of time that you have to think the offer over, because he or she has to keep the product on hold for you and cannot sell otherwise.
Should one of the parties make an offer in response to the offer received, this is called a counteroffer.
Contract Element No. 2: Exchange of Things of Value
In legal terms, the thing of value that is being exchanged with a contract is called consideration and is basically the promise to do something. As a simple example, a printer that prints a specific number of brochures for you might only do that if you pay a certain amount of money for this print job.
There is, however, a difference between gifts and contracts.
A contract with value offered by both parties involved is different from a one-sided promise or rather generous statement.
- For instance, one of your friends offers to do something for you but never gets around to do it, and you have not offered anything in return.
- As a consequence, this is is not a contract and, hence, not enforceable.
- An agreement between the two of you exists, however, once you offer your friend anything of value in return for their help, for instance.
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