Contracts are everywhere in business, and can be as complex as multi-page documents on legal paper, or as simple as a handwritten, signed note. Is one more valid than another? Can someone question the validity of your agreement with a fellow freelancer just because it wasn’t in an official legal form?
In this article from SignHouse, we’ll go over exactly what a contract is, so you can go forth and close deals with confidence. And if you’re having trouble writing up a contract, feel free to look through dozens of our ready-made templates, which will help get you started!
What is a legally binding contract?
A contract is any document that spells out the rights and responsibilities of both parties to an agreement. It contains explicit directions for what each party will do for the other, and usually include guidelines when there’s been a breach of contract. It becomes legally binding when both people have agreed to the contract, usually with a signature.
Elements of a legally binding contract
A contract starts when one party offers something to another in exchange for something they want. It could be as simple as a roommate contract or as complex as leasing an office space. For example, suppose you offered $1000 per month to lease office space in a new building. Once you send the offer over to the owner of the building or leasing company, the contract officially exists. The contract begins its life when it has been seen by both parties.
Contracts can also be established verbally. It would be possible to initiate a contract by speaking to the leasing company about the office space you want. However, in the vast majority of business situations, it is advisable to have a written contract in place.
To continue the office lease example, the next step in forming a contract between you and the leasing company is for the company to accept your offer of $1000 per month for the space. The leasing company is generally considered to have accepted the terms of your contract when they sign it.
However, if they bargain or make a counteroffer, that’s a rejection of your original contract and calls for the establishment of a new one. Suppose you ask for $1000 a month, and the leasing company provides a counter-offer of $1500 per month. A new offer has been made. If you accept this, the terms of the contract between you and the leaser are now established. You’ll give them $1500 per month, and they will lease you the office space for a year.
Capacity or Competence
Both parties entering into a contract must be considered capable of understanding the deal. Minors, mentally disabled persons, or intoxicated persons are generally not considered to have the legal capacity required to enter into a contract. This is why if a 16-year-old wants to buy a car, he must have a co-signer of legal age. Anyone who can write can sign a contract or create a digital signature, but if there is doubt that they understood the contents of the contract, the signature doesn’t represent a legally binding agreement.
Mutuality or Meeting of the Minds
Both parties must be equally bound to the obligations of the contract. If one party reserves the right to cancel at any time while the other party is forced to carry out their side of the agreement without stipulation, the contract might not be fully legal. This is why contracts usually come with certain conditions for breach of contract.
For example, once Elon Musk had contracted to buy Twitter, he would have had to pay a very large settlement in order to back out of the deal. This kind of stipulation was a way for Twitter’s lawyers to protect their own interests and help the deal move forward.
Consideration is each party’s exchange of value. To go back to our lease example, your consideration was $1500, and the lessor’s consideration was their office space. Each party must bring equal consideration, or equal value, to the deal.
Finally, a contract must follow all the existing laws of the land.Suppose you were starting a new job at a supermarket and their contract stipulated that you’d be paid less than the federal minimum wage. This would be illegal, even if you agreed to sign. In order to be upheld in a court of law, the actions undertaken in the contract must not violate any other laws.
Keep in mind, ignorance of the law isn’t an excuse. It’s worth researching federal and state law to see whether your contract will be affected. This is equally important if you’re writing contracts in other countries too.
Binding vs. Non-Binding Contract
A binding contract is one that includes features from all the points listed here. A non-binding contract is either missing one of these features, such as mutuality, or contains a disclaimer that states that the contract is non-binding.
Why is it Important to have a Legally Binding Contract?
If you have a legally binding contract, you can bring any disputes or breaches of contract to court to have your grievances resolved. If you have a non-binding contract, or a verbal-only contract with no physical proof, it may be difficult to obtain the legal outcome you need.
Can Help Resolve Disputes
A clear, well-written contract can make it easy for both parties to understand what they need to do. If any disputes arise during the contract period, both parties can simply refer to the contract for clarification.
A contract provides a sense of safety and security for both parties. They both know that their rights are protected and that the other party has a contracted obligation to provide what they said they would provide. This helps to keep both parties’ interests protected.
Help Businesses Run Smoothly
Businesses run more smoothly when there is a sense of trust built into the B2B relationship. Contracts provide that trust and allow businesses and individuals to interact freely with one another.
How to Create a Legally Binding Contract
Step 1: Select Template
Don’t want to spend time drafting a contract that might or might not be legal? SignHouse offers a full line of legal-vetted templates for your business needs. Simply choose one and fill in your details.
Step 2: Write Details of Agreement
State exactly what each party of the contract will be obligated to do. This includes the consideration from each party, time frames, consequences for breach of contract, and any circumstances that might make the contract null (such as impossibility of contract).
Step 3: Add Addendum if necessary
If this new contract is a modification of an existing contract, the parties may wish to simply add an addendum to the old contract instead of drafting a new one.
Step 4: Confidentiality Clause
If the contract contains trade secrets or personal information, a confidentiality or nondisclosure clause can be added. The party receiving the confidential information will be obliged to keep it that way.
Step 5: Termination Clause
This part of the contract defines what actions will end the contract. This is usually a length of time; for instance, if you contracted to lease a building for a year, the termination date would be the end of the year.
Step 6: Make sure all elements are present for a legally binding contract
Check the boxes for the rest of the legal elements of a binding contract. The offer and acceptance are ready. Do you have mutuality, consideration, legality and capacity?
Step 7: Include space for signatures
Finally, you have to have a space for both parties (and any witnesses if necessary) to sign the contract. If you are conducting your business on pen and paper, this will be the dotted line at the bottom. However, if you are conducting business remotely, going paperless, or simply want your contract signed faster, you can use an e-signature that has the same legal weight as a wet-ink signature.
At what point does an informal contract become binding?
Informal contracts become 100% legally binding when all of the parties put their signatures on the contract. Make sure the file includes mutual assent, offer, acceptance and consideration.
Informal contracts can be legally binding with both wet ink signatures and/or electronic signatures. As long as the file is signed by all parties, it'll be legally binding.
Creating a legally binding contract doesn’t have to be difficult once you know what to include. Make sure you and your business partner are on the same page, all the information is laid out in a clear format, and everything is legal, and you’re good to go.
SignHouse has all the tools you need to create a great contract, start to finish. Now that you’ve read this guide, jump over to our templates page and find the one that works for you. A lot of the work is done for you, so all you have to do is fill in your info and send it to your team or business partner for signatures. SignHouse will also generate legal, secure e-signatures on desktop or mobile so you can sign documents wherever you are in the world. Try today for free.
Can cheques be digitally signed?
Yes. All you have to do is upload the cheque, select your signature (it's free), and add it to the document.
What makes a contract null and void?
A plethora of things can make a contract null and void:
- It doesn't respect the 4 conditions for it to be enforceable: A contract, regardless of whether it's handwritten or not, needs to tick the the following boxes: A) Mutually agreed by both parties, B) Have legal validity, C) Capacity, D) Consideration.
- It's been tampered with
- It's been damaged
- It's been created by a party that was under the influence
- It's been created by a party that doesn't have the mental facilities
- It presents mistakes
- It presents terms that were violated by any party
- It presents information or data that is misrepresented