A contract is an agreement between two or more parties that defines the terms of an exchange, but if you want that agreement to actually hold up in court, there’s more to it than simply putting it in writing.

So, what makes a contract valid? Understanding the components that make a contract legally binding is vital to avoid any agreements going wrong.

In this article, we’ll cover the ins and outs of creating a valid contract, including five essential requirements and how you can make sure your agreements are legal.

Let’s get into it.

What are the 5 requirements of a valid contract?

While contracts can vary in style, length, and complexity, all legally binding contracts need to follow five foundational elements:

1. The offer

One party needs to make an offer to another party. This could be about performing a service, delivering goods, or taking or not taking a specific action.

The offer should describe the terms that the offering party makes to the other and is legally obliged to carry out. It should be clear and specific so there is no misunderstanding on the end of the receiving party.

2. Acceptance of the offer

To make a valid contract, the receiving party needs to agree to the offer. This acceptance should be communicated in writing to avoid ambiguity.

If one of the parties changes the offer before it is accepted, that would be considered a counteroffer.

3. Consideration

This is the part of the deal when all parties consider the question, “what’s in it for me?”

Consideration means that both parties are exchanging something of value, which is necessary to make a contract valid and enforceable. The “something of value” could be money, services, products, or even a promise not to do something (think non-compete agreements).

This, of course, should not include anything illegal, as this would invalidate the contract.

4. Capacity of all parties involved

Everyone who enters into the contract needs to be legally capable of doing so, meaning they should comprehend the full agreement and all obligations associated with it.

This means each party needs to be of sound mind, not under the influence, and of legal age. Otherwise, the contract can be voided.

5. Intention to enter the agreement

A contract can only be considered valid and enforceable if all parties entering the contract show a clear intention of beginning a formal agreement and accepting the terms as legally binding.

Without sufficient awareness, a contract can be void. Depending on the contract, different types of proof of intent can be used.

what makes a contract valid

How can you ensure you have a valid contract?

Even if you have all five elements covered, your contract still needs to be clear, complete, and properly executed to be enforceable.

Follow these best practices to make sure you get it right:

  • Spell out the details. Clear and specific terms about pricing, timelines, responsibilities, deliverables, and payment are vital. Nothing should be left to interpretation.
  • Use plain language. Simple, straightforward language helps make sure everyone entering the agreement understands exactly what they’re agreeing to.
  • Get it in writing. Having a written document that all parties can sign is the best way to enter into a legal agreement, as they are easier to reference, enforce, and protect. This is especially helpful if there are disputes down the line.

Related posts: Are verbal contracts legally binding?

The value of signatures

While it might seem like common sense, a signature is one of the most important aspects of a contract. It demonstrates that all parties willingly entered into the agreement and accepted all its terms, making it vital for enforceability in court.

Both physical and electronic signatures (eSignatures) are legally binding.

PandaDoc eSignatures can be added by any party with a simple click, eliminating the need for printing, scanning, or mailing—way more convenient than traditional signatures!

Streamline your entire contract process

Our solution also helps you with contract management, meaning you can simplify and speed up your entire contract lifecycle with features like:

So, why go with a contract management solution?

It can help you make sure your contracts are valid, plus it can increase close rates and contract value—just ask our client, LiteZilla.

We improved their close rate by 20% and increased their average contract value by 30%.

“We were meticulous in our search for the right tool that would take our proposals to the next level, and PandaDoc delivered on every front. As a small business, PandaDoc has become an indispensable part of our workflow, demonstrating time and time again why it was the right choice for us.” – Adam Greenspan, CEO at LiteZilla

What are the different types of contracts?

You’ll see contracts everywhere, and different situations call for different kinds of agreements.

Here are some common types of contracts to be aware of:

  • Service agreements: A service contract is an agreement between two parties that outlines the terms and conditions of a specific service to be provided by a third party. These are helpful for establishing clear expectations of the scope and timeline of a service, including deadlines.
  • Sales contracts: These contracts are designed to establish a mutual understanding between a buyer and a seller. They’re used when goods or services are bought or sold, and they typically include item descriptions, prices, delivery terms, and warranties.
  • Non-disclosure agreements (NDAs): NDAs protect confidential information shared between parties. These are similar to confidentiality agreements.
  • Standardized contracts: A standardized contract is an agreement that’s been entirely prepared by one party and signed without negotiation from the other. They are typically used in low-risk, low-value scenarios, such as terms of service agreements or employment contracts.
  • Enterprise contracts: These are legally binding agreements between organizations and external parties or vendors, which govern various aspects of business relationships. Here’s how to manage them.

If you want to dive deeper, here’s a closer look at different types of business contracts, plus a bunch of templates!

Is every written contract legally binding?

The short answer is no.

Just because something is written down and signed, it doesn’t guarantee that it’s legally enforceable. It needs to meet all five requirements for it to hold up in court.

Factors that can invalidate a contract:

  • Fraud or misrepresentation – This could be one party lying or withholding essential information.
  • Duress or undue influence – When a party is pressured, coerced, or manipulated into signing the agreement.
  • Lack of capacity – If one or more parties lack the legal ability to consent, such as minors or individuals with mental impairments.
  • Mutual mistake – It’s possible for both parties to misunderstand a basic fact that’s central to the entire agreement.
  • Lack of consideration – If there’s no meaningful exchange of value between the parties.
  • Illegality – This could point to the contract involving unlawful activity of some kind.
  • Unconscionability – When terms are one-sided or unfair to one party.
  • Lack of understanding – One party did not have a clear understanding of the terms and implications of the agreement.

Any of these cases could lead a court to decide not to enforce the contract (or parts of it), so it’s a good idea to stick to the five essential elements discussed earlier.

Contract validity checklist

Here’s a quick checklist to make it easier for you to make sure your contract is legally sound before sending it off:

  • Does the contract have a clear and specific offer?
  • Is there acceptance of the offer with no ambiguity?
  • Is there an exchange of consideration (something of value)?
  • Are all parties of legal age and of sound mind?
  • Does the contract have legal purpose (nothing shady or unlawful)?
  • Is the contract written in plain, understandable language?
  • Does the contract have detailed terms and conditions?
  • Has the contract been signed and dated by all parties involved?
  • Have you distributed copies of the agreement to each party involved?
  • Do you have a way to store the document securely (ideally in a contract repository)?

Final thoughts

Contracts are about building trust, protecting your business, and creating accountability for all parties involved in an agreement. Making sure they are valid and legally binding is vital to avoid trouble later on. PandaDoc makes creating valid, professional contracts easy.
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