Takeaways
- Legal contracts are enforceable sets of promises between two parties.
- Valid contracts require offer, acceptance, consideration, and a legal purpose.
- Bilateral contracts involve mutual promises, while unilateral contracts involve one promise.
- Severability keeps agreements valid even if some parts become unenforceable.
- Contracts can be invalidated by illegal terms or lack of capacity.
Before you begin drafting or signing a contract like a rental agreement or employment contract, you need to understand exactly what makes an agreement legally binding and how it protects your interests.
What Is A Contract?
A legal contract is an enforceable set of promises made between two or more parties. Both written and oral contracts can be legally valid, as long as all of the elements required to form a valid contract are satisfied.
Types Of Legal Contracts: Bilateral Contracts vs. Unilateral Contracts
There are two types of legal contracts: bilateral contracts and unilateral contracts.
Bilateral contracts
In a bilateral contract, each party makes a promise to the other party. A contract to purchase goods is a classic example of a bilateral contract. The seller agrees to deliver the goods to the buyer, and the buyer agrees to pay the buyer for the goods once they are received.
Unilateral contracts
In a unilateral contract, one party makes a promise to be carried out on a future date in exchange for a present action by the other party.
A good example of this type of contract is a liability Insurance policy: you perform a present action by paying your monthly premium in exchange for the insurance company's promise to pay your claims in the future.
What Makes A Contract Legal
Contract law is governed by both the common law and statutory law. The common law is created through decisions made by judges, whereas statutory law is written by state and federal legislative bodies, such as Congress.
Generally, contracts do not have to be committed to writing to be enforceable. However, each state has its own "Statute of Frauds", which requires certain types of contracts to be written to be legally valid.
However, all legally binding contracts must involve the exchange of something of value, such as goods, services, or money.
Legal contracts must also clearly and accurately describe the agreement between the parties. Errors, ambiguous or omitted terms, and mistakes can all render a contract invalid.
Elements Of A Contract: Legally Enforceable
Every legally enforceable contract must satisfy four basic elements: Offer, Acceptance, Consideration, and Legality. Each of these elements must exist to make a contract legally valid.
Offer
An offer occurs when one party makes a promise to do something or refrain from doing something.
Acceptance
Acceptance occurs when the offer is accepted unambiguously by the other party. Acceptance can be given through words, actions, or performance of the promise required by the contract.
Consideration
Consideration means that the accepting party promised something of value in exchange for the offered action or nonaction. Consideration law is what distinguishes a contract from a gift.
Legality
The legality element requires that the contract serve a legal purpose. A contract cannot be used to enforce illegal and/or criminal activities.
Severability Clauses in Contracts
The term severability refers to a clause in a legal contract or a piece of legislation that allows one part of the agreement's terms to remain in effect even if some of its other terms are unenforceable.
A severability clause in a contract means that its terms are independent of one another. However, in some cases, a severability clause states that certain provisions of the contract are essential and, therefore, must be met in order for the contract to be enforced.
Severable Services vs. Non-Severable Services
When managing contracts or allocating funds, you must know whether your project falls under a recurring or a project-based model. Go over the key differences between severable and non-severable services below to make sure your agreements are correctly labeled.
| Feature | Severable services | Non-severable services |
|---|---|---|
| Nature | Ongoing, recurring, or continuous. | Singular, finite, and project-based. |
| Delivery of benefit | Earned progressively on each service performed. | Only noted after the entire project is finished. |
| Examples | Janitorial care, IT help-desk support, and routine maintenance. | Systems design, building conversions, and environmental studies. |
How Can a Contract Be Signed?
For a written contract agreement to be valid, it must be signed by both parties. The signatures are legally recognized as each party's agreement to the terms of the contract and to be bound by the obligations of the contract.
Contracts can generally be signed either by hand or electronically.
Until recently, "wet ink" physical signatures were the only type of legally accepted signature. However, with the increase in international business and the improvements in modern technology, digital signatures are now a common and legally recognized practice.
