What Makes Contract Terms Legally Binding?
When drafting or entering into a commercial contract it is important to understand how legally binding contract terms affect all parties to the agreement.
Well-drafted contract terms should provide certainty and clarity in respect of the contractual obligations and of the remedies available in the event of a breach of contract.
Importantly, however, a contract does not have to be written to be legally binding. Where certain elements are proven to be present, an agreement and its terms may be legally enforceable despite there being no written documentation or formal signed contract.
The key elements of a legally binding contract
Legally binding commercial contracts are agreements or promises between two or more parties — two separate companies, for instance — creating specific obligations, such as the trade of goods or the provision of services in exchange for payment.
To be legally binding, a contract can be written, verbal or even implied, provided the following elements are present:
1. An offer
An offer expresses contractual intent by one party (the ‘offeror’) to another (the ‘offeree’) on a specified set of terms. In other words, where an offer is accepted by the offeree, the offeror intends to be contractually bound by this.
An offer may be made expressly, either orally or in writing, or by conduct. It can be addressed to a single person, to a specified group of persons or to the world at large.
2. Acceptance of the offer
Acceptance of an offer is the unconditional assent, communicated by the offeree to the offeror, to all terms of the offer and made with the intention of accepting.
Acceptance must be brought to the attention of the offeror either by conduct or words. It is possible for the offeror to stipulate the method of acceptance, although it is not possible for silence to be construed as or form the basis of acceptance of an offer.
The offeree must be acceptance of the full terms as specified in the offer itself. Any proposal to vary or change the terms of the original offer will invalidate the original offer and constitute a counter-offer which the original offeror is to accept or reject.
Further, acceptance can only be valid where agreement to the terms is reached fairly and without undue pressure or duress.
Consideration relates to a bargained-for exchange, and the benefit each party expects to receive from signing a contract. For instance, the offeror may expect payment from the offeree for providing a service or trading products.
Importantly, consideration does not have to be ‘adequate’, nominal consideration will suffice to meet the requirement. Each party must make a change in their position by either making a payment, or making a promise to do something you’re not otherwise legally obligated to do, or making or a promise not to do something you otherwise have the right to do such as a promise not to make a claim.
4. An intention to forge an ongoing relationship
For a contract to be legally binding, the fourth requirement is that there is an intention by all parties to enter into a legally enforceable agreement. The specific circumstances of any agreement will be taken into consideration when looking at intention. For example, in commercial or business relations, there is generally a presumption of intention to enter into a legally binding relationship, but this presumption may be rebutted before the court with evidence.
What makes a contract unenforceable?
A contract may be considered invalid or unenforceable if it lacks any of these fundamental elements, or where other conditions apply, for example where the agreement entices someone to commit a crime or is illegal, where the agreement is entered into by a person who lacks capacity to enter into a legally binding agreement, or where the agreement was reached through deception, duress, undue influence or unconscionable conduct.
In such instances, legal remedies may be available for example to avoid, invalidate or terminate the contract without penalty.
Understanding the importance of legally binding contract terms
In reality, commercial contracts can take many different forms. Emails, social media communications and telephone conversations for example can all constitute legally binding contracts where the core elements are present, and can result in a claim for breach of contract where terms have not been met. Verbal contracts, while enforceable where the fundamental elements exist, can, compared to written contracts, result in more ambiguity, uncertainty and exacerbate legal issues should a dispute arise.
So while it is possible for unwritten agreements to be valid and legally enforceable, there are many benefits to operating under well-drafted, written agreements, setting out unequivocally the terms of the contract. Written contracts offer a documented record of the obligations the parties agreed to and must adhere to. The contract will also be the primary point of reference in any dispute resolution or litigation proceedings that may ensue.
In the commercial context, it is often the case in practice that parties work together on the basis of combined verbal and written contract terms. The combination of contract types in itself may not create legal issues, but it can make it challenging to define and evidence the specific enforceable terms of the agreement in the event of a dispute. Where disputes arise in such instances, professional advice is recommended to ensure evidentiary requirements are met in support or defence of any claim for breach of contract.
Legally binding contract terms: when you should seek legal advice
Taking professional advice when entering into a commercial contract and drafting legally binding contract terms can help ensure your rights and requirements under any commercial agreement are protected and enforced.
It is important to understand
Taking professional legal assistance when drafting and negotiating commercial contracts can help you understand the implications of all terms as set out under an offer prior to accepting and binding yourself to the terms of the contract, and in doing so manage any associated commercial risk and protect from future disputes.
Where you are in dispute over legally binding contract terms under an existing contract, whether this relates to a written or verbal agreement, legal advice will be critical to establishing your position and the legal options open to you, and in devising a strategy to through any dispute resolution that may result.