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What makes a contract legally binding?

Although many people think of contracts as being long sheets of paper filled with fine print and legal jargon, in fact, the concept of a contract is very simple. A contract is designed to spell out the conditions of a transaction. As such, a contract can be very informal and yet be valid and legally binding. As long as the necessary elements are included, a written document is a valid and legally binding contract.

The Offer

An offer is a legal term for the goods or services that are being made available. A potential employer may make a job offer to a promising candidate. In real estate, the asking price for a house represents an offer also. Each contract must contain an offer to be considered legally binding.

Acceptance or Rejection

Once the offer is made, the other party or parties may accept the offer or reject it. If the offer is accepted, then the parties can go on to finalise the agreement. If the offer is rejected, the rejecting party may make a counteroffer, or an offer that alters one or more terms of the original offer. One example of a counteroffer is when a buyer proposes a lower price or requests a better interest rate for a house he is otherwise interested in buying. If the counteroffer is accepted, then the contract can go forward.

Mutual Consideration

When an agreement has been made, this means that both parties have consented on the fundamental terms of a contract. In the case of a job offer, the potential employee accepts the offer made by a potential employer and offers her services in exchange for the paycheck, benefits and other terms of the offer of employment. There must be mutual consideration for a contract to be considered legally binding.

Performance or Delivery

The performance or delivery is the execution of the terms of the contract. For instance, with the purchase of a house, the buyer delivers the down payment and mortgage agreement, while the seller delivers the house (by turning over the keys). Another example is a book contract, where the author delivers a finished manuscript to the publisher in exchange for an advance and royalties.

Unilateral vs. Bilateral Contracts

Most contracts are bilateral, in that each party is actively involved in the negotiation of the terms of the contract. However, in a unilateral contract, the offer is made, and the buyer (or person accepting the contract) accepts the terms of the contract as is. One example of a unilateral contract would be if a sign were posted in a baseball field, offering a cash prize to any batter who hit the sign with a home run. The execution of the contract would come with the home run and the payment of the cash prize.

Expert Insight

Although most contracts are written, oral contracts are also valid and legally binding, except when they fall under the Statute of Frauds. The Statute of Frauds dictates the terms of contracts that must be in writing to be legally binding, usually contracts for large amounts of consideration (or money) or long-term contracts.

Illegal contracts (contracts for illegal acts or substances), or contracts made in violation of public policy or contracts, are never legally binding.

Contracts that are not negotiated in good faith (for instance, fraud) or contracts made under duress (or force) or undue influence (unfair manipulation) are also not considered legally binding.

About the Author

Chris Blank is an independent writer and research consultant with more than 20 years' experience. Blank specializes in social policy analysis, current events, popular culture and travel. His work has appeared both online and in print publications. He holds a Master of Arts in sociology and a Juris Doctor.

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