What makes a contract binding?
If you are in business and are in the process of preparing and entering into an agreement or contract with another party, it is important to understand what essential elements make a contract binding. Let us simplify it for you.
What Makes a Contract Legally Binding?
For a contract to be legally binding it must contain the following elements: –
- An offer;
- An acceptance;
- An intention to create a binding agreement; and
- Consideration (usually monetary).
Further to the above, the parties must also have legal capacity to enter into the contract / agreement and it must have a legal purpose. For some contracts, certain formalities must also be met to make the contract / agreement binding for example, it must meet relevant requirements set out in relevant legislation.
Offer and Acceptance
For a contract to be binding, there must be an offer by one party and acceptance of that offer by the other party. You can make an offer in writing or verbally and it may be accepted in writing, verbally or by way of conduct of the party. Acceptance must be unequivocal and effectively communicated to the offeror. An example of accepting an offer by way of conduct may be where the offeror provides a quote for services and upon receiving the quote, the offeree tells the offeror to do the work pursuant to the quote.
This is the price paid by one party in return for the performance of the contract / agreement by the other party. For example, rental payments are the consideration made by the lessee to the lessor under a lease in exchange for renting a house. Consideration must be of value but does not necessarily need to be monetary.
In the absence of consideration, a contract may be deemed unenforceable.
Intention of the Parties to Create Binding Agreement
For a contract to be binding, both parties must have a genuine intention to enter a legally binding agreement. The law is concerned about whether a reasonable person in the circumstances would consider that the parties intended to create a legally binding contract / agreement. It is important to make it clear expressly or otherwise, that the intention of the parties is to create a legally binding contract / agreement.
Contracts / agreement may be unenforceable if a party lacked legal capacity to enter the agreement / contract at the time of entering the contract. Parties to a contract / agreement must be of sound mind and free from any duress / undue influence or unconscionability to enter a contract / agreement.
There are also other factors that might affect the person’s capacity to enter into a valid contract / agreement such as being a minor, a prisoner or bankrupt. You should always check that the other party has legal capacity to enter the agreement / contract before entering into the contract / agreement with that person.
A contract / agreement must have a legal purpose and not involve any illegal conduct otherwise, it may be void and unenforceable. A contract might be illegal at common law because it is contrary to public policy for example, to commit a tort or fraud, prejudices the administration of justice, promotes corruption etc.
Some legislations will set out requirements for certain contracts to be valid and binding. If those requirements are not met, then the contract may not be binding and enforceable. It is always prudent to check that your contract / agreement is compliant with all relevant legislations and law to ensure it is enforceable.
How Does This Affect You?
If you are considering entering into a contract / agreement or are in the process of preparing a contract / agreement, it is important that you consider whether it will be legally binding and enforceable.
If you are in doubt, seek legal advice. This is general information only and does not constitute legal advice and should not be relied on as such. If you require legal advice about this topic, please contact us at Klein Legal today.