As a business owner or manager, having an understanding of basic contract law before making any binding agreements will help determine if the contract will be legally enforceable. The contract or agreement should outline the performance obligations of all of the contracting parties; however, circumstances often arise which may make the performance obligations unclear. For significant transactions, it is prudent to have an experienced contract attorney review the language before finalizing an agreement, particularly regarding contract performance.
What Elements Make A Contract Legally Enforceable?
Basic contract law requires a contract to meet certain criteria before it can be enforced in a court of law. The general legal principles that define contract validity have been established through hundreds of years of common law. The specific requirements for contract validity are imposed by applicable state law. That is, contracts are governed by the law of the state in which the contract was executed or performed.
State laws will provide specificity as to what is necessary for contracts in general, and for different types of contracts such as construction contracts, sales of goods, real estate, financing transactions, leases and services. Compliance with applicable state law is the first component a contract must satisfy before it will be enforceable.
In most states, a contract must have each of the following components to be enforceable:
1. Agreement Must Be In Writing
Most states have specific requirements concerning what types of contracts must be in writing. In most states, contracts pertaining to real estate transactions, trusts and wills must be in writing to be enforceable.
Not all contracts must be in writing. An everyday example of a contract that need not be in writing is the contract you make when you order a meal from a restaurant. When you give the waiter your dinner order, the restaurant will begin to prepare your meal with the expectation that you will pay for it when you finish.
In some situations, enforcing an agreement that is not in writing becomes challenging for the party trying to prove that a verbal contract exists. Accordingly, it is always preferable to put significant agreements in writing, especially business agreements.
2. Agreement Must Have An Offer And An Acceptance
A valid contract must contain both an offer and an acceptance. The offer is something that one party is promising to do, such as lease a car to the other party, sell a ring to the other party, or pay the other party for goods or services they provide.
After an offer is made by a party, it must be accepted by the other party to the contract. Acceptance means that the other party agrees to what has been offered. If, instead of an acceptance, the other party makes changes to the offer, it is deemed a counter-offer which itself must be accepted before a contract exists. Also, a counter-offer operates as a rejection of the original offer.
A complication can arise after the offer is made if too much time passes before the other party accepts or rejects the offer. After an offer is made, the other party may need some amount of time to think it over before accepting it. At some point, the offer can expire, which can lead to a dispute. To avoid legal issues pertaining to the expiration of an offer, it is wise to clearly establish a deadline for how long the offer will be available. If no acceptance occurs by the deadline, the offer expires.
Note that the offer can also expire if the offeror revokes the offer before it has been accepted. Once the offer has been accepted, however, the offeror cannot revoke it.
3. Exchange Of Value
An enforceable contract must involve an exchange of value. Without an exchange of value, you have only a gift, or maybe just a promise to give the other party a gift. A promise to give a gift is not legally enforceable. A gift is a one-sided transaction that does not require exchange of value.
An exchange of value consists of a promise to do something in the future. It can be a promise of payment for goods or services in return for a promise to perform a service. In the restaurant example used above, the exchange of value occurs when the restaurant prepares your meal as you ordered it, in return for your promise to pay for it.
Once the restaurant performs its obligation to prepare your meal, the restaurant has satisfied the exchange of value requirement; you cannot later change your mind. Likewise, if you paid the restaurant for your food in advance, the restaurant is obligated to provide your food as per your order or give you back your payment.
4. Intent To Be Bound By The Agreement
The contract must reflect the parties’ intent to be legally bound by the agreement. That is, each party to a contract must accept the terms of the contract with the intention and knowledge that it forms a legally binding relationship between the parties.
The contract must include some form of payment. In legal terms, the payment is called “consideration.” Consideration is any kind of payment that is exchanged for the product or service that is being offered. Usually, the payment is in the form of money, but it could be something else of value such as a car, a piece of jewelry or another valuable item.
Without consideration, the transaction is likely to be deemed a gift. For example, if your friend promises to help you move to a new apartment next week and does so, it is a gift because you did not have to pay your friend or promise anything in return. If your friend had not kept that promise, you could not take your friend to court to try to enforce the promise.
6. Voluntary And Competent
The contract will not be valid unless the parties entered into it voluntarily and they each have the legal competence and authority to do so.
“Voluntary” means that none of the contracting parties were coerced or forced into the agreement. Coercion exists when someone uses threats to induce a party to agree to specific terms or provisions of the contract against that party’s will. Such intimidation tactics can involve threats to kill or harm a family member, friend, or other person or to withhold or take a person’s property, among other unlawful acts. Coercion will invalidate the contract.
“Competence” means that the parties were adults, not minor children and both parties were mentally sound. In some cases, one of the parties may be represented by an attorney, parent, guardian or someone else who has the appropriate authority to act on behalf of that party.
Consult With The Contract Attorneys At KPPB LAW
Contracts and contract disputes are a significant part of doing business. The best way to avoid contract disputes is to consult with one of the contract attorneys at KPPB LAW before signing any documents of agreement. They can help to negotiate a contract that is fair and that fully protects your interests. If you are embroiled in a contract dispute, the KPPB LAW attorneys can assist in negotiating a resolution, or represent you in court.