What Makes a Contract Legally Binding – Business Guide
Whether you are a small business owner partnering with a new vendor or a corporate executive overseeing mergers and acquisitions, you must understand the importance of business contracts. What makes a contract legally binding? Do you need an attorney to draft one for you?
Our team at Anthony Law Group is here to answer these questions and more. Contact our firm when you need a business lawyer in Phoenix, AZ, to help you understand contract terms and other legal requirements.
Why Legally Binding Contracts Are Essential for Every Business Transaction
It would be nice if every business owner could verbalize an offer and an acceptance with another party, shake hands, and consider it a done deal. Unfortunately, one party could break this agreement and hurt the other one in the process. If a legally binding contract exists, both parties understand their role and must uphold their end of the deal.
Valid contracts help protect businesses from various risks if a breach occurs. Any purchase order for your business should come with a binding legal document for peace of mind.
Six Key Components of a Legally Binding Agreement
What makes a contract legally binding? There are six elements that generally make a business agreement enforceable by law. Find out what you need to change about your contract creation process to make the document valid.
1. A Subject
Are you hiring someone to work at your company? Extend an official employment contract to them, outlining their role and your expectations.
Do you want to prevent someone from releasing confidential information about your workplace? A non-disclosure agreement keeps sensitive information from getting out.
These are two examples of contract subjects. Whether you are entering a new partnership, taking out a loan, or entering a service agreement, you will have to create a contract with a clear subject.
2. An Offer
The offer is the basis of the deal. An employment contract is one of the simplest ways to understand this component. You are giving another party the chance to work for your company in a specific role.
Every offer must be clear and tied to something of value for the signer’s consideration.
3. Consideration
What makes a contract legally binding? If it does not outline some type of valuable exchange between two parties, it is not considered enforceable.
Consideration refers to the incentive that you provide parties entering a contract. An exchange of money is a common consideration, though you may use other incentives, such as:
- Goods
- Services
- Forbearance
4. Acceptance
Contracts start to take shape at this stage. Acceptance can only happen when the offering party clearly lays out their terms of the contract and the receiving party agrees to them. If they change any of the presented terms, it is considered a counteroffer rather than an acceptance.
In certain circumstances, a verbal agreement is an acknowledged acceptance. However, if the other party does not hold up their end of the bargain, it could be difficult to prove that the contract was valid. The standard form of acceptance is to sign the document either physically or electronically.
5. Mutual Agreement
One of the key requirements of a legally binding contract is the mutual assent, or a meeting of the minds. After the offer’s acceptance, both sides should have a clear understanding of their contractual obligations. This essential element aims to prevent disputes or misunderstandings.
6. Legal Capacity
Imagine someone tries to come to an agreement with someone who is not of a legally sound mind, either due to their age or a health condition. Even if they sign the document, their mental capacity could make the contract invalid. According to state and federal laws, you cannot enter into a contract without the proper legal capacity.
This also protects those who accept terms under coercion or undue influence.
Is Notarizing a Business Contract Necessary?
Local laws may require documents like wills and real estate purchase contracts to be notarized. The average business contract does not require this extra step, though you may decide to notarize future documents.
A notary public rules out fraud by checking the ID of the parties involved. They will be a witness to the signing and can offer testimony if disputes arise. A business law attorney may recommend notarizing certain contracts, depending on their unique terms.
How To Enforce Your Business Contracts
Imagine someone does not know what makes a contract legally binding. You meet all six elements mentioned above, and they accept the terms but do not fulfill their obligations. Can you hold them accountable for their actions?
Consult an attorney and gather important evidence supporting your claim. You can take legal action against the breaching party in an attempt to make them hold up their end of the deal.
Any of the parties involved in a business contract could breach its terms. For example, say you partner with a construction company to renovate your commercial building before the grand opening of your business. They would breach the binding contract if they agree to complete the work but only finish half of the renovations with no intention of completing the project.
On the other hand, you could be the breaching party if you offer the construction company a certain amount of money for their services and fail to pay the full value. Disputes like these affect business owners across various sectors.
To resolve a dispute, keep the original document on file. It’s wise to keep both physical and digital copies for easy access. Should disputes arise, refer to the initial contract and seek legal counsel for personalized assistance.
Review the Legality of Your Business Contracts With Anthony Law Group
Now that you know what makes a contract legally binding, you can tell if a form you have signed is enforceable by law. What can you do if your business contract was breached? Turn to Anthony Law Group for assistance with various matters involving contract law.
Our legal counsel practices business law and can draft contracts for all of your company’s transactions. To consult with an attorney, submit an online request form on our website or call (602) 362-239