Creating Legally Binding Contracts

Legal Contract

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January 9, 2016

You’re in business. Like it or not that includes dealing with suppliers, clients, service providers – in other words, people! And by “dealing” we mean transacting with in a contractual manner. While on the one hand, you should always aim to transact with people whose word you can trust, a legally-binding contract is the culturally-accepted framework for your transaction and – better yet – should things go wrong, it will protect the rights of both of you. Naturally, the strong recommendation is to use a lawyer for all matters of contract (that too protects you, from your own lack of legal training as much as anything else). However, even though you may be outsourcing for legal expertise, you still need to know enough to understand the advice when you receive it.

A legally-binding contract consists of two principal building blocks: the agreement (which consists of offer and acceptance) and the consideration, both of which contain various elements…

The agreement.
The agreement contains the “meeting of minds” and the basic process is one of a party offering terms and conditions which are then accepted by the other party – perhaps in return for consideration. In some cases, the initial offer is amended or rejected by the recipient in which case it becomes a counter-offer which the first party then considers with the same three options in mind – acceptance, amendment or rejection. The process may run through a sequence of offers and counter-offers.

However simple or drawn out the process is, once agreement is reached this is the heart of what both parties have signed up to. That’s “signed up” in a figurative sense because the agreement may be oral or written and is likely to be binding either way. Different states have different laws but some contracts (commonly those concerning real estate or those that will last for more than a year) must have written agreements – check your local requirements and regulations. As well as offer, acceptance and consideration, one of the other main requirements for an agreement to become binding is the requirement for the parties to have legal capacity to enter the agreement. In other words:

  • Both parties must be of legal age, i.e. not minors (under 18 years old).
  • Neither must be under the influence of drugs or alcohol.
  • Both must be of sound mind.

Put simply, the parties must be “competent” to enter into a legal agreement. They must also have the legal power to enter into the agreement. Most people have the legal power to represent themselves but if the person you are dealing with is representing another company or other third party, the question of “legal power” bears checking closely.

The consideration.
Consideration is ‘the price paid for a promise’. It is the value that each party must receive from the agreement in order for it to be legally-binding. A contract in which a party receives no value for his obligations may not be a legal contract per se, and may in certain circumstances be deemed to be a voidable gift from one person or body to another (and gifts are not necessarily legally-binding). The usual form of consideration is an exchange of money from one side and the supply of a product or service from the other. The consideration is linked to (and dependent on) many of the other standard contract provisions, including:

  • Obligations and Conditions of the Contract – put simply, what each party needs to do to have fulfilled their side of the bargain.
  • Performance – to what standard or criteria each party must carry out their obligations.
  • Payment Terms – how much and when by.  Liabilities – a clear statement of what each party if liable for.
  • Breach of Contract – agreement on what will happen (or what parties’ options are) in the event that one of them fails to carry out their obligations under the agreement.

Optional but highly recommended clauses.
The above components are the absolute minimum for a legally-binding contract. However, even though the following are not – strictly speaking – required by law, the following so-called “boilerplate” provisions should be included in any contract:

  • Confidentiality clause – ensuring the parties keep the terms of the contract confidential.
  • Termination clause – setting out when each party can legally terminate the contract.
  • Arbitration clause – putting any disagreements in the hands of an independent arbitrator.
  • Entire agreement clause – clearly stating that the agreement and conditions are those written in the
    contract, independent of any previous agreements or condition (a sort of “clean slate” clause).
  • Force majeure clause – agreeing that if the contract can no longer be carried out due to an event beyond
    the control of either party then the contract is no longer valid.
  • Governing law clause – setting out the law that applies to the contract and the courts that shall have jurisdiction to determine disputes.
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