A contract is invalid if any of the following conditions apply:
- The terms of a contract specify the illegal activity.
- One of the parties to which the agreement relates doesn’t have legal capacity (is mentally incapable of entering into a legally binding agreement).
- One of the parties was coerced (undue influence) or manipulated (misrepresentation) into signing the contract.
- The contract restricts certain freedoms, rights, or points of public policy protected under law.
Agreements that meet any of the criteria above are considered unenforceable contracts and, subsequently, cannot be upheld by a court.
It is important not to confuse invalid contracts with “voidable” ones. Some contracts include terms that, if satisfied, result in their nullification (voidable contracts).
This article will discuss the basic elements of a contract and explain ways to ensure they are legally valid.
What is a simple definition of a contract?
A contract is a form of agreement between multiple parties. It details the precise terms of the agreement and ensures that everybody involved understands what is expected of everybody else.
The main reason contracts exist is to help prevent and settle any disputes that may occur during the length of the agreement and to make sure your agreement complies with business law.
What are the basic components of a valid contract?
Many kinds of both verbal and written contracts can be considered legally valid, but there are certain features or lack thereof, that can render them invalid or reduce the chance that a contract will hold up in court or a legal dispute.
For a contract to be valid under state and federal laws, it needs to have certain elements that allow it to be enforced using contract laws.
In general, a contract must at least contain the following elements to be classed as valid:
1. An offer and acceptance of that offer
One of the parties involved in the agreement must make some kind of offer, they must describe what product or service is being provided.
The other party or parties must then accept the offer and its terms.
2. Something of value exchanged
A price or value must be transferred as part of the contract.
This is known as consideration and can include anything of value, such as rights, benefits, cash, or even a promise to provide any of these things in the future.
3. The legality of the terms
All the terms of the agreement need to be legal under federal and state law.
For example, you cannot buy an illegal item and cover its purchase using a contract, or it would become an illegal contract. Some contracts, such as employment contracts, are governed by strict and specific rules.
4. The capacity of everyone involved
All parties entering the agreement need to be older than the minimum age of consent, have the mental capacity to fulfill their obligations defined by the contract, and accept the terms of their own free will.
5. Beneficial to all parties
It can’t be a one-sided agreement, therefore all parties involved in the contract must gain something.
For example, if one party is purchasing a house, the seller would need to receive payment for the home.
6. Verbal and written contracts
Contracts can exist in written form or as an oral agreements. It’s perfectly plausible for oral contracts to be legally binding and valid agreements, but it is risky.
This is because it’s more difficult to prove exactly what terms were originally agreed upon if the case ever goes to court over a dispute.
It’s usually far more reliable to create a written contract in the first place.
As long as a written contract is created with every fundamental element in place, reviewed by a legal professional well-versed in contract law, and signed by every party, then it should hold up in court.
Some types of contracts, such as real estate agreements, are required by law to be written, so a verbal agreement would be invalid.
Tips for properly formatting a contract
1. Read everything
It sounds obvious, but this is a mandatory rule you need to follow. Contracts can be highly complex and contain legal jargon that’s very difficult to understand.
Carefully read the details to make sure you comprehend the terms of the offer and know what obligations you are binding yourself to so you don’t find yourself in breach of the contract.
2. Be specific with the offer
For a contract to be valid, all the terms must be clear and precise. For a contract involving the sale of a car, for example, the specific details of the car like brand and model should be clearly defined.
3. Get legal guidance
If you’re in doubt about anything, recruit the help of a legal professional who understands contract law. They will identify any issues with the contract and hopefully prevent any disputes in the future.
4. Sign it
Once you’ve read and understood the terms and are confident you want to enter into the agreement, it’s necessary for you and every party involved to sign the contract.
This shows that you accept the terms, and makes the agreement officially official. You can sign by hand, or use an electronic signature. Failure to sign immediately makes a contract void.
Using electronic signature software such as PandaDoc is just as legally enforceable as a physical signature.
A tool like this one can save you a ton of time and give you access to other powerful features like templates, signing notifications, and document tracking.
5. Engage a contract lawyer
To ensure that a contract constitutes a valid agreement, it is advisable to seek the assistance of an expert that understands the relevant legal issues and has experience creating enforceable contracts.
As the kinds of legal documents most people require are fairly commonplace, especially in a business context, legal services tend to be inexpensive.
Know what you’re signing
As long as you follow the basic principles of creating and executing a contract, you can be reasonably confident that your agreement is valid.
The most important thing to remember is that you understand the subject matter and terms of the contract, get legal advice from a law firm if needed, and everyone involved should sign it, either physically or electronically.
