Every professional relationship starts with a business contract. But many business owners often overlook the importance of written legal contracts and often fall into the trap of making their agreements verbally when starting out.
However, as your business matures and grows, it’s essential you have all your legal agreements in writing. And on top of simply being in writing, every contract you have needs to include six essential elements in order to be considered valid and legally binding. Essentially, if you don’t have these elements in a contract, you don’t have a contract.
If your contracts are missing any of these components, they might not stand up to legal scrutiny, putting you and your business at risk, causing you stress and ultimately, costing you money.
Consider these elements legal table stakes for your business – the minimum legal requirement for a business agreement. Ensuring you have these six essentials will help protect you and your business in the future.
An offer is effectively a promise that is to be honoured, assuming both involved parties accept the terms of the agreement. The party that makes the offer is called ‘the offerer’ while the receiving party is called the ‘offeree.’ A contract effectively begins when the other party accepts the terms of the offer. There are often negotiations, or counter offers at this stage, where both parties suggest amendments to the offer until they’re both satisfied. There can sometimes be several rounds of negotiations during this phase.
[Read our blog: Get deals closed faster with Caravel’s Contract Automation service]
Acceptance means that both parties have unconditionally agreed to the terms of the offer. In order to make this agreement legally binding, both parties should sign the contract. Without acceptance, there is no contract.
Acceptances can be made verbally, but they are easier to challenge if there is vagueness around the terms of the offer, so it’s best to have it in writing.
Consideration refers to the agreement to exchange something of value, usually money. Generally, this is the exchange of money for goods or services. Consideration can also include rights, responsibilities or promises.
A contract cannot be binding unless there is something of value exchanged for fulfilling an obligation. A contract can sometimes have a dollar amount as low as $1, which is a token amount but still sufficient to make the contract legally binding.
[Read our blog: What you need to know about arbitration clauses in contracts]
4. Intention to create legal relations
The intention to create legal relations is one of the trickier elements of a contract. Also referred to as a ‘meeting of the minds’, it essentially means that both parties are fully aware they are entering into a legally binding contract.
When courts review a contract, they examine how the parties entered the agreement. For it to be binding, each party must have voluntarily agreed to the terms, acknowledge the contract is legitimate and consent to the terms of the contract.
Where this can get complicated is the use of ambiguous words and phrases. A party can dispute or attempt to void a contract if they have a different understanding of a word or phrase in an agreement. It is in your best interest to remove as much ambiguity as possible when drafting contracts.
5. Authority and capacity
Authority and capacity refer to a party’s ability to act under the law. This means that both parties are of the age of majority and have the legal authority and capacity to enter into a contract. Both parties must be able to demonstrate they understand the terms, consequences and obligations outlined in the contract.
The offeree must also enter into the agreement freely and without coercion. People who cannot legally enter into a contract include minors, those under the influence of drugs and alcohol, those suffering from specific mental illnesses and those who do not understand the language of the contract.
[Read our blog post: Understanding what indemnity means in a legal contract]
Certainty means that all parties involved have a clear understanding of what they are agreeing to.
The best way to ensure your contracts meet this requirement is through clearly defined responsibilities and obligations, as well as clearly identifying key parties.
Ensure your contracts are legally binding
It’s not enough to simply have a contract, business owners also need to ensure their agreements are enforceable under the law. If you need help getting started with legal contracts for your business, we can help. Caravel has 85 qualified and experienced lawyers, including those specializing in contract law. Get in touch with our team today to find out more.
The information provided in this article is not intended to be legal advice. Many factors unknown to us may affect the applicability of this content to your particular circumstances.