How to Create Legally Binding Contracts
How to Create Legally Binding Contracts is by guest contributor Stewart Dunlop, a full-time content marketer working with LegalZoom, part-time footballer and reader of Stephen King books.
When is a contract not a contract?
This somewhat Zen-looking question is actually quite important for the small business owner. Why? The very essence of a contract is that it is an enforceable agreement.
This enforceability means a valid contract is legally binding. One of the parties to the agreement can't just wake up one day and change their mind, with no repercussions. Clearly then, you want to make sure your contracts really are contracts.
If your contracts aren’t actually contracts – and aren’t legally enforceable – then you could open yourself up to huge problems if a client reneges on their contract. For instance, you might spend 20 hours working on a project for them, only to end up never getting paid at all and having a poor cash flow, and you wouldn’t have legal recourse.
The Elements of a Valid Contract
The rules of contract creation remain the same regardless of the situation. So, whether you're looking at something specific, like a contract for management services, a contract for independent contractor, or you're just negotiating a general agreement with a client, if you want your agreement to be legally binding, three things are required:
1. An offer
2. An acceptance
3. Consideration (an exchange of value)
We’re going to cover all of these in more detail in a moment. While these terms are all legal concepts, it doesn't mean that you need the assistance of an attorney for every client agreement you want to enter into. In fact, despite the legal rules underlying the creation of a contract, a one-page agreement you draft yourself can be as valid a contract as a complex, multipage legal document.
If your company is fairly new, small or strapped for funds, then going down the do-it-yourself route can often be the best option.
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Putting the Elements Together
So long as the agreement you negotiate with your client contains the three elements, you will have put together a valid contract. Again, don't let the legalese put you off:
● The offer. This is simply what you're putting on the table for your client. If you're a consultant, for example, then the offer you're extending might be for your consulting services. The terms of your offer will be subject to changes that result from your discussions with your client.
● The acceptance. Your offer must be accepted by your client. Again, the offer your client accepts would contain any changes the two of you have negotiated. A contract isn’t complete without an acceptance, so don’t assume that simply sending the contract is sufficient: you do need to get it signed or otherwise agreed.
Once you have the offer and the acceptance in hand, you will have come to an agreement.
However, the final element, consideration (the exchange of something of value), is also required before you have a valid contract:
● In order for your agreement to be enforceable and legally binding, there must be an exchange of value. You may be thinking, okay, so my client is agreeing to pay a fee for my services, and that's something of value, but what am I giving them in return? That's easy: The thing of value you're offering in return for their payment would be your services.
● The consideration does not have to be monetary and, in fact, in most contractual relationships, it's typical for only one side to offer monetary payment. It’s unlikely, for instance, that you’d pay the client you’re consulting with … or that an independent contractor would pay you for the privilege of handling your bookkeeping!
You Need All Three Elements
All three elements — offer, acceptance and consideration — are required in order to create a contract. When it comes to enforcing contracts, usually it's not so much the offer or the acceptance that causes problems, but rather the need for an exchange of value. In other words, an agreement that's essentially a gift or a one-sided promise can't be considered a valid contract, because only one side is giving something of value.
For example, say your favorite aunt learns about a startup business you're contemplating and offers to give you money for it, but insists she wants nothing in return. You decide to exercise your business smarts since your startup could really use the money, so you draw up a document in which she agrees she will give you the money you need.
However, under the terms of your agreement, she doesn't get anything in return. If she changes her mind after signing the document, you wouldn't be able to sue her for the money. Not that you'd want to, considering she's your favorite aunt! But, even if you did, you wouldn't be able to.
What about Putting It in Writing?
You've probably noticed the rules say nothing about putting your agreement in writing. That's because oral agreements that meet these requirements are just as valid as a contract set down in writing. However, it's important to note that in certain cases — for example, the purchase and sale of real estate — state laws may require a written contract and, in such cases, even if you meet all the required elements of a valid contract, you will also need to put it in writing.
Even if there are no state requirements, it's always a good idea to put your agreement in writing anyway. Having a written contract greatly reduces the chances of future conflicts over what you and your client have agreed to. Even confirming what you’ve verbally agreed to in an email is better than nothing.
With the best of intentions, it’s easy for verbal contracts to be misremembered or misinterpreted. For instance, if you negotiated over the price, your client might have misremembered the eventual outcome, or if you had some back-and-forth about the delivery date, they might be expecting their project to be finished sooner than you can actually manage.
So get your contacts in writing – and make sure they are contracts. Every new client contract you sign is a cause for celebration. And, when you follow the rules of contract creation and make sure every agreement you make with a client contains all three legal requirements, you can rest assured that you have a legally enforceable contract to fall back on if necessary.
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