What makes a contract valid?
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. They can be written or verbal, both are legally valid in the right circumstances, but some like real estate purchase contracts are legally required to be written.
Why would you need a contract?
Having a contract makes the terms of the agreement clear from the beginning. For minor agreements like lending your neighbor a hammer, a contract isn’t really necessary.
However, for something of significant value, like the sale of a property, things could get messy if there is no valid contract in place.
When a contract exists, it allows all parties to prove what was agreed upon should any kind of dispute come up. If the dispute makes it court then a proper contract will allow the matter to be resolved 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 the agreement recorded in one place. If you end up in court, it’s way easier to make your case, especially if it’s in a written signed contract.
The main components of a valid contract
The following elements of a contract are crucial for any legally-valid contract:
1. 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 tends to be a typical part of the contract process.
3. The capacity of the parties involved
For a contract to be valid, everyone who enters the contract needs comprehend and understand the full agreement and all the obligations associated with the contract.
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.
5. All parties intend to enter the agreement
For a contract to be valid, everyone entering the contract must show clear intention to begin a formal agreement and accept the terms as legally binding. Different types of contracts can have different proofs of intent.
While not always necessary to sign a contract to enter into a legal agreement, having one for all involved parties is best practice. A signature legally binds the signer by demonstrating that they accept the terms and willingly entering the agreement.
Physical signatures or 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 via apps like PandaDoc.
Apps like these also include additional functionality that 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.
Always make sure your contracts are legally valid
When entering any contract, you want 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 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.