What Makes a Contract Binding

What Makes a Contract Binding

What Makes a Contract Binding?

A contract is binding if there is an agreement between parties and consideration for the agreement. I will talk more about these two elements below. Though a proper agreement and consideration exists, there may still be routes for one party to get out of a contract that they previously signed.

Agreement

An agreement is more than it may seem. In order to be legally binding, an agreement to contract must show mutual assent on behalf of both parties. Usually, this is satisfied through an offer to contract and an acceptance of that offer. An acceptance of an offer is accepting every term of the offer. If someone bargains with the other party to change terms after an offer has been extended, then there is no legally binding contract. Additionally, if someone rejects the offer, then no contract is created.

Consideration

In addition to an agreement, there must be consideration in order to form a legally binding contract. Consideration is a bargained exchange between the two parties. This can take the form of a performance or return promise, forbearance or creation, modification or destruction of a legal right.

picture of a contract being ripped up

For example, a performance or return promise is agreeing to pay a certain amount for services. Forbearance would be agreeing to abstain from acting on a legal right in consideration of the contract. An example of forbearance is agreeing to abstain from drinking alcohol in order to inherit money. The creation, modification or destruction of a legal right can take the form of forbidding someone from voting in return of money.

Defenses to Contract Formation

Even if there is an adequate agreement and consideration, there are still potential options for someone attempting to get out of an otherwise valid contract. Some examples of defenses to contract formation are:

  • Lack of Capacity for Parties to Contract
  • Contract Created Under Duress
  • A Misrepresentation of an Essential Element of a Contract
  • A Mistake on Behalf of a Party Contracting
  • A Mistake in the Contract
  • Public Policy Arguments Against the Content of the Contract

While not all of these defenses are available to everyone wishing to get out of a contract, many times contracts are actually unenforceable. This happens because parties contract without actual knowledge of contract law. They believe that a handshake or personally written contract will hold up in court, but unfortunately, they frequently do not. While no one should ever enter a contract lightly, it is important for parties to know and understand their rights once they already have. Here is a great article from Entrepreneur.com that talks about all of this!

Comments are closed.