Legally Binding Contracts: Everything You Need to Know
Legally binding contracts are agreements made between two or more parties that are enforceable by law and are valid according to federal and state contract laws. 3 min read updated on February 01, 2023
What Is a Legally Binding Contract?
Legally binding contracts are agreements made between two or more parties that are enforceable by law and are valid according to federal and state contract laws. Because a contract is legally binding, all parties must follow the terms and do what the contract says they should.
There are many ways a legally binding contract can be created. The best way is for both parties to draft a contract together and put it in writing with the terms and conditions clearly outlined. However, emailing, faxing, or calling someone and agreeing to an exchange of services is also considered creating a legally binding contract.
If parties think the contract has been broken and want to dispute the legality of their arrangement, they may have to take the case to court where a judge will decide if there has been a breach of contract by looking at certain criteria. However, legal action shouldn't be taken lightly, especially because contract law can be complex and time-consuming.
In order for a contract to be legally binding, it must have two essential parts:
- An agreement
In addition to the two required elements, other provisions can be added to increase a contract's legality. These items include things like:
- Payment terms
- Breach of contract
To enter into a contractual agreement, both parts must be competent and cannot be under the age of 18 or under the influence of drugs or alcohol. All parties must be of sound mind when entering the contract and have the legal power to join the agreement, which is especially important for companies or third parties. A contract that was created by force or coercion isn't considered legally binding, nor is one that involves illegal activity, such as a contract to sell illegal drugs. In some cases, such as with the sale of real estate, contracts must be in writing to be valid.
Important Elements of a Contract
A contract must clearly state an offer to do something, such as an offer for a job. The offer can include counteroffers and negotiations between the two parties. An offer must include a timeframe and has to be precise. An offer lapses when the timeframe for acceptance has passed or if the offer is withdrawn. An offer can be written or oral, except in contracts for real estate or those that last more than a year, which must be agreed to in writing. Contract requirements vary by state, so it is important to find the correct laws for your state.
Acceptance of a contract can only include what is in the offer, and the terms and conditions must be accepted exactly as they are proposed. Counteroffers and negotiations can happen before acceptance to tailor the offer to the correct terms and conditions. If new terms are proposed, it is considered a counteroffer. Negotiations for a contract end when the terms are accepted, no matter which party makes the final offer. Acceptance can be written, verbal, or done by performing actions from the contract that indicates acceptance, such as completing the service from the offer.
3. Intention of Legal Consequences
All parties involved in the contract must realize they are entering a legally binding agreement and should state they will follow the contract or risk being taken to court. A contract doesn't have to specifically state this, however, because the intention to create legal relations is assumed when entering a contract. In order for a contract to not be legally enforceable, all parties must agree that the contract is not to be legally bound.
Valuable consideration is required for a contract to be legally binding. That means that one party is agreeing to do something in return for a promise of value from the other party. Essentially, consideration is a trust agreement between the two parties. It is often a monetary price for the service being exchanged, but can also be anything of value. All parties in the contract have to receive something of value or else it is considered a gift instead of a contract.
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