What are the basics of a binding contract?
What is a legally binding contract versus a non-binding contract?
What are the essentials of a valid contract?
In this article, we will break down the basics of binding contracts so you know all there is to know about it.
Are you ready?
Let’s dive in!
What is a binding contract?
A contract is a contract or legal agreement between two or more persons or legal entities.
For a contract to be binding, it must respect key elements that make the contract valid.
These elements are:
- Offer
- Acceptance
- Legal purpose
- Legal capacity
- Consideration
A binding contract is legally enforceable.
When a contract is legally enforceable, the parties to the contract must obey the terms of their contract and perform their duties and obligations.
In other words, when you have a binding contract, you can expect the other parties to be legally committed to do or not to do what they’ve committed to.
Similarly, they can expect that you perform your obligations as well.
If a party fails to perform its contractual obligations, upon petition of a party, the court may impose penalties and sanctions on the breaching party.
A binding contract can be formed either verbally or in writing.
The enforceability of a contract will not change whether you entered into a verbal contract or a written contract.
For simple transactions, verbal contracts work just fine.
For more complex transactions, it may be worth entering into a written contract.
What is a non-binding contract?
A non-binding contract is a contract that fails to include the key elements of a valid contract or violates the applicable laws.
Here are some examples of a non-binding contract:
- A person did not have legal capacity to enter into a contract
- The purpose of the contract violates the law
- There is no consideration
- The law requires a written contract and the parties did not put their agreement in writing
- There was coercion on a party to enter into the contract
- Due to misrepresentation and fraud
When a contract is “non-binding”, it means it will not produce legal effects on the parties and a court will not sanction or penalize a party for failing to comply with the contract terms.
You can read our article on voidable contracts for me details.
In other words, it cannot be enforced against the other party.
Requirements for a legally binding contract
What are the key elements to have a legally binding contract?
For a contract to be binding, it must observe key elements necessary for their formation and legal recognition as a binding contract.
There must be a mutual assent between the parties as to the basic contract elements.
Without the key elements, a contract will not be binding and will not produce any legal effects on the parties.
Let’s look at each of the requirements to have a binding contract.
Offer
The offer is when a party makes an offer to contract to another.
The offer will include the terms of what the person making the offer is intending to legally commit to.
The offer will be specific as to the parties to the contract, the purpose or object of the contract and the consideration.
The person submitting the offer is the offeror and the party receiving the offer is the offeree.
The offer itself is not a legally binding contract.
When it’s accepted though, a contract is formed.
Acceptance
The acceptance in contract law is when a party received an offer to contract from another one and accepts it.
This is where when we have mutual assent or the meeting of the minds.
When the offer is accepted, a contract is legally formed.
With the formation of the contract, you have a legally binding commitment provided the other key elements of a contract formation are observed.
Purpose
The purpose of the contract must be legal for the contract to be binding and enforceable.
If a party enters into a valid contract and obeys all the key elements of a valid contract, but the purpose was illegal, they will not a binding contract.
For example, if you have a valid contract for someone to commit a crime or illegal act, that contract is not legally binding.
Capacity
Legal capacity is the ability of the parties to legally enter into a contract.
Parties must have the mental competence to enter into a binding contract.
For example, a child or a person with a mental illness will not have the capacity to enter into a contract.
These are vulnerable individuals the law will often protect.
If a party is signing a contract in his or her own name, then the person must have legal capacity to enter into the contract.
If the person is acting on behalf of someone else, they will need to have the property authorization or legal authority to act for the other.
For example, a company can legally be represented by its officers.
The officers have the legal capacity to bind their corporation.
Consideration
Consideration is an important element of a binding contract.
As the saying goes: no consideration, no contract!
The consideration is what each party stands to benefit by contracting with another.
For example, if a car dealer sells a car, it benefits by getting your money in exchange for the car in its possession.
Similarly, you get the benefit of getting a car held by the dealer in exchange for giving away your money.
The consideration is money for one party and the car for the other.
Content of a binding contract
If you want to have a binding contract, what should be included in the contract document?
Contracts are highly flexible legal instruments.
Anyone can draft a contract.
Contracts can also be drafted in a different way and include clauses or wording suited for the specific objective they are looking to reach.
Generally, a contract will be drafted following a similar pattern or structure.
