A legally enforceable agreement between two (or more) parties, often an exchange of goods or services, is called a contract. A contract may be legally formed by a verbal agreement and a handshake, but written contracts—whether they’re ink-on-paper or digital—are always preferred, as they provide a record of the agreement and the parties’ signatures.
If you sign a contract, then you’re agreeing to a legal duty or responsibility and may face lawsuits or other adverse consequences if you fail to honor your end of the agreement. Poorly written contracts may not be worth the paper they’re written on, so it’s important to understand what makes a contract legally binding before you sign it or present it to another party.
We’ll explain what makes a contract legally binding, including the elements required, what to do if something is missing from a contract, whether an invalid contract may be fixed, and more.
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What are the elements of a legally binding contract?
Different legal texts break down the elements of a legally binding (or “valid”) contract in different ways, typically identifying between three and six elements. Reputable legal sources generally describe the same thing, however, even if the elements are grouped differently. For our purposes, let’s consider the following three elements of a legally binding contract:
- Subject. This comprises the details of the agreement, specifically the offer and an acceptance of clear, unambiguous terms.
- Consideration. This is the reason or motive for the contract. For instance, a party may be motivated by money (if it’s a monetary transaction) or the desire to keep certain information confidential.
- Capacity. Everyone signing onto the contract must be of legal age, of sound mind, and possessing the legal authority to enter into the contract.
Putting these elements together, let’s consider what a valid contract might look like. Company X presents an employment contract to Jane. The subject includes the terms of the job, including the salary and the type of work involved (i.e., the offer). If Jane agrees with the terms and signs the contract, she has provided her acceptance. Since Company X wants to hire Jane, while Jane wants a job and the salary that comes with it, there is adequate consideration. Both parties have the capacity to enter into this agreement.
How do I know whether a contract is legally binding?
The simple answer is that a contract is legally binding as long as it contains the elements listed above, but it may not always be so obvious. For instance, a party drafts a contract to sell you the Brooklyn Bridge. The offer, acceptance, and even the consideration are clear. However, the party offering the bridge does not actually own it, and therefore lacks the legal capacity to sell it.
Keep in mind that legally binding contracts still may be considered “voidable.” While an invalid (or void) contract is one that never was enforceable to begin with, a voidable contract is enforceable unless a party actively challenges it and proves that it has one or more legal issues. For example, a minor who signs a contract may have that contract voided if they’re able to prove they weren’t legally an adult at the time it was signed.
In any event, it’s always best to ask a lawyer if you have any doubts or concerns about whether a contract you signed (or have yet to sign) is legally binding.
What should I do if something that was discussed is missing from the written contract?
Whether the other party omitted a term that was discussed earlier in negotiations by accident, or by sleight-of-hand, make sure you know exactly what it is you’re signing onto. In some cases, the contract may have been written up prematurely and doesn’t reflect the most recent deliberations. Whatever the case: If it doesn’t look right, don’t sign it.
You can scrap the original contract and start over, or you may use a Contract Amendment to change one or more of its terms. Even if the other party is sincere about upholding terms that were discussed but not included in the written contract, you don’t want to sign a legally binding contract if it’s not quite right.
If the contract isn’t technically valid, but the parties are making a good faith effort to reach a mutually beneficial agreement, it’s best not to rely on good intentions alone. An invalid contract may or may not hold up if a disagreement occurs and the contract gets tested.
Can I breach a contract that I signed without consequences if it turned out to be invalid?
It depends. While, generally speaking, an invalid contract may not be legally enforceable, there are situations where a contract that might otherwise be unenforceable becomes enforceable by having a severability clause, or by some other legal rule. For example, there might be a valid verbal contract in place that overlaps some terms covered by the invalid written contract in question.
Therefore, it may not be advisable to breach an invalid contract with reckless abandon. You might think the contract is invalid, but it may be legally enforceable, which might put you in a bad position. Likewise, you might not want to burn bridges with the other party to the contract, especially if it involves a person or organization that you hope to work with in the future.
Make sure your contracts are legally binding and work for you
Life is riddled with contractual relationships, even when we don’t actually “sign” a contract (clicking on a web site disclaimer, for example). Understanding what’s required for a legally binding contract can save you time and money, while preventing unintended consequences. Rocket Lawyer’s extensive legal resources and documents will help you enter into contracts the right way. Be sure to ask a lawyer if you have any pressing questions about contracts.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.