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What makes a contract legally binding?

What makes a contract legally binding?

If you engage in business-to-consumer or business-to-business transactions, if your contract is deemed to be legally invald the consequences can cause a financial disaster for your business.

So what makes a contract valid? 

When writing a contract, to make it legally binding it is important that you satisfy the following four requirements: 

  • An offer has to be made from one party to another and that offer on the stipulated terms, must be accepted.
  • The contract must contain some form of “consideration” i.e an exchange of something for something. An example of this type of contract would be a payment made by one party for the provision of goods or services from the other.
  • The parties must both ensure that they have the “capacity” to enter into the contract, this includes as examples; being the legal age and of sound mind.
  • There must also be a clear mutual intention to create a legally binding

When one party sought to rely upon the Heads of Terms, the court found that they were not valid and therefore enforceable due to the fact that they had not been signed and, amongst other issues, the language used within the Heads of Terms indicated a future agreement, not an existing one.

The above points seem straightforward when it comes to creating a legally binding contract, but the courts continue to highlight uncertainty and discrepancies in ‘valid’ contracts.

It is important to note that there have been court cases where involved parties have only emailed contracts across to employees and employees have not signed them and sent them back. When one party sought to rely upon the Heads of Terms which the court found were not valid due to the contracts not being signed.

The case above is a reminder that making a contract legally binding shouldn’t be overlooked as the consequences could put the business into financial distress. If you are writing your business contracts and are concerned that your contract may not be legally binding, or you want to ensure that it is legally binding we suggest speaking to one of our commercial lawyers here at CP Law Associates.

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