Contracts are the lifeblood of business and personal transactions, serving as binding agreements that define rights, obligations, and expectations.
Yet not all agreements are enforceable, and understanding the elements that make a contract legally valid is paramount.
In this guide, we delve into the intricacies of enforceable contracts, shedding light on what makes them legally binding and the factors that affect their validity.
- An enforceable contract is a legally binding agreement between parties that can be upheld in a court of law.
- A contract is enforceable when it meets certain essential elements, such as mutual assent (agreement) and consideration.
- A contract isn’t enforceable when it lacks the required elements (e.g. mutual agreement), includes illegal provisions, is based on fraud or duress, or involves parties without the legal capacity to enter into it.
What is an enforceable contract?
A legally recognized agreement between two or more parties, which satisfies specific legal requirements, is an “enforceable contract.”
In order for a contract to be enforceable, it must contain key elements.
These ensure the contract represents a genuine and binding commitment.
When a contract is enforceable, it means that if one party fails to fulfill its obligations as outlined in it, the other party or parties have the legal right to seek remedies and enforce its terms through the legal system.
Such remedies may include monetary damages to compensate for losses incurred due to the breach or a court order for specific performance, which compels the breaching party to carry out their obligations as specified in the agreement.
What makes a contract enforceable?
For a contract to be enforceable, it must meet several essential criteria, including:
1. Offer and acceptance
Both parties must make a specific, clear offer and receive a corresponding, straightforward acceptance.
They must also understand and agree to the terms and value of contract.
2. An intention to create legal relations
The parties entering into the contract must have the intention of forming a legally binding agreement.
Contracts made in a social or casual context may lack this.
Consideration refers to something of value exchanged between the parties.
Each party must provide this, whether it’s money, goods, services, or a promise to do something in the future.
4. Legal capacity
The parties involved must have the legal capacity to enter into the contract.
This means they must be of sound mind, of legal age, and not under the influence of coercion or fraud.
5. Legality of purpose
The purpose of the contract must be legal too. Contracts that involve illegal activities or are against public policy are typically not enforceable.
6. Compliance with formalities
In some cases, contracts may also need to adhere to specific formalities, such as being in writing or being witnessed by a notary public, to be enforceable.
7. Consent and genuine assent
Both parties must enter into the contract willingly and with genuine assent. If one party is deceived, coerced, or pressured, the contract may be voidable.
8. Properly executed
The contract must be properly executed with all necessary signatures and approvals from the involved parties.
9. Certainty and possibility of performance
The terms and conditions, including the contract effective date, must be clear and specific.
It must be possible for the parties to fulfill their obligations as outlined in the contract.
10. A meeting of minds
There must be a mutual understanding between the parties regarding the essential terms of the contract.
Misunderstandings or a lack of clarity can render it unenforceable.
When is a contract not enforceable?
A contract may not be enforceable under various circumstances, depending on the specific legal principles and factors involved.
Here are some situations where a contract may not be enforceable.
1. Lack of capacity
If one or more parties lack the legal capacity to enter into the contract, such as being a minor, mentally incapacitated, or under the influence of drugs or alcohol, the contract may not be enforceable.
2. Illegal purposes
Contracts with an illegal or unlawful purpose are generally not enforceable.
For example, a contract to engage in illegal activities, like drug trafficking, is void.
3. Lack of genuine consent
If a party’s consent was obtained through fraud, duress, undue influence, or misrepresentation, the contract may be voidable, and the injured party can choose not to enforce it.
A mutual mistake by both parties about a fundamental aspect of the contract may render it unenforceable.
Similarly, unilateral mistakes by one party, if the other party knew about the mistake or it was material to the contract, can also affect enforceability.
5. Impossibility of performance
If circumstances beyond the control of the parties make it impossible to fulfill the contract, it may be discharged, and enforcement may not be possible.
6. Statute of frauds
Some contracts must be in writing to be enforceable under the Statute of Frauds.
These typically include contracts involving real estate, marriage, or agreements that can’t be completed within one year.
Contracts that are so one-sided and unfair that they shock the conscience of the court may be deemed unconscionable and unenforceable too.
8. Public policy
Contracts that violate public policy or are against the interests of society may be unenforceable.
For example, contracts that encourage discrimination or harm to consumers.
9. Failure to meet formal requirements
Contract management best practices often demand that contracts comply with specific formalities to be enforceable.
This could include having the contract in writing, signed, or notarized as required by law.
A quick example of an enforceable contract
Scenario: Imagine you want to hire a professional to redesign your backyard.
You find a local landscaping company, and after discussing your requirements, they provide you with a written contract that outlines the following terms:
In this scenario, the contract is likely enforceable because it meets the essential elements of a valid contract.
Offer and acceptance: You, as the homeowner, accepted the landscaping company’s offer by signing the contract.
Consideration: Both parties are exchanging something of value — the landscaping company is providing landscaping services, and you’re providing payment.
Legal capacity: Assuming both parties are adults of sound mind, they have the legal capacity to enter into the contract.
Legal purpose: The purpose of the contract is legal — landscaping services and payment for those services.
Certainty and possibility of performance: The contract specifies the work to be done, the payment schedule, and a reasonable timeframe for completion, ensuring clarity and feasibility.
This contract, if properly executed and adhered to by both parties, would typically be enforceable in a court of law.
However, if there were disputes or breaches of contract, the dispute resolution clause would come into play, requiring arbitration as the initial method of resolving any issues.
Enforceable contracts in real estate
Enforceable contracts in real estate are crucial for ensuring property transactions proceed smoothly and legally.
Real estate transactions often involve significant financial investment, and parties rely on enforceable contracts to protect their interests.
Here are some key aspects of enforceable contracts in real estate.
1. Purchase agreement or sales contract
A common type of enforceable contract in real estate is a purchase agreement or sales contract.
This outlines the terms and conditions of the property sale, including the purchase price, financing details, contingencies (such as inspections and appraisals), and closing date.
Once both the buyer and seller sign this contract, it becomes legally binding.
2. Statute of frauds
In many jurisdictions, real estate contracts must be in writing to be enforceable, as mandated by the Statute of Frauds.
This requirement ensures the terms of the contract are clear and documented.
Oral agreements relating to real estate transactions typically hold little legal weight.
3. Earnest money deposit
To demonstrate seriousness and commitment, buyers often provide an earnest money deposit when signing a purchase agreement.
This is typically held in escrow and becomes part of the purchase price at closing.
If the contract isn’t fulfilled due to a breach by one party, the other party may be entitled to the earnest money as compensation.
Enforceable real estate contracts often include contingencies that allow either party to withdraw from it under certain conditions.
Common contingencies include those related to home inspections, financing, and the sale of the buyer’s existing property.
5. Title and ownership
Real estate contracts should specify the condition of the property’s title and the obligations related to the title transfer.
Issues related to clear title, liens, and encumbrances should be addressed in the contract.
6. Closing procedures
The contract should outline the procedures and responsibilities for the closing of the real estate transaction.
This includes the transfer of funds, deed execution, and other legal formalities.
7. Dispute resolution
Enforceable real estate contracts may include provisions for dispute resolution, such as mediation or arbitration, to resolve conflicts between the parties without going to court.
All parties involved, including buyers, sellers, and any agents or brokers, must sign the contract to make it enforceable.
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