Here is what you can find in the contract as a document:
- The identification of the parties
- The recitals or an introductory factual context
- Defined terms
- A statement about the purpose of the contract
- The obligations of the parties
- Warranted, representations and covenants
- General terms and conditions
- Signature block
- Schedules, exhibits and annexes
Written contract requirement in some cases
In some cases, a contract must be in writing to produce legal effects.
The law in each jurisdiction will dictate what type of contract must absolutely be in writing for it to be binding and legally enforceable.
For example, the transfer of land title or the sale of a property must be in writing.
A mortgage or a lien on a property must be in writing.
Some consumer protection laws will require that certain types of contracts be put in writing so the consumer is protected.
It’s prudent to identify what type of contracts are required to be in writing further to the applicable laws.
Breach of a binding contract
Millions of contracts are entered into every day.
Contracts are essential for the development of our economy and in business dealings.
Enforcement in court
What makes contracts great is the ability to rely on the commitment of the other party to do or not to do what was committed as failure to do so can be sanctioned by the court.
A contract is a legal instrument created by the parties giving them the ability to enforce what was agreed in the event one fails to respect its end of the bargain.
A court can impose penalties or award damages the parties do not obey the terms of their written contract.
A contract is a legally binding agreement producing legal consequences if its terms are breached.
Types of contractual breaches
Contractual breaches can be categorized as follows:
- Minor contractual breaches
- Material contractual breaches
- Anticipatory contractual breaches
A minor contractual breach is when a party fails to observe minor parts of the contract without important consequence on its overall obligation.
In some cases, repeated minor breaches can lead to a fundamental breach of the contract affecting the party’s contractual obligations are affected when taken as a whole.
A material contractual breach is when a party fails to observe substantial elements of his or her obligations.
In the event of a material breach, the non-breaching party can stop executing its own correlative obligation due to the failure of the breaching party.
An anticipatory contractual breach is generally liked to contracts having specific milestones or timelines.
If a party fails to meet its obligations by a specific date, there is a contractual breach.
How to create a legally binding contract
In business, you need a contract to enter into a relationship with customers, vendors, suppliers, partners or any other business stakeholder.
How can you create legally binding contracts?
Should your contracts be validated by an attorney?
Actually, anyone can create a legally binding contract provided that the contract respects the formation requirements of the law and its not illegal in nature.
Small businesses may opt for having a contract attorney prepare a commercial contract for them once so they can have a working contract template.
Then, they’ll use that template to adapt it to their specific needs going forward.
For example, if you are a consultant, you may have a lawyer draft the template of a consulting agreement.
Then, whenever you have a consulting gig, you will create the contract yourself without having a lawyer bless it or approve it every single time.
Contract law and enforcement
Contracts are enforceable in court and produce legal effects on the parties.
This means that if a person’s rights or obligations are violated, the courts will enforce the contract and provide the necessary compensation for any damages suffered.
The objective of the law is to allocate a lot of importance to contract so that the contracting parties are protected in the case of a contractual breach.
This is important for the proper functioning of the economy.
We must be able to rely on the commitments of another.
Without having trust that the other person will comply with the contract or the contract is binding on them, we may not want to fully comply with our won obligations.
Without strong legal protection, this vicious cycle can perpetuate itself.
Contract laws are substantially similar from one jurisdiction to another, at least from the perspective if its binding contract elements.
There are nuances so it’s important to ensure you comply with the specifics of the applicable laws to your contract.
Frequently asked questions about binding contracts
In this section, we will look at some frequently asked questions about binding contracts.
Let’s first see if a promise is a binding contract or not.
Can a promise become a binding contract?
When you make a promise to another, you need to be careful.
Remember, a contract can be verbally formed and be binding on the parties.
If you make a verbal statement or promise and the other party relies on your promise to do something and expecting for you to deliver on your promise, a court may consider that there was a valid contract.
This is not to say that a promise leads to a binding contract and is enforceable all the time.
What’s important here is that you make a clear promise or commit to something when you are sure about it.
The best practice is to be clear if you wish to have a written contract or that what you are proposing is just a suggestion.
When you are dealing with complex transactions, it’s almost always better to have a written contract in place.
Are verbal statements binding?
If you are in a business meeting or speaking with other business parties, you’ll need to be careful as to what you say to avoid inadvertent binding statements.
Your statements in a business meeting can be construed as an offer if your business partner relied on what you said.
