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Whether you’re working with clients, customers, partnerships, vendors, or employees, a contract is one of the most important legal documents you need to have in place to protect your small business. But it’s not enough to simply write up a contract and have the other person sign it. In fact, there are a number of key elements that a contract needs in order to be considered legally binding.
The first of the key elements is the offer itself. Inside of your contract, you want to make sure that your offer is clearly outlined - the terms and conditions, what is being exchanged, scope of work, and anything else necessary to have in writing surrounding the offer.
Once you’ve got an offer in place, there needs to be an acceptance of the offer by both parties. Having signatures for both parties signed and dated is important in showcasing that the offer itself was accepted by both sides.
In order for the contract to be legally binding, it needs to have both parties intending for the contract to create legal obligations. In most business contexts, this intention is presumed, but it’s worth noting in case you create a contract with a family member or a friend as that’s not always the case in those instances. If that sounds confusing, what’s important to know here is that having a written contract is usually sufficient in proving that the parties intended to create a legally binding contract.
This simply means that there is a mutual exchange of benefits. Both parties much provide something of value to the other party. In most situations, you’ll find that the exchange you’re working with in your contracts is your service and their money. However, money, goods, services, or a promise to do something are all considered considerations within a legally binding contract.
Every party that enters into a contract must have the legal capacity to do so. This means they must be of sound mind, are not minors, and are not under the influence of anything that might impair their judgement. Even with a signed contract and every other essential element, a contract where the parties lack legal capacity can be voided.
Legality of purpose is just a fancy way of saying that the purpose of your contract must be legal. If you have illegal activities, harm to others, or actions contrarary to the law inside your contract, you’ll find that it’s not legally binding.
This key element is one that business owners find themselves bumping up against most. The terms of the contract must be clear and certain, and vague terms can make a contract unenforceable. If you’ve ever had a client request something that you felt like was addressed in your contract, but when you went to read through the contract to pull the exact wording out to remind them of it … oops! All of a sudden what you thought was clear is being seen in a new light, and you may find yourself agreeing to the request to keep the client happy since you realize you can’t really enforce your contract in the way you thought you could.
The other part of this key element is that the performance of the contract must be possible and not based on an impossible or illegal task.
Your contracts can either be written contracts, orverbal contracts, although we recommend written because they’re much easier to enforce.
Most contracts will require signatures from both parties in order to indicate consent. And yes, electronic signatures are legally binded with authenticated properly.
Having these 9 key elements in place go a long way to ensuring that your contract is legally binding. However, your contract needs to be well-written and clear instead of vague. Because even if you have all of the key elements, but the contract isn’t clear enough, you may still find yourself in a situation where your contract isn’t legally binding. Which is why we recommend that you check out our contract templates - these legal documents are written by a lawyer and are easy to implement - making sure your contracts are enforceable!
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