Termination Of A Contract
Most written contracts will include terms that explain when the contract will terminate. Contracts generally terminate on a certain date, upon the performance of the duties of the contract, or at the request of either party.
Many written contracts will also include terms regarding how parties can terminate the contract if one party fails to perform their duties under the contract.
This failure to fulfill contract obligations is called a "breach of contract", or just a "breach". If the contract does not contain terms allowing for the termination of a contract upon a breach, then the non-breaching party can pursue compensation from the breaching party through the court system.
In court, there are several remedies for a breach of contract. Most commonly, the non-breaching party can sue for damages, requesting that the breaching party compensate for the loss suffered because of the breach.
However, in certain situations, a judge may order that the breaching party perform the obligation required by the contract (this is called "specific performance") or terminate the contract.
What Makes A Contract Invalid or Non-Binding?
To create a valid legal contract, certain requirements must be met. Failing to meet those requirements can invalidate an agreement..
If a contract has illegal or vague terms or limits a person's rights, it can be considered a void or invalid contract.
Generally, this is the case when a contract was made with someone who did not have contractual capacity and is not considered a binding contract, nor is a contract that was not mutually assented to.
Individuals who are not considered to have contractual capacity include:
- Anyone under the legal age of consent
- Individuals who are mentally disabled or mentally ill
- Individuals who are intoxicated
The party who lacked capacity can choose to honor the contract, or they can render it invalid.
Additionally, for a contract to be valid, all parties must have agreed to the terms of their own free will. This concept is called "mutual assent". This means if any of the following occur, the contract could be voided:
- One party induced the other party to agree to the contract through fraud, force, threats of violence, or other undue influence
- Both parties had the same mistaken belief about a fact at the time the contract was made.
- One party was tricked into signing the agreement
Errors are included and effect one or both of the parties. Finally, a contract may be invalidated if one party fails to perform its duties.** For example, in a contract for the sale of goods, if the seller never delivers the goods, the buyer will not have to pay.
Resources:
Contract Law - Legal Information Institute, Cornell
Contract Law - Judicial Education Center, University of New Mexico
Takeaways
- Legal contracts are enforceable sets of promises between two parties.
- Valid contracts require offer, acceptance, consideration, and a legal purpose.
- Bilateral contracts involve mutual promises, while unilateral contracts involve one promise.
- Severability keeps agreements valid even if some parts become unenforceable.
- Contracts can be invalidated by illegal terms or lack of capacity.
Before you begin drafting or signing a contract like a rental agreement or employment contract, you need to understand exactly what makes an agreement legally binding and how it protects your interests.
What Is A Contract?
A legal contract is an enforceable set of promises made between two or more parties. Both written and oral contracts can be legally valid, as long as all of the elements required to form a valid contract are satisfied.
Types Of Legal Contracts: Bilateral Contracts vs. Unilateral Contracts
There are two types of legal contracts: bilateral contracts and unilateral contracts.
Bilateral contracts
In a bilateral contract, each party makes a promise to the other party. A contract to purchase goods is a classic example of a bilateral contract. The seller agrees to deliver the goods to the buyer, and the buyer agrees to pay the buyer for the goods once they are received.
Unilateral contracts
In a unilateral contract, one party makes a promise to be carried out on a future date in exchange for a present action by the other party.
A good example of this type of contract is a liability Insurance policy: you perform a present action by paying your monthly premium in exchange for the insurance company's promise to pay your claims in the future.
What Makes A Contract Legal
Contract law is governed by both the common law and statutory law. The common law is created through decisions made by judges, whereas statutory law is written by state and federal legislative bodies, such as Congress.
Generally, contracts do not have to be committed to writing to be enforceable. However, each state has its own "Statute of Frauds", which requires certain types of contracts to be written to be legally valid.
However, all legally binding contracts must involve the exchange of something of value, such as goods, services, or money.
Legal contracts must also clearly and accurately describe the agreement between the parties. Errors, ambiguous or omitted terms, and mistakes can all render a contract invalid.
Elements Of A Contract: Legally Enforceable
Every legally enforceable contract must satisfy four basic elements: Offer, Acceptance, Consideration, and Legality. Each of these elements must exist to make a contract legally valid.
