If your friend sends you an email asking you to split the cost of a vacation with him, and you reply with “Let’s do it!” — have you entered into a legally binding contract? Maybe! If you were on your second glass of wine when you sent that reply, does the answer change? It might!
As we move into the holiday weekend where there will be plenty of burgers and beers, I thought it appropriate to share the requirements of a legally binding contract with you all.
What Is Required to Form a Binding Contract?
Most people are savvy enough to know that a contract is an enforceable agreement between two or more people or entities. However, you may or may not realize the fundamental elements of a valid contract. Understanding the basic components of a legally valid contract can be very helpful in conducting daily activities so you don’t inadvertently make a legally binding agreement without knowing you are doing just that. There are four essential elements: capacity of the parties, mutual assent, consideration, and legality.
Capacity of the Parties. Don’t Be Brittany Spears.
A core element of an enforceable contract is that the parties have legal capacity. This means that the parties must be capable of fully understanding what they are doing, as well as the consequences of their actions. Those who are under age 18 or in a coma would lack the capacity to enter into a contract. Sometimes, however, it is not so clear. An older person suffering from intermittent dementia, which comes and goes, would have capacity to contract during periods in which her mind was sound. Contracts will not be enforced against parties who were not able to understand what they were doing at the time they entered into the contract.
Word to the wise. Make sure you don’t form a contract with someone who is under the influence of drugs or alcohol at the time they entered into the agreement. Remember Brittany Spears and her wedding in Vegas? No capacity = annulment!
Mutual Assent. Your Minds Must Attend a Meeting Together?
The next element of a legally binding contract is mutual assent. This is often called the “meeting of the minds.” Mutual assent means that the parties to the contract meant to enter into the agreement on certain terms. This is usually proven by showing that an offer was made and that it was accepted.
A super easy example of mutual assent is seen in the process of buying a house. The buyer makes an offer to buy a specific house for a specific price. The offer is drawn up with all of the terms that the buyer wants and is sent to the seller. The seller is usually given a limited amount of time to accept the buyer’s offer. The seller may also reject the buyer’s offer and propose a counteroffer, with new terms, usually a higher price. The buyer is then free to accept or reject, or she may make a counteroffer herself. The process continues until it either falls apart or until the two reach mutually agreeable terms. Once those terms are found, there is mutual assent.
Word to the Wise. Mutual assent does not have to be in writing unless we’re talking about the purchase and sale of real estate and a few other types of agreements. It can happen just as easily in most cases by email or even verbally. Be careful what you agree to!
Consideration. This Doesn’t Mean Being Nice.
A contract is not valid and enforceable unless it is supported by consideration. Consideration in contracts doesn’t mean you have to be nice or your contract isn’t valid. It means giving something of value in exchange for something of value. In the home-buying example above, the buyer is promising to give money for the house, and the seller is promising to give the house to the buyer after payment is made. However, consideration is not always this straightforward. The idea is that both parties to the contract have to give up or receive something of value.
In the case of a personal services contract in which you are delivering services, you are giving up your time as consideration to enter into the agreement whereas the other party is giving you a commitment to pay for your time.
Legality. You Can’t Hire Someone to Beat up Your Boss.
The last element of a binding contract is that it must have a legal purpose. Judges will not enforce illegal contracts. It is easy to understand that a contract to kill a person or to pay someone to sell drugs would not be enforceable. However, as with many legal concepts, it is not always that simple. For instance, a contract to enforce a gambling debt might be legal in some states but not in others, depending on state law.
A Special Requirement: A Writing
Some contracts carry one additional element: They must be in writing. This requirement is known as the Statute of Frauds. Sounds scary, but it’s not. Basically, it just means that state law determines what types of contracts must be in writing. Most commonly, these are contracts to buy land and contracts for services that cannot be performed in less than one year.
People use contracts all the time. If you need help with your contracts, give us a call. We’d be happy to talk with you!