What makes a contract valid?
For a contract to be valid, it must include several key elements: 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 enter into contracts many times throughout their lives. From employment agreements to real estate transactions, car purchases, and more, they are an important part of modern life.
This article will help to define the elements needed for a contract and explain what makes a contract valid.
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, but some, like real estate purchase contracts, 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.
Most day-to-day business contracts relate to common situations that involve the exchange of things of value.
Why would you need a contract?
Having 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 5 characteristics of a valid contract?
The following elements of a contract are crucial for any legally valid agreement and should be kept in mind as general 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
To make a contract valid, any offer that’s been made needs 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 necessary for a contract to be legally valid.
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 have different proofs of intent.
How can you make sure a contract is valid?
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 accept the terms and willingly enter into the agreement.
Physical signatures and electronic signatures are both legally binding. Handwritten signatures are more traditional, but are slowly becoming outdated.
Electronic signatures, or eSignatures, allow any party to add a signature with a simple click.
It also helps to improve efficiencies around contract management, such as contract templates, automated approvals, bulk send, and the ability to track document statuses to increase your close rates.
Summary
When entering any contract, 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 the contract contains the necessary elements to make it valid.
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.