What Makes a Contract Legally Binding?
Contracts are the backbone of all businesses, no matter your industry. They enable commercial transactions, work agreements and loan applications by ensuring both parties fulfill their obligations — but only if the contracts are legally binding.
Invalid contracts can lead to legal repercussions, delays or lost investments. So, make sure every contract you draft and sign is legally binding with our helpful guide.
What Makes a Contract Legally Binding?
Are you creating loan applications or non-disclosure agreements? Or are you the individual signing these contracts?
Either way, assuring any contract is legally binding is critical. If anything goes awry and you end up with a legal case on your hands, you must ensure that the contract you signed — or drafted — is legal.
Let’s say you recently signed a contract. However, the other party hasn’t held up their end of the deal, ultimately costing you time and money. You want to receive what was promised, so you take the case to court.
With a legally binding agreement, or contract, you might be able to fight your case and receive anything owed to you. However, if the court finds the contract nonviable, you have no case and can lose money or goods in the process.
To avoid the latter situation, make sure the contract is legally binding from the start.
Requirements for a Legally Binding Contract
Anyone can create a contract — but not all contracts are legally binding.
The core elements of a legally binding contract are simple: value and agreement. The involved parties must exchange something of value and agree to the contract’s terms.
There are five requirements to establish value and agreement within a contract.
Offer and Acceptance
The offer is the idea behind any contract. Without a proposal for an exchange of services or goods, there’s no reason to draft a contract.
Once all parties agree to the terms of the offer, they officially accept the proposal. If someone declines, the party extending the offer can reconsider the terms and present a new one or terminate the contract.
Contractual Consideration
The contractual consideration is the bulk of any legally binding contract. It explains what each party will gain as stipulated in the agreed-upon offer.
Considerations can include anything of value, such as money, services or goods. However, they can’t contain any past actions or services that either party is already legally required to fulfill. For example, if you already signed a lease contract and agreed to a specific monthly payment, that same agreement can’t be part of a new contract.
Intention or Mutuality
Both parties must mutually agree to the terms of the contract. They must clearly intend to enter the agreement and be bound by the contract.
If either party doesn’t want to enter the agreement, the contract becomes invalid. Normally, people would simply not sign a contract they disagree with, but some individuals can be coerced into signing against their will. In these cases, the document is no longer legally binding.
Legality
A legally binding agreement must, of course, include only legal stipulations. Any contract that promises unlawful negotiations, considerations or exchanges automatically becomes invalid.
Each city, state and country has its own laws, so contracts usually have a clause explaining what governing body determines applicable rules. For example, a contract might include a statement declaring the agreement valid under the laws of the State of New Mexico.
Competence and Capacity
For a contract to be legally binding, all parties involved must be lawfully able and allowed to sign. In most states, all signers must be at least 18 years old. Anyone under 18 wouldn’t have the legal capacity to sign.
Competence and capacity also apply to the signers’ mental state. An intoxicated or inebriated person can’t enter a legally binding contract, nor can someone with limited cognitive function.
What Makes a Contract Null and Void?
A null and void contract was never legally binding or valid. In other words, an agreement that doesn’t comply with the above mentioned requirements is null and void from the start. We already mentioned a few examples that would make a contract null and void:
- A signer is a minor or not in the right mental state
- The document includes past considerations
- A signer was coerced into signing against their will
- The contract includes illegal negotiations
However, failure to abide by those rules isn’t the only way for an agreement to be null and void.
A contract can include all the value and agreement stipulations but be impossible to fulfill. In that case, the contract becomes null and void. One example could be an agreement between a restaurant and a supplier, where the supplier promised to provide a certain amount of fresh vegetables each month. If the crops were destroyed due to pests or bad weather, the supplier can no longer uphold their end of the deal, and the contract becomes null and void.
Of course, any fraudulent contract would also be null and void. If either party withheld essential information or lied about something, the contract is no longer viable. Suppose a homeowner hired a contractor to redo their roof. If that roofer lied about their experience, the roofing contract becomes null and void since it was based on fraudulent information.
How to Make a Legally Binding Contract
Now that you understand what makes a contract legally binding — or null and void — it’s time to apply those rules to the document creation process. Here are a few steps to follow that will help you keep those requirements at the forefront.
1. Set the Terms
If your company is drafting the contract, you might be able to use a template with standard terms. Just ensure they apply to the current situation and make any necessary changes.
2. Clearly State the Exchange of Value
One of the contract terms will likely include details about the exchange of value — especially since it’s the core of the contract. So clearly explain what services, goods or money the two parties will exchange.
Keep in mind the points above about not including any past considerations, which would make the contract null and void.
3. Establish a Deadline
Set a deadline for the other party to review the initial contract terms to keep the process moving. Depending on the contract type and overall urgency, this could be anywhere between 24 hours and 30 days.
The recipient can accept the terms, decline them or request changes. Either way, you want to know as soon as possible to avoid any unnecessary delays.
4. Expect Counteroffers
Remember, both parties must accept the offer for the contract to be legally binding. That means there can be negotiations and several counteroffers before anyone signs — and that’s completely normal.
You can set review deadlines after each iteration to help streamline your workflows and keep everyone on track.
5. Get the Document Signed
Once everyone accepts the terms and value exchange, it’s time to make it official with some signatures. The easiest and most efficient way to gather signatures is with an electronic signature provider like jSign.
Sign Legally Binding Contracts With jSign
Simply upload your document to the jSign platform and invite others to sign. You can even set deadlines for each recipient and establish a signing order (parallel or sequential), so everyone follows the correct protocol.
And the best part is that e-signatures with jSign are legally binding. Since jSign complies with the E-Sign Act of 2000, any e-signature — whether typed, drawn, uploaded or signed with a sign pad — is entirely valid. Ready to see for yourself how jSign can help you make legally binding, tamper-proof contracts? Sign up for a two-week free trial today.
