Whether you are entering into a relationship with a customer, a vendor or an independent contractor, contracts are a fact of business. You need them because they serve as legally valid agreements protecting your interests.
But aren’t contracts laden with legalese? Don’t they have to be blessed by an attorney to ensure their validity? Not always.
In fact, I’ve seen contracts come across my table that are less than one page in length, in plain English, and still legally binding. How?
Generally, to be legally valid, most contracts must contain two elements:
- All parties must agree about an offer made by one party and accepted by the other.
- Something of value must be exchanged for something else of value. This can include goods, cash, services, or a pledge to exchange these items.
In addition, certain contracts are required by state law to be in writing (real estate transactions, for example), while others are not. Check with your state or with an attorney if you are unclear, but it’s always good business practice to put every binding agreement in writing.
Here’s how your small business can comply with these requirements and ensure your contracts are legally valid:
1)The Ins and Outs of Reaching an Agreement
The point when two parties come to an agreement can be a little fuzzy. For example, many businesses will put a standard contract template before an independent contractor and expect it to be signed without any discussion. At that point – and the law is clear on this – a legal contract exists only when one party makes an offer and the other accepts all terms of that offer. So in this example, the contractor is still free to rebut any of the points in the contract and make a counter offer, until an agreement has been reached.
How Long Should an Offer Stay Open?
Offers are rarely accepted immediately and further discussions or amendments may be required. Unless the offer has a deadline for acceptance, it can remain open. It’s good practice to include an expiration date to ensure you have room to maneuver should you wish to change the terms or revoke the offer before a certain date.
Offers that are subject to an expiration date – known as option agreements – are typically price-driven or give the buyer the opportunity to mull the decision without fear of losing out to a competing buyer. It’s important to understand that a seller can place a fee on option agreements. For example, if you decide to give a buyer 30 days to think over a purchase, you can charge him for that. This typically occurs when the product or service is of high value or when the seller pledges not to sell that product to another customer during that 30-day option period. Likewise, a seller can’t revoke the offer until that 30-day period ends.
What about Counteroffers?
Bargaining or negotiating can often lead to a counteroffer. Once made, the legal responsibility to accept, decline, or make another counteroffer then shifts to the original offeror.
2)The Importance of Exchanging Something of Value
In addition to ensuring both parties are in agreement on the terms of an offer, the second element that ensures a contract is legally valid is that both parties exchange something of value. This is important since it differentiates a contract from being a one-sided statement or even a gift. “Something of value” might be a promise to perform certain services by one party while the other party agrees to pay a fee for the work performed.
Most business transactions are based on this exchange of promises. However, the act of doing the work can also satisfy the exchange of value rule. For example, if you contract with a vendor to provide you X and Y, but you decide you need to add Z to the final deliverable, the vendor can create a binding contract by actually doing Z – something which you can’t quibble or get out of if you change your mind.
More Information and Resources
For more information about the legality of any agreements, consult a lawyer or attorney.
For insights into what a contract should look like, check out available contract templates from SCORE. Use the search field to find “contract agreements” or other keywords for the type of contract you are looking to create. Also check out these blogs for additional tips:
FAQs
The basic fundamentals of a legally binding contract are that it must include an offer outlining what will be provided and an acceptance of that offer. There must also be something of value exchanged, which could be a service, sale of goods, money, or even a promise to provide one of these things.
What are the 3 requirements for a legally binding contract? ›
The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality. In some states, elements of consideration can be satisfied by a valid substitute.
What makes a contract legally binding in California? ›
REQUIREMENTS FOR A CONTRACT
A valid contract is a legally binding agreement and is enforceable in court by and against the contracting parties. In order for a contract to be valid, there must be an offer, an acceptance of the offer, an exchange between the parties of something of value, and an agreement to the terms.
What is an example of a legally binding contract? ›
In order for any contract to be legal, the parties have to be in mutual agreement and they have to be exchanging something for another thing. For example, someone might sign a contract to buy a car with an auto loan, in which the contract commits them to making monthly payments to repay the loan.
What are the four requirements of a legally binding contract? ›
It is a legal framework for the agreement between the parties, which is both certain and enforceable. However, to be legally binding, a contract must include four key elements: an offer, acceptance, consideration, and an intention to create legal relations.
What 4 elements are needed to make a legally binding contract? ›
There are four essential elements of forming a contract: offer, acceptance, consideration, and intention to create legal relations. Beyond this, the terms of the contract must also be unambiguous, and the parties must have the mental capacity to agree.
Can anyone write a binding contract? ›
Why You Need a Business Contract Lawyer. If you're asking whether you need a lawyer to draft a contract, legally, the answer is no. Anyone can draft a contract on their own and as long as the elements above are included and both parties are legally competent and consent to the agreement, it is generally lawful.
Can anyone make a binding contract? ›
Legally binding contracts
A valid contract needs the following elements: People entering the contract must intend the contract to be binding. An offer is made by one person and is freely accepted by another. Some price (money, right or benefit) is paid in return for a promise.
What are the 7 elements of a legally binding contract? ›
There are seven essential elements an agreement must have to be considered a valid contract. The elements of a contract include identification, offer, acceptance, consideration, meeting of the minds, competency and capacity, and contract legality. Preferably, the document will be in writing (electronic or on paper).
What voids a binding contract? ›
Contracts become null and void if one party is coerced into signing through threats or manipulation. Duress involves physical or mental threats, while undue influence occurs when someone manipulates or pressures another party into an agreement against their will.
A contract is unenforceable when there is evidence of lack of capacity, coercion, undue influence, misrepresentation/nondisclosure, unconscionability, violation of public policy, or impossibility.
What are the requirements for a valid contract in California? ›
One party must make an offer and the other party must accept it. There must be a bargained for exchange of promises, meaning that something of value must be given in return for a promise. The terms of a contract must be sufficiently definite for a court to enforce them.
Can you write your own legally binding contract? ›
Simply put, yes, you can write your own legal contract. You just need to be sure to include key components such as an offer, an acceptance, an exchange of value, and the willingness of both parties to enter into a contract. Legally binding contracts can be done both in writing or orally.
How to write a simple contract? ›
How to draft a contract between two parties: A step-by-step checklist
- Check out the parties. ...
- Come to an agreement on the terms. ...
- Specify the length of the contract. ...
- Spell out the consequences. ...
- Determine how you would resolve any disputes. ...
- Think about confidentiality. ...
- Check the contract's legality. ...
- Open it up to negotiation.
Contracts made under duress are invalid and unenforceable. Parties must voluntarily consent to be bound by the agreement without coercion or intimidation. If any party was compelled to enter into the contract against their will, it will invalidate the contract.
Is a homemade contract legally binding? ›
There are no legal differences between typed and handwritten agreements when it comes to enforceability. When most people think of a contract, a formally typed, the professional contract usually comes to mind. Nonetheless, a handwritten contract can be as valid as one that's typed.
How to make a legal contract without a lawyer? ›
Contracts have three essential elements: an offer, an acceptance of that offer, and sufficient “consideration,” or what each party will “get” out of the contract. The contract should be written in such a way that the parties involved clearly understand the contract without an attorney to interpret it.
