Ever wondered what is needed for a contract to be legally binding? The answer lies in four critical ingredients: an offer, acceptance, consideration, and mutual intent to establish a legal commitment. In this article, we’ll briefly highlight these key components, setting the stage for a deeper understanding of each and how they interplay to form a solid, enforceable contract.
Key Takeaways
- A legally binding contract must include an offer, acceptance, consideration, and intent to create legal relations.
- Both oral and written contracts can be binding, but oral contracts are harder to enforce due to misunderstandings and lack of evidence. Some contracts must be in writing under the Statute of Frauds.
- Parties must have legal capacity to enter a contract, meaning they must be of legal age, mentally sound, and have authority. State laws may add specific requirements.
Does a Contract Have to be In Writing to Be Legally Binding?
Remember, there are two types of contracts: oral and written. An oral contract is either not written at all or only partially written; however, in most cases, oral contracts are considered just as binding as written contracts, the difficulty comes in proving what the terms of the agreement were if they are not written down. A written contract has the terms and agreements specifically written out and often requires legal counsel to create. Some orders of business, such as real estate transactions, must be in the form of a written contract, and it is often recommended that most contracts be put in written form rather than oral. If you want more information on oral contracts read Are Contracts Valid Even if They Aren't Written Down?
There is a common belief that an oral contract is only binding if a handshake is exchanged between the two parties. Contrary to this belief, an oral contract can be considered legally binding without a handshake. If one party delivers the good or service which they promised to do upon creation of the contract and the other party willingly accepts the good or service, then the contract can be considered legally binding and the terms of the contract must be fulfilled.
In Illinois, courts have found that even if both parties did not sign a written contract, if they acted in such a way that would fulfill part of the terms of the contract, they are bound to complete all terms. For example, if one party was making payments that were consistent with what was laid out in a contract, the courts assume that the person intended to be bound by the contract and therefore must complete all parts of the agreement. It has also previously been determined in courts that usually if there is no objection to one party performing the contract, it has been agreed upon and is thus binding.
What is Required to Create a Valid Contract in Illinois?
Generally speaking a contract is legally binding if one party made an offer to do something in exchange for consideration from the other party, and the other party accepted the offer. These are the three elements of a contract: (1) offer; (2) acceptance; and (3) consideration.
For something to legally be considered a contract, not only must the parties have a meeting of the minds as to what is being agreed upon, but there must also be “consideration” involved. “Consideration” means that both parties receive some kind of benefit from the agreement; if consideration is not present in the terms of the contract, the exchange is considered a gift rather than a contract. For example, someone in the contract will provide a good or service and the other person will provide payment; therefore, both parties benefit by having an agreed-upon contract and the contract is able to legally be considered a contract. If someone agrees to provide a service, but is not receiving any benefit in exchange for his or her service from the other side, there is no enforceable contract.
Technical requirements for a contract to be legally binding are that both parties involved are at least 18 years old, are of sound mind and have the legal power necessary to enter the contract. Possessing the proper legal power for a contract mainly applies to those acting as guardians or making decisions as an agent for someone else.
Timing is also important. When one party makes an offer, a contract is only formed if the other party accepts the other in full before the offer is withdrawn. If the other party does not accept the offer in full, but accepts some of the terms and tries to change others, this is a counteroffer, not an acceptance. A counteroffer terminates the original offer. If a counteroffer is rejected, the person making the counteroffer cannot simply go back and accept the original offer unless it is re-extended by the offeror.
While the general rule is that oral contracts are enforceable, certain particular types of contracts must be in writing in order to be valid. For example, a contract with respect to property or debt that exceeds a certain value or performance that will not occur within one year of the agreement being made must be in writing in order to be legally binding.
Some state and federal statutes make certain particular types of contracts unenforceable, or require specific language or notices to be included in the agreement in order to make the contract enforceable. These statutes usually apply to industries in which one party is more sophisticated than the other. The statutorily required language is typically required in order to protect the unsophisticated party or inform him or her of his or her rights.
Finally, in certain situations such as duress or mutual mistake of a material fact, a contract that is enforceable on its face may be ultimately unenforceable because the facts surrounding the execution of the contract caused one of the parties to have a valid defense to the other party’s breach of contract claim. For more detail on this topic, check out our article: Defenses to Breach of Contract Explained.
Letters of Intent and Non-Binding Contracts Explained
Generally, if a contract says “Agreement Subject to Contract” that signifies that there is no formal agreement that has been reached yet and the contract is therefore not legally binding. “Without Prejudice” is another phrase that can be used meaning the same thing as “Agreement Subject to Contract”. These terms are used during contract negotiations and mean that there is no legal consequence attached to the words being exchanged. In this case, a formal contract will be signed before there can be any legal ramifications.
Non-binding agreements can be revised and changed later, whereas binding agreements cannot be. However, if a document is non-binding it is not typically considered a “contract” and is instead a “letter of intent”. Letters of intent are used to ensure that both parties agree to the substantive terms of the contract before either party hires a lawyer to draft and negotiate the final legally-binding version of the agreement. Non-binding agreements should specifically state that both parties agree it is non-binding, so that there is not an unintentional binding contract created.
Determining whether an agreement is binding or non-binding and knowing how to act in each case is important for businesses and individuals who reach agreements daily and need to be informed of the ramifications of their actions.
Oral vs. Written Contracts
Two forms of contracts exist: verbal and written. Each is capable of being legally binding, although they present distinct challenges and stipulations. Fundamentally, a contract functions as a formal agreement among parties to fulfill their respective duties.
The nuances of both oral and written agreements and the extent to which they can be enforced will now be examined.
Validity of Oral Contracts
Verbal agreements, also known as oral contracts, are formed through spoken communication and are legally binding if they include the four essential elements previously discussed. For instance, should you come to an agreement over the phone to sell your vehicle to a friend and both parties understand and agree on the price (signifying offer and acceptance), acknowledge that the contract is intended to be legally recognized (demonstrating intention), with something of value being exchanged (consideration), then a legitimate oral contract has been established.
There can be issues concerning reliability with verbal contracts when compared to their written counterparts due to lacking physical documentation specifying each detail of the actual agreement. This gap might lead to confusion or disagreements down the line. Still, supporting evidence such as emails or bills—even testimony from witnesses—can substantiate an oral contract’s validity in upholding its terms.
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