Legally Binding Contracts: Everything You Need to Know

Are you considering suing someone for breaching the terms of a contractual agreement? Or are you interested in learning more about the clauses and legalese you agree to on a regular basis? Although most people encounter legally enforceable contracts daily, few understand what definite factors are required to make a legally enforceable contract.

 A legally binding contract is defined as a promise or set of promises for which the breach of law gives a remedy or the performance of which the law recognizes as a duty. In other words, a contract is a legally binding promise, and the breach of a contract can lead to legal consequences for the breaching party and remedies for the plaintiff.

To form a legally binding contract, multiple elements are required. From the exchange of consideration to a meeting of the minds, here’s everything you need to know about making a legally enforceable contract.

Creation of a Contract

When a breach of contract occurs, one party typically seeks to enforce the terms of the contract or obtain damages. Courts must determine whether a legally enforceable contract was created to award damages or enforce a contract.

Every contract requires mutual assent (“meeting of the minds”) and consideration from both parties to be considered legally enforceable. Because contracting is considered an exercise of personal liberty, a party is not bound in the absence of their assent regarding the terms of the agreement.

One of the most popular types of contract, an express contract (also known as an oral contract), is a written or oral agreement. In the eyes of the law, not all contractual agreements are spoken or written, and some are formed simply based on conduct. However, written and spoken agreements are often easier to enforce in a court of law.

Offer and Acceptance of the Contract

As a general rule, every legally binding agreement begins with an offer. According to contract law, an offer is a manifestation of intent to be legally bound. Here, a meeting of the minds is key, as each party must reasonably understand that acceptance of the offer leads to the formation of a legally binding contract.

An offer must be communicated to the person to whom it is addressed. A valid offer must indicate the offeror’s intent to enter a legal binding contract and must specify the exchange of things of value and the terms that will govern the contractual relationship.

To be valid, acceptance must occur before the specified expiration date (if applicable). The offeree must express an outright acceptance of the terms of the contract to the offeror. In most cases, acceptance is expressed in the form of a handshake.

An offeree may wish to enter the contract agreement on different terms. If the offeree changes the terms of the agreement and submits a counteroffer, the original offer is considered rejected. The original offeror must then accept the counteroffer to form a legally binding contract.

Determining the Intent of the Parties

Under contract law, the intent of the parties is generally established through the process of negotiation. Negotiations involve one party (the offeror) making an offer, and the other party (the offeree) agreeing to the offer.

It is important to remember that a true, subjective meeting of the minds is not necessary to form a legally binding contract. Instead, the court asks whether a reasonable person in similar circumstances would have understood that assent to form a contractual agreement was given.

Exchange of Consideration

An exchange of consideration is required for a contract to be legally binding. Consideration shows the intent of the parties to be legally bound. Although courts do not police the adequacy of consideration, consideration is considered valid when an offeror receives something or exchanges something for a promise.

Consideration can also be considered a benefit is given to one party in exchange for a detriment inferred by the other party. The detriment is often considered the waiver of a legal right (typically by the plaintiff) at the of the other contracting party (the defendant).

Types of Contracts

A bilateral contract involves the exchange of reciprocal commitments between two parties in the form of an agreement. In other words, an offer is made when both parties express a meeting of the minds. Bilateral contracts require an unequivocal and unqualified acceptance to form an enforceable contract.

Like other legally enforceable contracts, bilateral contracts involve the exchange of consideration. The use of words, oral or written, express the intent of the parties to be bound. Each party in a bilateral contract has outstanding promises to be performed in the future.

In a unilateral contract, one party’s performance is considered as the exchange of consideration and acceptance of the offer. In this case, the offeror-promisor accepts the offer by beginning some kind of performance. For instance, if a grandmother promises to pay her grandson if he successfully quits smoking for one year, the grandson can begin his performance by stopping smoking.

When does a contractual agreement become void?

A void contract has no legal power from the beginning of its formation and is not legally enforceable by either party. Meanwhile, a contract is considered voidable, or invalid, if one party is disadvantaged according to contract law.

A legal contract can become voidable due to one party’s status as a minor, mental incapacity, or intoxication. In addition, contract terms are automatically void when they involve illegal activities, such as prostitution, or violate state laws or public policy.

When does the statute of frauds apply?

The statute of frauds acts as a defense to the enforcement of an underlying contract. Contrary to popular belief, the statute of frauds does not work as a valid enforcement in the majority of contract lawsuits.

When the statute of frauds is satisfied, parties of the contract can come to court to litigate the underlying contract. On the other hand, when the statute of frauds is not satisfied, the case is dismissed because the underlying legal document is a valid contract and can be legally enforced. The statute of frauds is most commonly applied in real estate transactions.

To determine whether a contract satisfies the statute, the court of law first asks whether the terms of the agreement are in writing. Legal documents must be signed to establish a clear relationship between parties. In most cases, an oral contract will not satisfy the statute of frauds.

In addition, the legal document must be signed by the party to be charged, or the breaching party. The terms of the offer are not enforceable against the party that did not sign (typically the plaintiff).

Modifying a Contract

When both parties still intend to perform their contractual duties, a modification is made to an existing contract. Modifying the terms of the contract under common contract law is considered an attempt to keep the contract together.

Common modifications include changes to the payment terms of a contract or the arbitrator. To modify a contract, a new consideration exchange must be present. 

When is a contract breached?

The breach of a contract involves any complication of nonperformance when performance is legally due under the contract terms. When a legally enforceable contract is breached, the injured party may enlist the help of a lawyer referral service to determine whether they are entitled to damages.

If you suspect that contract terms have been breached, seek adequate assurance from the suspected breaching party. Under contract law, the defendant is required to supply reasonable assurance in the form of writing for the contract to remain valid. If you fail to receive assurance from the breaching party, you have the legal capacity to declare the contract as void and sue.

Although learning legalese can seem boring and tedious, understanding the basics of what makes a legally enforceable contract is key to determining when further legal advice is required. If you encounter lots of contracts or business agreements on a daily basis, understanding legalese can help you avoid liability.

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