A legally binding agreement is a formal, written contract between two or more parties. You can use this type of agreement in various situations, such as hiring an employee, leasing office space, or buying goods or services from another business.
Four main elements must be present for an agreement to be legally binding: offer, acceptance, consideration, and intention to create legal relations. In this blog post, we’ll take a closer look at each of these elements and offer tips on drafting a legally binding agreement that will hold up in court.
The first element of a legally binding agreement is an offer. An offer can be made verbally or in writing, but it must be unambiguous. The offer must also indicate that the person making the offer is willing and able to enter into a contract. For example, if you own a small business that sells handmade jewelry, an offer to sell a necklace to a customer for $50 would be considered unambiguous.
Many people make the mistake of thinking that both parties must accept an offer for it to be considered legally binding. However, in some cases, this is not true. You can revoke an offer before acceptance, so it’s essential to ensure that all offers made by your small business are unambiguous.
In this step, having an experienced lawyer review your offers is a great way to ensure they meet the legal requirements. If possible, the offer should also be written down and signed by both parties. You can also include a clause that allows you to revoke the offer if it’s not accepted within a specific period.
The second element of a legally binding agreement is acceptance. Acceptance can also be made verbally or in writing, but it must mirror the terms of the original offer. In our example above, the customer’s acceptance of the $50 necklace would be considered valid because it mirrors the terms of the initial offer. You must ensure that any acceptance reflects the original proposal, as a simple “yes“ is not always considered legally binding.
If acceptance is made verbally, you should get the other party’s verbal consent in writing. This is especially important if the acceptance deviates from the original offer in any way. For example, if you offer $50 and the other party agrees to pay $60, you should get their acceptance in writing. To ensure that the agreement is legally binding, it’s essential to ensure both parties understand and agree to all of the terms.
The third element of a legally binding agreement is consideration. Consideration is what each party agrees to give up to receive something else of value. Using the same example, the customer is giving up $50 in exchange for the necklace. Consideration can also take the form of promises, such as when one party agrees to do something (e.g., mow the lawn) in exchange for another party agreeing to do something else (e.g., pay them $20).
Depending on the agreement, consideration can also take the form of money, services, or goods. Sometimes, it’s a good idea to put the consideration in writing, especially if the terms are complex. Because consideration is a crucial element of a legally binding agreement, you should make sure it is clearly stated and understood by both parties.
4. Intention to Create Legal Relations
The fourth and final element of a legally binding agreement is the intention to create legal relationships. This means that both parties must intend for the contract to create a legal relationship. In our example, both the customer and the store owner intend to create a legal relationship because they are entering into an agreement whereby the store owner will sell and deliver the necklace to the customer in exchange for payment.
Not every agreement creates a legal relationship. For example, if you agree with your neighbor to have lunch at a restaurant next week, you are not creating a legally binding agreement. In this case, the intention to create legal relations is missing.
It’s important to note that even if all of the elements of a legally binding agreement are present, the contract may still be invalid if it is illegal or against public policy. For example, an agreement to commit a crime or engage in illegal activity would not be legally binding. Similarly, a deal that discriminates against someone based on their race, gender, or religion would not be legally binding.
Suppose you’re planning on entering into any legally binding agreement. In that case, whether it’s with an employee, tenant, or supplier—you must understand the four elements that must be present for the contract to be enforceable in court. By drafting a well-written agreement that includes all of these elements, you can help protect yourself and your business from potential legal disputes down the road.