This can be problematic if your business partner relied on what you said, took action and suffered damages or losses.
The partner may turn around and demand that you compensate them for the damages and the misrepresentations that were made.
Having a written contract in business is crucial to avoid any misunderstandings and ensure you have a legally binding contract.
Does a contract need to be in writing for it to be binding?
A contract does not need to be in writing for it to be binding.
In fact, you can have a valid contract by verbally committing yourself to another and the other verbally committing himself or herself to you.
The biggest advantage of a written contract is to allow the parties prove the content of their agreement.
A contract does not need to be in writing to be binding but it’s best that you put your agreements in writing to avoid having to make the evidence of the scope and nature of your verbal agreement in case the matter ends up in court.
When is a binding contract formed?
A contract is formed at the very precise moment when the offeree accepts the offer of the offeror.
If I offer to sell you my bike for $100 and you accept, at that very instant, a contract is formed.
For a verbal contract, the contract is formed when the accepting party communicates his or her acceptance to the offeror.
In business transactions, business parties will opt for a written contract.
When business parties are negotiating a contract and there are many back and forth between them, the contract is not formed and binding until both parties clearly demonstrate their acceptance of the terms and conditions in the contract.
Generally, the demonstration to be bound to the contract is by way of contract signature by both parties.
When the contract is fully signed, a binding contract is formed at that precise moment.
What is mutual assent?
Mutual assent is also called the “meeting of the minds”.
This is when two parties reach an agreement recognizing that they are entering into a legally binding contract.
We can refer to mutual assent when both parties clearly demonstrate consent or their willingness to be bound in the contract.
For a verbal contract, the mutual asset can be clear from the statement of the parties but most importantly it can be inferred by their actions.
For a written contract, mutual assent is demonstrated when the parties sign the contract.
In some cases, a party may be coerced, forced or pressured to sign a binding contract.
In that case, the contract cannot produce legal effects as a key element of the contract formation was not observed.
If a party entered into a contract under duress, the law will not recognize that contract as an enforceable contract.
In such cases, there is no mutual assent and therefore the contract is non-binding.
For how long should an offer stay open for acceptance?
An offer can stay open for as long as the offeror wishes.
Should it stay open indefinitely though?
Not really.
It’s a good idea to include an expiration date to an offer to ensure it is legally removed from the table at some point in time.
In business, companies tend to make offers with an expiration date when the price is subject to change or they give an important discount provided the client accepts the offer in the short-term.
Every business or person can determine what is a reasonable timeline to keep the offer open.
What’s important is that during the entire time the offer is open for acceptance, the offeror is committed to respecting the terms of the offer should the offeree accept the offer.
In other words, if the offeror is selling a rare collectible item and offers it to someone while the offer is open for acceptance if he sells it to someone else but the initial offeree accepts the offer, then you have legal trouble.
The offeror should have the ability to execute the terms and conditions of his or her offer during the entire period the offer is valid.
Why is the consideration important for a binding contract?
The consideration is important for a binding contract as that’s what motivates both parties to legally commit themselves to one another.
The consideration is what makes a contract bilateral or two-sided.
Consideration goes something like this: I’ll give you that thing of value that I have and you value in exchange of a thing you have that I value.
For example, I’ll give you money (a thing that I have that is valuable to you) in exchange for the car (a thing that you have that I value).
The exchange of the car for cash is the consideration for the contract.
If I obligate myself to pay you the price of a car but you are not obligating yourself to deliver the car to me, we do not have consideration and therefore we do not have a binding contract.
What is express vs implied contract?
An express contract is one where the parties clearly show and express their agreement.
An express contract can be an oral contract or a written contract.
An implied contract is when the intention of the parties is expressed through their actions and behaviour as opposed to their express statement or what’s written in their contract.
One example is when you have someone renovate your basement.
The contractor will buy material, spend time renovating your basement and bring others to help him.
You have an implied renovation contract.
Takeaways
A binding contract is one that is legally enforceable against another.
To make sure you enter into a binding contract, you must respect the key elements of a valid contract.
A contract respecting its formation elements will be upheld in court in case a party breaches its terms.
An enforceable contract is one where a party can legally demand the execution of the obligation of the other or ask for damages to compensate losses or injuries suffered due to a breach.
In this article, we covered the basics of an enforceable contract so you have a better understanding of what a legally binding contract entails.