Offer
An offer occurs when one party makes a promise to do something or refrain from doing something.
Acceptance
Acceptance occurs when the offer is accepted unambiguously by the other party. Acceptance can be given through words, actions, or performance of the promise required by the contract.
Consideration
Consideration means that the accepting party promised something of value in exchange for the offered action or nonaction. Consideration law is what distinguishes a contract from a gift.
Legality
The legality element requires that the contract serve a legal purpose. A contract cannot be used to enforce illegal and/or criminal activities.
Severability Clauses in Contracts
The term severability refers to a clause in a legal contract or a piece of legislation that allows one part of the agreement's terms to remain in effect even if some of its other terms are unenforceable.
A severability clause in a contract means that its terms are independent of one another. However, in some cases, a severability clause states that certain provisions of the contract are essential and, therefore, must be met in order for the contract to be enforced.
Severable Services vs. Non-Severable Services
When managing contracts or allocating funds, you must know whether your project falls under a recurring or a project-based model. Go over the key differences between severable and non-severable services below to make sure your agreements are correctly labeled.
| Feature | Severable services | Non-severable services |
|---|---|---|
| Nature | Ongoing, recurring, or continuous. | Singular, finite, and project-based. |
| Delivery of benefit | Earned progressively on each service performed. | Only noted after the entire project is finished. |
| Examples | Janitorial care, IT help-desk support, and routine maintenance. | Systems design, building conversions, and environmental studies. |
How Can a Contract Be Signed?
For a written contract agreement to be valid, it must be signed by both parties. The signatures are legally recognized as each party's agreement to the terms of the contract and to be bound by the obligations of the contract.
Contracts can generally be signed either by hand or electronically.
Until recently, "wet ink" physical signatures were the only type of legally accepted signature. However, with the increase in international business and the improvements in modern technology, digital signatures are now a common and legally recognized practice.
Termination Of A Contract
Most written contracts will include terms that explain when the contract will terminate. Contracts generally terminate on a certain date, upon the performance of the duties of the contract, or at the request of either party.
Many written contracts will also include terms regarding how parties can terminate the contract if one party fails to perform their duties under the contract.
This failure to fulfill contract obligations is called a "breach of contract", or just a "breach". If the contract does not contain terms allowing for the termination of a contract upon a breach, then the non-breaching party can pursue compensation from the breaching party through the court system.
In court, there are several remedies for a breach of contract. Most commonly, the non-breaching party can sue for damages, requesting that the breaching party compensate for the loss suffered because of the breach.
However, in certain situations, a judge may order that the breaching party perform the obligation required by the contract (this is called "specific performance") or terminate the contract.
What Makes A Contract Invalid or Non-Binding?
To create a valid legal contract, certain requirements must be met. Failing to meet those requirements can invalidate an agreement..
If a contract has illegal or vague terms or limits a person's rights, it can be considered a void or invalid contract.
Generally, this is the case when a contract was made with someone who did not have contractual capacity and is not considered a binding contract, nor is a contract that was not mutually assented to.
Individuals who are not considered to have contractual capacity include:
- Anyone under the legal age of consent
- Individuals who are mentally disabled or mentally ill
- Individuals who are intoxicated
The party who lacked capacity can choose to honor the contract, or they can render it invalid.
Additionally, for a contract to be valid, all parties must have agreed to the terms of their own free will. This concept is called "mutual assent". This means if any of the following occur, the contract could be voided:
- One party induced the other party to agree to the contract through fraud, force, threats of violence, or other undue influence
- Both parties had the same mistaken belief about a fact at the time the contract was made.
- One party was tricked into signing the agreement
Errors are included and effect one or both of the parties. Finally, a contract may be invalidated if one party fails to perform its duties.** For example, in a contract for the sale of goods, if the seller never delivers the goods, the buyer will not have to pay.
Resources:
Contract Law - Legal Information Institute, Cornell
Contract Law - Judicial Education Center, University of New Mexico
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