What is a legally enforceable contract?
By Nadia Cabrera-Mazzeo
Not all agreements are legally-binding. For a contract to have legal teeth, it must contain these 6 elements:
1. Offer
2. Acceptance
3. Mutual Assent
4. Consideration
5. Capacity
6. Legality
Offer—someone has to put something on the table for the other person to accept or reject.
Every contract begins with an offer—something of value to someone else that can be exchanged for something (usually money, but not always). Technically, an offer does not exist until it is received by the other person. The person making the offer is allowed to change it or take it back any time before the other person accepts the offer.
The person receiving the offer can choose to make a counter-offer, at which point the original offer is terminated and the ball is in the other person’s court to accept or reject the counter-offer.
Acceptance—the person receiving the offer can accept it in different ways
An offer can be accepted verbally, in writing, or by action. In any case, acceptance must be explicit. It does not work for the person making the offer to say “if you do not get back to me by Friday, I will assume that you accept this offer.” Assumptions by the person making the offer and inaction by the person receiving the offer do not create a contract. Similarly, the person making the offer can’t bind the other person by taking unilateral action like sending unsolicited materials.
Mutual Assent—both sides must clearly and affirmatively show their willingness to enter into the contract.
A contract will be considered invalid, or voided, if one of the parties can show that they were made to sign the contract against their will. For a contract to be valid, both parties must be aware that they are entering into an agreement and are doing so willingly. This contract element is often called the “meeting of the minds” because the parties must also show a mutual under-standing of the major terms of the contract. If two people enter into a contract to buy/sell a specific car, but they find out later that they were talking about two different cars, then there is no meeting of the minds to satisfy this element and the contract is invalid.
It is essential that both parties know what they’re getting into.
Consideration—both parties have to give something.
A contractual relationship is premised on a give-and-take. If one party gives something to the other party without getting anything in return, then that is a gift, not a contract. This element of contract formation requires that both parties give something of agreed-upon value. The consideration (or the something of value) given by a party must be theirs to give and must have value to the other party. It does not work to say “in exchange for giving me your car, I will give you my sister’s car” or “in exchange for giving me your old bike, I will give you this rock that has enormous sentimental value to me even though you said you don’t want it.”
Examples of valid consideration:
• Money
• Services
• Goods
• Property
• A promise to do something that you wouldn’t otherwise do
• A promise not to do something that you otherwise have the right to do
Capacity—both parties must have the ability to understand the obligations and consequences they are agreeing to.
The legal capacity to sign a contract refers to the parties’ ability to fully understand what they’re agreeing to. A party may lack capacity to sign a contract when:
•. They are a minor;
•. They have a brain disorder (e.g. dementia);
•. They are under the influence of alcohol or drugs;
•. They do not speak the language that the contract is written in.
The above examples may not result in incapacity to sign a contract depending on the circumstances. Incapacity may also be overcome in different ways, such as when a minor has a court-appointed representative or providing an interpreter for a non-fluent speaker. As prior elements require, contracts must be entered knowingly and willingly.
Legality—the contract must not violate the law or public policy
The general rule is that a contract is subject to the laws of the place where it operates. The contract must abide by applicable local, state, and federal law. A contract that violates the law is not valid even if the parties think the activity is allowed. A contract involving criminal activity is not valid.
Even when the activities in a contract are legal, the contract, or parts of it, may still be found to be invalid if the activities have a harmful effect on the general public such as an employment agreement that forbids an employee from joining a union.
Despite all of these requirements, entering into a contract with another person is pretty easy (see this post about ordinary people wielding the power of contracts). But the whole point of entering into a contract is the power to enforce it if the other party doesn’t make good on their promises.
It’s important to understand the legal requirements that make a contract enforceable at the outset so that you don’t end up buried in legal fees only to find out that the contract will not be enforced.
Our lawyer at Honest Contracts can work with you to create a custom contract that is enforceable, fair, and clear about expectations. Investing in a properly-written contract is a worthwhile way to avoid misunderstandings and set your deal up for success.
Law office of Nadia Cabrera-Mazzeo, Esq.
Based in Taos, serving clients throughout New Mexico
505 427 2025
nadia@honestcontracts.com