What makes a contract valid?

Legal contracts can provide protection for the participants, but what makes a contract valid and legally binding?

It is vital that a contract meet all the requirements for a contract to be valid.

Usually, this involves certain key elements, including clearly defined terms (terms of the contract), mutual agreement among parties of sound mind, and legality, meaning that the agreement cannot relate to illegal activities. 

Most people will enter into a number of contracts during their lives.

Employment agreements, real estate transactions, car purchases, and more, contracts are an unavoidable part of modern life and are particularly important when large amounts of money are involved.

In this article, we will explore the elements of a valid contract in more detail, and by the end, you’ll have no doubt about what makes a contract valid.

  • What is the definition of a contract?
  • Why would you need a contract?
  • Written and verbal contracts
  • What are the five requirements of a valid contract?
  • How can you ensure you have a valid contract?
  • Summary: what constitutes a valid contract?

What is the definition of a contract?

At its most basic level, a contract is simply an agreement between two or more parties that defines the terms of an exchange. 

A contract can be written or verbal, and both are legally valid in the right circumstances if they contain the essential elements of a valid contract.

However, some contracts, for example real estate purchases, are legally required to be written.

A binding contract typically has an expiration date and is created through a process that includes preliminary discussion and counteroffers, meanwhile most day-to-day business contracts relate to common situations that involve the exchange of things of value.

Why would you need a contract?

A contract makes the terms of an agreement clear from the beginning. For minor agreements like lending your neighbor a hammer, a contract isn’t necessary.

However, for something of significant value, like the sale of a property, things can get messy if there is no valid contract in place.

The best approach in these cases is to enter into a binding agreement that is valid in the eyes of the law and therefore offers protections to all involved parties. 

When a contract exists, it allows all parties to prove what was agreed upon should any kind of dispute arise.

If the dispute needs to be resolved in court then a legal contract will allow the matter to be dealt with quickly, and may even prevent it from entering the legal system entirely, although state law does vary.

Written and verbal contracts

The two ways of creating a contract are written and verbal. Both can be legally binding and are allowed under business law, but it’s always best to have a written contract for any important agreement.

This is because the specifics of oral contracts are harder to argue if you end up in a dispute with another party.

A written contract includes each and every term of an agreement recorded in one place. If you end up in court, it’s easier to make your case if you have a written signed contract at your disposal.

What are the five requirements of a valid contract?

The essential elements of a valid contract can be summarized in these rules:

1. The offer (terms of the offer)

One party must make an offer to another. This is a description of terms that the offering party makes to the other and is legally obliged to carry out.

A formal job offer is a perfect example.

2. Acceptance of an offer

Next, a valid contract requires any offer that’s been made to be accepted by the other party. This is a widely recognized part of the contract process.

3. The capacity of the parties involved

For a contract to be valid, everyone who enters the contract needs to comprehend and understand the full agreement and all the obligations associated with the contract. They must not be coerced into signing the contract or be a victim of undue influence.

A minor cannot usually enter into a contract (although there are some exceptions).

4. Some form of consideration

Consideration means the exchange of something of value and is another necessary element that makes a contract valid and enforceable. This cannot include anything that breaks the law, so a contract would not be valid if it related to the sale of anything illegal.

This applies to both personal and business agreements.

5. All parties intend to enter the agreement

For a contract to be valid, everyone entering the contract must show a clear intention to begin a formal agreement and accept the terms as legally binding.

Different types of contracts can use different proofs of intent, but they still ensure a valid contract.

How can you ensure you have a valid contract?

While it’s not always necessary to sign a contract to enter into a legal agreement, having all involved parties sign a written document is the best practice.

A signature is among the most essential contract elements and legally binds the signer by demonstrating that they have willingly entered into the agreement and accept all the terms.

Physical signatures and electronic signatures are both legally binding. Handwritten signatures are more traditional, but are slowly becoming outdated.

With PandaDoc, electronic signatures, or esignatures, can be added to a contract by any party with a simple click. 

Our dedicate solution also helps improve efficiencies around contract management, such as contract templates, automated approvals, bulk send, and the ability to track document statuses to increase close rates.

Summary: what constitutes a valid contract?

When entering any contract, it’s important to ensure that it’s legally sound to avoid any possible issues.

The best way to do this is to pay close attention and confirm that it meets the requirements for a valid contract before signing. 

If you’re unsure about anything, then consider obtaining legal advice from a contract law specialist who understands your state’s laws.

Finally, written and signed contracts are almost always the best course of action in terms of their legal robustness and are invaluable if major issues arise.