Legal Binding Contract: All you Need to know
Having a business nowadays, whether virtual or a physical brick and mortar one, almost always involves some legal issues and deals with certain aspects of the law. A business owner wants to know if there are any permits or licenses they need, or whether there are any legal contracts and policies they should have, etc.
The answer to this last question is a definite yes. In fact, there are many contracts and policies that a business must-have, and then there are some that a business should have. If you’re a business that operates virtually or has a website, then you must have all of these policies on your site. This article is part 1 of Contract series articles, where I’ll discuss different parts of the contract, terms & conditions, terminations, etc. First, let’s understand the basics…What is a legal binding contract?
What is the Definition of a legal binding contract?
A contract is a legally binding agreement between two or more parties (not just people, it can be between businesses) where the involved parties have a legal duty or obligation toward each other. The definition of a contract varies from person to person, but at heart, the above stated is true, albeit simplified. You can also find other similar definitions on many different legal sites, such as this one.
Here is another simple way to explain what a contract is:
A contract is a legal and binding agreement between people or other legal entities such as corporations, limited liability companies, etc., where one of the parties involved agrees to provide goods or services in exchange for money or other goods and services.
When parties make a contract, they typically promise to do something, to carry out a contractual obligation to the other, in exchange for some benefit. All parties that are part of the contract must understand the contract and agree to the terms voluntarily.
What Makes a Contract Legal?
Above we discussed what the definition of a contract is in simple terms. Obviously, there is a lot more that goes into what makes a contract, but you’re not taking a legal test right now, and what’s stated above explains contracts in a way for you to understand as a business owner or freelancer.
To make sure that you have a legal binding contract, there are some requirements that you must meet when creating and agreeing to that contract. Here is an article on the same topic that might interest you as well. Let’s dive in.
A legally enforceable contract must have the following elements to be a legal binding contract in the court of law:
- Offer and acceptance
- Consideration
- A meeting of the minds
- Competent contract parties
I am going to try to explain all of these terms as simply as possible, trying to avoid legal jargon so that every person reading this understands the basic essentials for contracts.
For a legally binding contract, the terms of the contract need to be clearly stated. This means no ambiguities, no terms to “figure out later” or “to determine as you go”. The contract will need to state plainly what you’re offering, and what the other side is offering.
Now, offer and acceptance is a relatively simple concept to understand. Each legal binding contract must have an offer (where one party offers to do something) and acceptance (where the other party accepts that offer).
Consideration is the idea that a contract offer and acceptance must be based on giving up something of value in exchange for a benefit. For example, if I hired a content writer for my site, the content writer would be giving up her written piece in exchange for money, and I would be giving up my money in exchange for the written content. That’s called consideration.
Every valid contract must have consideration.
A legally binding and valid contract usually enforceable whether it’s in writing or made orally. However, in law, and in contractual situations, it’s always best to at least the important terms in writing. This will protect you from future “he said, she said” situation.
Written contracts are especially recommended when the contract in question is a business contract.
Offer and Acceptance are Requirements for a Valid Contract
Any legally enforceable contract must have a valid offer and acceptance. Without this initial step, there cannot be a legal binding contract.
What is Offer
In a valid contract that is enforceable by law, there must be a clearly stated, a definitive offer that has a timeframe for acceptance. The offer must not be ambiguous, and it must be precise. If the timeframe of acceptance expires, the offer lapses, and can no longer be accepted.
Also, the person or entity who makes the offer can withdraw it within the allotted time-frame, before acceptance happens. If the offer is withdrawn, the other party cannot accept it. Before an offer is accepted, it can be negotiated, counter-offered, and changed.
What is Acceptance
Acceptance is the second mandatory part of a legally valid contract. It’s important to understand that an entity can also accept that which is offered, nothing more, nothing less.
If an entity wants to accept the offer but says “I accept, only let’s raise the price to $x amount” or something along those lines, then that’s not acceptance anymore. That’s a counteroffer.
To have definite acceptance, it must be complete and accept the offer as is. Now, at the offer stage, the entities are allowed to counteroffer, change the terms as much as they want until they come to a point where they can accept the terms wholly, as presented in the offer (regardless of whether that is the initial offer or negotiated offer).
Once there is acceptance, all the negotiations come to an end, and now there are terms and conditions for the legal binding contract.
What are the Boilerplate Basic Legal Terms of Contracts?
Different contracts have different terms in them that make sense for that situation. However, before we discuss any specialized contracts, we should learn what are some boilerplate basic legal terms of contracts that should be present in every legal binding contract to protect you, your business interest, and the other party.
Some basic legal terms of a contract that are present in almost all of them are:
- Force majeure clause
- Arbitration clause
- Entire agreement clause
Force Majeure Clause for Enforceable Contracts
A force majeure clause is also sometimes referred to as the Unforeseen Events clause and it refers to events that happen that are outside of either party’s control. These are generally natural disasters such as earthquakes, tornadoes, etc.
These disasters can make it impossible or difficult to accept the offer, or after acceptance to carry out the terms and conditions of the legal binding contract itself.
Depending on your contract and your desired terms, you can have force majeure clause which either makes the contract invalid if the object of the contract itself is destroyed, or if performance is at issue, then your contract can have additional days to perform due to the out-of-control situation.
Let’s understand this with examples. Let’s say the contract is for the sale and purchase of a car. The transaction started, the money is in escrow, but before the contract can be carried out, let’s assume there was a tornado that destroyed the car. This is a classic force majeure situation. The car was destroyed by something that was not within the control of either party. Therefore, this contract will be invalid or canceled.
Similarly, let’s say the contract was to provide services, and a tornado happened. People went into hiding, and you could not provide the services you were contracted for within the time-frame because you were hiding with everyone else to save your life. In these kinds of situations, your force majeure clause might allow some additional days for performing, let’s say 10 days or whatever is reasonable under the circumstances.
To some people force majeure might not seem important because how likely is it that a tornado will destroy a car, for example. However, this particular clause is a boilerplate clause and should always be included.
Arbitration Clause
An arbitration clause is an important term in a contract because it can prevent unnecessary lawsuits and litigations. Usually, an arbitration clause mandates a neutral arbitration in case of a disagreement arising out of the contract if the parties can’t themselves come to an agreement.
When you have an arbitration clause, usually the parties are prevented from filing a lawsuit in court and must find a solution through arbitration. There is an independent arbitrator who has no interest in the contract terms and therefore will be fair in decision making. Both sides will be heard, given an opportunity to come to an understanding. In the end, the independent arbitrator will make a decision. This decision is binding.
Entire Agreement Clause for Basic Legal Terms
The Entire Agreement clause is extremely important and must be present in every single contract. This is the clause that says this contract that the parties agree to with all its terms is the only contract there is.
Anything that came before, whether in writing or orally, has either been incorporated in this contract or this contract controls everything. Moreover, any future terms mean a change to the current terms and those can be done only with the written consent of both parties.
The Entire Agreement clause makes sure that neither party will be able to say that “Yes, I signed the contract, but before that, we also agreed to this ‘Y’ terms orally.” Doesn’t matter what you agreed to before this contract. As long as you signed this one, it rules and controls everything and all the terms.
Conclusion
In this article, I explained what is a legal binding contract, what are the essential parts of a legal writing contract, and what are some important boilerplate clauses that every contract must-have.
Contracts, if done right, are legally enforceable legal documents. You can be held liable for a breach of contract, and vice versa. This means that if the other party breaches the contract between you, then that other person will be liable to you. In most cases, you will get some monetary compensation and possibly even punitive damages.
If you’d like to know how to write your own business contracts, then make sure to check back for the next article in the series.
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