A binding contract is a legally enforceable agreement. So, if you agree to something in a binding contract and fail to follow through, the other party can take legal action against you.
In this article, we'll look at the basics of contract law including what a contract is and what makes a contract legally binding.
Table of Contents
- What is a contract?
- What makes a contract legally binding?
- Different types of contracts
- How do you make a contract?
- When do informal contracts become legally binding?
- Are verbal contracts legally binding?
- Is a contract legally binding without a signature?
- What makes a contract invalid?
- Does a contract need to be approved by a solicitor to be legally binding?
- Can you break a legally binding contract?
- Get expert advice on legally binding contracts from Lawhive
What is a contract?
A contract is a promise, made either in writing or verbally, that is legally enforceable. It involves one party agreeing to do something in exchange for something as value, known as consideration.
What makes a contract legally binding?
For a contract to be legally binding, there must be:
An offer
Acceptance of that offer
Consideration (something of value promised in exchange for the actions)
The willingness of both parties to be legally bound by the terms of the agreement.
Contracts must also comply with all applicable laws and can’t involve anything illegal. In a contract, all parties should:
Receive a benefit
Understand that they are agreeing to be bound by the contract
Have the legal ability to agree to the contract (i.e. have mental capacity).
Different types of contracts
Contracts come in various forms. They can be:
Unilateral: This involves a promise in exchange for a specific action or performance.
Bilateral: This involves a promise exchanged for another promise.
Contracts can also be express, with explicitly stated terms, or implied when they arise from circumstances rather than explicit terms.
In business, commonly used contracts include sales agreements, NDAs, and service agreements.
How do you make a contract?
Contracts can be established or changed through telephone calls, face-to-face conversations, emails, text messages, or non-verbal actions.
A recent court ruling in Canada established that a thumbs-up emoji was legally binding in establishing a contract between two business people.
When do informal contracts become legally binding?
Informal contracts can be convenient, however their informality can sometimes lead to uncertainty over their legality.
For an informal contract to become binding, both parties must agree to the same offer and should both intend to follow through with the agreement.
If you are unsure whether an agreement is legally binding, a solicitor can review the contract and advise on your situation. Alternatively, you might get a solicitor to draft a contract to protect your interests.
Are verbal contracts legally binding?
In common law, verbal agreements can be legally binding if they include the essential components mentioned in this article.
However, contracts involving land leases, transfers, options, employment, and certain types of intellectual property must be made in writing to ensure both parties understand their rights and obligations.
In any case, verbal agreements can be difficult to prove if a dispute arises. Therefore, if you’re looking to make an agreement it is a good idea to put it in writing.
Is a contract legally binding without a signature?
Typically, written contracts require signatures from all parties to be legally binding. However, there are instances where an unsigned written contract can still hold legal weight.
For instance, suppose a small business owner negotiates office supply terms with a supplier over email, detailing the supplies, quantities, prices, and delivery schedules. Although neither party signs a formal written contract, if both proceed with the transaction based on these terms, their actions indicate an intention to be bound by the agreement.
Consequently, the transaction can be deemed legally binding and enforceable.
What makes a contract invalid?
A contract may be ruled as invalid if:
One party cannot enter into a contract (i.e. they’re underage or mentally incapacitated).
One party is coerced into entering into the contract.
One party exerts undue influence over the other, affecting their decision-making.
One party provides false information or fails to disclose material facts relevant to the contract.
The terms of the contract are excessively unfair or one-sided.
The contract would violate public policy or break the law.
A significant mistake is made regarding the contract’s subject matter or terms.
If fulfilling the contract becomes impossible because of unforeseen circumstances.
Does a contract need to be approved by a solicitor to be legally binding?
Agreements don’t have to be prepared or approved by a solicitor to be legally binding. Nor do they have to be witnessed by a solicitor.
However, if you are ever unsure of what the terms of a contract mean or want to make sure your interests are protected, it might be a good idea to use a solicitor to draft or review your agreement.
Can you break a legally binding contract?
If one party in a legally binding agreement doesn’t fulfill their obligations they are in breach of contract.
When this happens, the problem can be resolved between the two parties by negotiation or one party may choose to take the matter to court to enforce the contract.
Get expert advice on legally binding contracts from Lawhive
Our network of lawyers is here to assist with contract matters quickly and affordably. Whether you need help drafting, reviewing, or enforcing a contract, we're here for you.
Contract issues can be confusing and our specialists will listen to your matter, create a plan, and give you a clear quote for the services of commercial lawyers in our network.
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