As a contract lawyer, many clients ask me if their contracts are legally binding. By definition, if an agreement meets the requirements of a contract, then the contract is legally binding. Further, contracts are legal documents by their nature. So what makes a contract binding and enforceable? And what are some factors that make a contract not binding? Below, I will explain that all for you.
Elements of a Contract
The basic elements of a contract are: 1) offer, 2) acceptance, and 3) consideration. ‘Consideration’ is that thing that the parties bargain for exchange and distinguishes a mere ‘promise’ (which is not legally binding) from a contract. For example, if a painter promises to paint your house but then never does, you probably have no legal claim (there are exceptions to this). However, if you pay the painter (the money is consideration) and the painter does not paint, then you have a contract with the painter and the painter breached the binding contract.
At its core, a contract is very simple. It does not necessarily have to be in writing, nor does it need to be written in complicated legalese. There are, however, other important requirements such as ‘clear and definite terms’ and a ‘meeting of the minds’ so it’s still important to have a well written contract. But having a user-friendly contract is more important than having obscure legalese language.
Things That Can Make Your Contract Partially or Completely Nonbinding
There are some things you should definitely avoid if you want your contract to be legally binding:
- Having Illegal Terms: This is common when there is an unequal difference in power between the parties such as between employees and employers. An employer (sometimes unknowingly) will include terms in the employment contract that violate an employee’s legal rights. Examples of violations are agreeing that employee be paid less than minimum wage or not having certain rights under the Family Medical Leave Act (FMLA). When a contract has illegal terms, a court may not enforce the contract either partially or completely.
- Lack of Consideration. In many contracts, consideration is obvious such as paying your painter money to paint your house. However, there is much litigation about what constitutes acceptable consideration. For example, actions of the past are not consideration. In other words, the bargained consideration must be negotiated at the time of the contract. If you paid your painter last year for a past service, the consideration does not carry over to all future paint jobs. Another highly litigated ‘consideration’ issue is the concept of forbearance as consideration. If a party agrees to give up a legally protected right in exchange for the contract’s benefit, this can be consideration. In one case I had, my client agreed to transfer her inheritance rights to her sister in exchange for her sister giving the equivalent later on. Opposing counsel argued that this ‘contract’ had no consideration but we successfully argued that when my client gave up her right to her inheritance, this was deemed ‘consideration.’
- A Contract for Illegal Acts. Surprisingly enough, there are people who try to enforce contracts that are outright illegal. Although it may be intuitive that courts will not enforce a contract that requires a person to do something illegal or will not punish someone who refuses to engage in an illegal act, the illegal action in dispute is not always obvious. In one case I dealt with, a real estate agent sued to get paid for his commissions for a transaction in another state that the agent was not licensed in. The defendant was able to use the concept of ‘illegal contract’ to have the contract nullified.
… A Note About Consideration and Binding Contracts
The right to contract is a legal right. This means that courts do not like to tell people what they can contract about and how they can contract. Courts, however, can create guidelines so that contracts do not offend public policy or violate the law. In that vein, courts do not determine if consideration is ‘adequate’ (with some exception such as non-compete clauses). For example, if your painter agreed to paint your house for $10 and then later retracts and says he no longer wants to paint because it is not enough money, he can not argue in court that the contract was not binding because he is not being paid enough. On the other side of that coin, if you agreed to pay your painter $1,000,000 to paint one room in your house, then change your mind because you feel like it was too much money, the court will not determine that $1,000,000 is too much to pay to paint one room and will not void the contract on that basis. Simply, the courts will not make decisions about your business on the point of consideration alone.
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