Quick disclaimer: This article speaks in broad terms and isn’t intended as legal advice. The laws in your region may vary. Always consult a law firm in your jurisdiction if you have questions about a written contract or verbal agreement.
What makes a document legally binding?
Well, to be considered legally binding, a document must contain the valid signatures of all sides entering into an accord, and also detail the duties and responsibilities each party has to the other.
In the business world, you handle dozens upon hundreds of legal documents daily.
Some of these documents may be administrative paperwork or best practice record-keeping, while others are contractor agreements, negotiations and other contracts.
When dealing with so much physical and virtual paperwork, it can be daunting to know which documents are legally binding and which ones are merely “agreements” of some kind.
However, in this guide we’ll look at what makes a document legally binding and how to ensure your contracts are enforceable, covering:
- The definition of legally binding
- How to make a document legally binding: key elements
- What makes a document invalid or not legally binding
- The consequences of not having a legally binding document
- The rules governing electronic signatures
- Notarized documents
Let’s delve right in.
What is legally binding?
Under the right circ*mstances, almost any document can turn into a binding and enforceable contract.
In this context, ‘legally binding’ applies to contracts and other types of legal agreements.
A legally binding document is one in which each party promises to obey or carry out an obligation.
Both parties must fulfil the terms of the offer, consideration, and exchange.
If either party fails to live up to their end of the deal, the opposite party can pursue legal recourse.
How to make a document legally binding: key elements
Sometimes legal documents have grey areas that are open for interpretation.
When you’re drawing up a legal contract, you want to manage risk to your business.
If a deal takes a turn for the worse, you can’t afford to be left hanging due to an unenforceable contract clause.
To avoid this, write clean, transparent documents that minimize fuzzy legalese.
The heart of any legally binding document is specific, written offer and consideration.
Keep these terms concise and well-defined.
Depending on the document type and jurisdiction, you may need signatures or the inclusion of a notary. However, we can dig a bit deeper.
Here’s a quick rundown of what makes a document legally binding:
1. The document contains an offer
One party must offer something of value, such as goods or services, to the other party.
The intent to make an offer needs to be clear and the offer needs to be stated in specific terms.
The offer also needs to be clearly identifiable.
2. The offer is accepted
The second party in this exchange must accept or reject the initial offer.
The two parties can negotiate or counteroffer until they reach an agreement.
Once an agreement is reached and both parties agree to the terms, the offer is accepted.
3. The agreement offers consideration
Contracts aren’t one-sided affairs. Something of value must be exchanged to make a contract enforceable. This is called consideration.
The most common form of consideration is money, but you could also exchange services, stocks, real estate, or other items of value to fulfill this obligation.
A properly signed contract represents a consensual agreement that both sides feel is mutually acceptable and beneficial.
It provides the necessary details surrounding that meeting of the minds, including everything you need to know in order to fulfill the terms of the agreement.
Regardless of the type of contract involved, all three elements of a contract must be present for a contract to be considered enforceable and a legally binding document.
When a contract contains those essential terms and elements (subject to federal regulation and state laws), it has the legal capacity to hold its own weight in a court of law.
4. Signatures and enforceability
The final element you’ll need to create binding documents is proof that the contract was accepted.
This is most often accomplished by having both parties sign the contract — either electronically or via a handwritten signature.
However, a signature isn’t always required to make a contract legally enforceable.
Verbal agreements can be considered legally binding, though they can be difficult to prove.
If one party stops operating by the terms of the contract and the other side can prove that both parties initially agreed to those terms, the contract may be deemed legitimate.
Having written agreements and contracts for your business transactions and partnerships will go a long way toward overcoming any breach of contract or similar legal issues you might encounter.
For most individuals, startups, and small businesses, electronic signatures are one of the fastest and easiest ways to handle this.
What makes a document invalid or not legally binding?
In general, legal documents have varying levels of unenforceability.
Some documents may be considered completely invalid if the basic elements of a contract (offer, acceptance, consideration) aren’t followed.
At the same time, if it’s not possible to prove that both parties signed a contract or have been operating under the guidelines set forth by a contract, then a contract may be deemed invalid.
Read next: What makes a contract invalid?
However, if the contracts were signed in good faith and all the basic elements of a contract are present, then it’s possible that a contract will only be deemed invalid in a limited scope and that portions of the contract will be considered valid when others are not.
What are the consequences of not having a legally binding document?
Depending on the relationship between both parties, consequences of not having a legal binding document could range from minimal to catastrophic.
If both parties operate within the agreed-upon terms and never encounter an issue, then the consequences are likely to have a minimal impact.
Unfortunately, contracts exist as a guideline for situations where things don’t go as planned. In those scenarios, the consequences can be catastrophic, leading to multi-million dollar lawsuits and sour business relationships.
From a business perspective, having a clearly defined contract can save time, money, and headaches in the event of a dispute farther down the road.
What rules govern electronic signatures?
A number of important pieces of legislation. These are:
United States
- Uniform Electronic Transactions Act
- Electronic Signatures in Global and National Commerce Act
- FDA Electronic Signature Regulations
European Union
- eIDAS Regulation
- United Kingdom Department for Business, Energy & Industrial Strategy on Electronic Signatures and Trust Services
- General Data Protection Regulation (GDPR)
You can also check out our e-signature legalities page for additional information on electronic signatures in other countries.
Is a notarized document legally binding?
While a notary won’t help with the specific terms of the contract, the notary can verify the identities of the signees and bear witness to the signing.
Notarization is not essential for a document to be legally binding, but it does make it easier to verify valid contracts if later issues should arise.
Read next: How to notarize a document
For individuals, startups, or small businesses without in-house counsel or legal services on retainer, notarizing printed documents can be useful.
However, electronic signatures are a faster and easier way to get documents signed.
