What Is a Legal Binding Agreement?
An understanding of the basics of contract law is critical at a time when even a parking lot ticket stub is a type of contract. It is also important to know what is and is not a contract, because you don't want to unintentionally bind yourself to a legal obligation or fulfill a promise that is not legally enforceable. This article gives a general description of what makes an agreement legally binding.
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Offer and Acceptance
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Every binding agreement starts with an offer by one party followed by acceptance by another party. Offers and acceptances need not be in writing, although it would be good idea to write them down. An offer must be definite enough to be understood as an invitation to enter a legally binding arrangement by the accepting party. Problems most often arise when one party makes an offer, and the other party accepts the offer on different terms ("OK, but only if..."). Legally, such a response is treated as a counter-offer, which requires an additional acceptance in order to create a legal obligation.
Mutual Consideration
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The word "consideration" as applied to contract law is a legal term of art. It means that for an agreement to be legally binding, each party must give something of value, even if only a promise. For example, "I promise to paint your house and you promise to pay me $500." A unilateral promise to make a gift ("I promise to paint your house for your birthday") is not legally binding. However, any amount of consideration, no matter how small, will render the agreement legally binding; for example, if you promise her a BMW and she promises you a kiss on the cheek in return, the kiss will be treated as sufficient consideration, no matter how much the BMW is worth.
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Verbal Contracts and the Statute of Frauds
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A contract is considered to be an agreement in the minds of at least two parties that is intended to be legally binding. Because of this, an agreement is not necessarily unenforceable merely because it is never written down. Nevertheless, to preserve evidence, it is important that you produce a written contract. Under the statute of frauds of various jurisdictions, certain transactions must be in writing in order to be legally enforceable. These include transfers of an interest in real estate and contracts that by their terms cannot possibly be performed in one year.
Identification of Parties and Essential Terms
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Certain essential terms must be included in any contract. The most important among these is identification of the parties to the contract. Other than that, which terms are considered essential depend on the nature of the agreement. A sales transaction, for example, must include the price. Even oral agreements are held to this standard; for example, an oral agreement might be enforced if a witness testifies that she overhead a negotiated oral agreement between two parties that included agreement on all essential terms. Signatures are not legally required in most cases but are encouraged.
Defenses to Contract Formation
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Several defenses exist that can render a contract unenforceable. A contract for prostitution or another illegal purpose cannot be enforced. A minor (under the age of 18) cannot be sued for breach of contract (although a minor can sue the other party for breach). Mentally incompetent people and people who were intoxicated or incapacitated at the time the contract was formed are not considered capable of participating in a legally binding agreement. Other possible defenses to the formation of a contract or bases for rescinding a contract include impossibility of performance (due to an embargo or a natural disaster, for example) or mutual mistake of a critical fact.
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