People engage in numerous transactions throughout their life, and to make them legally binding, they rely on contractual agreements. Contracts endorse each party’s interest and ensure they fulfill their obligations. Legal remedies are available if either party breaches the contract.
Contractual agreements may be verbal, in writing, or a combination of the two. However, a written contract is necessary in some circumstances, such as real estate deals or long-term agreements. Individuals can look to contract law and their respective jurisdictions to see if a business agreement must be in writing. But what makes a written document legally binding? Keep reading to learn all about valid contracts, voidable contracts, and their fundamentals.
A valid contract is a legally enforceable agreement between two or more parties that meets the essential elements required by law. A party can either be an individual, a company, or a legal entity. Employment contracts, purchase orders, and tenancy agreements are all legally binding documents.
Contracts are subject to the state laws in which they are executed. Depending upon the subject of the agreement, it can fall under State’s Common Law or Uniform Commercial Code. While UCC is for contracts for the transaction of goods or services, Common Law governs standard business agreements. Throughout a business relationship, these evolving laws assist parties in resolving contractual disputes. Now that we know what a valid contract is, let’s go over the fundamental components that make it so.
The legal validity of a contract depends on several key elements: agreement, capacity, consideration, intention, and governing laws.
While it seems like stating the obvious, an agreement between all the parties is essential for a valid contract. They must have a mutual understanding and see eye to eye on all major points. A preliminary discussion about the potential for creating a contract and consequent negotiations can assist all parties in getting on the same page. Usually, an offer and acceptance serve as a demonstration of mutual agreement. One party makes an offer outlining the contract terms, and the other accepts the offer with no changes or conditions.
One of the parties must make an offer to initiate an agreement. The offer, whether written or oral, must be clear, definite, and communicated to the other party. The offering party must specify the terms and conditions to the other party and is legally obligated to follow them. An invitation to treat, on the other hand, is when a party invites someone to make an offer. In most cases, there is no intent to be bound by an invitation to treat, and it does not constitute a legally binding contract. For example, a $300 laptop advertisement does not imply that the advertisers must deliver to everyone who accepts the offer.
Once there’s an offer on the table, the other party must accept it for there to be a mutual agreement. The acceptance should be unconditional and communicated in response to the offer. Both parties should have a meeting of the minds, meaning they understand and agree to the same terms and conditions. Quick and univocal acceptance is hardly the norm during business arrangements. That is why parties negotiate and make counter-offers to reach an agreement. What constitutes an appropriate acceptance, for example, signature or payment, differs depending on the type of contract.
Consideration refers to something of value exchanged between the parties, such as money, goods, services, or a promise to do or refrain from doing something. It is the basis for the contract and is typically required to make the contract legally binding. It ensures that both parties have a vested interest in the outcome of the agreement. Exchanging something of value distinguishes a contractual document from a gift or one-sided promise and makes it legally enforceable. In both personal and business contracts, consideration cannot be anything illegal.
The contracting parties must have the legal capacity to do so. It means they must be of legal age and have the mental capacity to understand the terms and implications of the contract. Contracts entered into by minors, individuals lacking mental capacity, or individuals under the influence of drugs or alcohol cannot be deemed valid. Each party must voluntarily and freely accept the offer. Therefore, coercion, fraud, and misrepresentation can also affect the legality of agreements.
The parties must have a genuine intention to create legal relations. If it is determined that one or both parties did not have a genuine intention to be legally bound by the contract, it may be deemed invalid. It is particularly relevant in situations where social or domestic agreements are involved, as they are generally presumed to lack the intention to create legal relations. Moreover, the purpose of the contract must be legal and not against public policy. A contractual agreement that encourages conduct deemed immoral or illegal or involves illegal activity will probably be ruled invalid by the courts. The contract should not violate any laws or public regulations.
Some contracts may require specific formalities to be valid. For example, certain contracts, such as real estate contracts, may need to be in writing and signed by the parties involved. Additionally, certain contracts may require witnesses or notarization. It is important to understand and comply with any formalities required by law for the particular type of contract.
A voidable contract is a type of contract that is initially valid and enforceable, but due to certain legal defects or circumstances, one or both parties have the option to void or cancel the contract. It means that the contract is susceptible to being declared void by the party with the right to do so. The party with the power to void the contract can choose whether to affirm the contract and continue with its terms or to void it and be released from any further obligations.
Here are some common reasons why a contract may be considered voidable:
Lack of Capacity: If one or both parties entering into the contract lack the legal capacity to do so, such as being a minor or mentally incompetent, the contract may be voidable at the discretion of the party lacking capacity.
Misrepresentation or Fraud: If one party makes a material misrepresentation or engages in fraudulent behavior to induce the other party to enter into the contract, the innocent party may have the right to void the contract.
Duress or Undue Influence: If one party is forced or coerced into entering the contract under duress or undue influence, the contract may be voidable at the discretion of the affected party.
Mistake: If both parties enter into the contract based on a mutual mistake regarding a material fact, the contract may be voidable by either party.
Unconscionable Terms: If the terms of the contract are highly unfair or oppressive, such that they shock the conscience and one party is taken advantage of, the affected party may have the right to void the contract.
Illegality: If the subject matter or purpose of the contract becomes illegal or against public policy after the contract is formed, one or both parties may have the option to void the contract.
A party seeking to void the contract typically needs to take action within a specific timeframe and follow the legal procedures outlined in applicable laws. If the right to void the contract is not exercised within the specified time or in the correct manner, the contract may become valid and enforceable.
Voidable contracts differ from void contracts, which are contracts that are deemed invalid from the beginning, usually due to a fundamental legal defect. Void contracts are considered to have no legal effect and cannot be enforced by either party.
A valid contract is a contract that meets all the essential elements required by law and is enforceable by both parties involved. A voidable contract is an agreement that is initially valid and enforceable, but due to certain legal defects or circumstances, one or both parties have the option to void or cancel the contract.
It's essential to understand that the distinction between the two depends on the specific circumstances and the applicable laws in a particular jurisdiction. Adopt Dock 365 contract management software for competent agreements and consult legal counsel to ensure a clear understanding of the legal implications and options available for your organization.
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