How Do I Create a Legally Enforceable Contract?

“When people think of contracts, they tend to think of multi-page documents with all this arcane legal language in them — but they don’t have to be that way,” says New York business attorney Sarah Gold. 

There are a few key requirements any contract must meet in order to be legally binding and enforceable, including legal capacity, mutual assent, exchange, and offer and acceptance. It’s possible to have a contract that meets all the requirements while being clear and to the point. For legal help drafting a valid contract, reach out to a local contract lawyer.

Why Is It Important To Have a Well-Prepared Contract?

“Once you begin litigation, you’ve lost.” This insightful advice from Daniel B. Faizakoff, an estate planning and probate attorney in New York City, highlights the importance of having a well-prepared contract.

“My client did all the work, and the others were passive investors. He was giving away 40 percent of the profits and wasn’t happy,” Faizakoff says.

Unfortunately, the original contract did not define how to withdraw from the company. “Instead of a 30-page operating agreement to specify his rights and obligations, this is two-and-a-half pages that says almost nothing. It says just enough to be dangerous.”

Now the only way out is through litigation. “And litigation costs time, money, and anxiety,” Faizakoff says. “It can go on for years, and you may not get the answer you want. Even if you do, you can’t get back the time. And often the money.”

The Elements of a Valid Contract

“A contract is an agreement between two or more parties regarding terms of their own choosing,” says Gold. “Whether the contract is about “an item or a money agreement, it doesn’t really matter what the terms are about as long as both parties agree to it.”

There are some key requirements that any contract must meet to be considered legally binding and enforceable.

1. Legal Capacity

To make a legally binding contract, the parties must have legal capacity to enter a contractual relationship. People who lack legal capacity include:

• Minors (under age 18)
• Individuals who have a mental disability
• Those who are taken advantage of or coerced

2. Mutual Assent

The parties must have a “meeting of the minds” to perform (or not perform) specific actions. They understand what is being talked about and agree to the terms of the contract. As Gold says, “If [the parties] don’t agree to the same thing, there is no valid contract.”

A meeting of the minds can mean two things:

• Both parties are of sound mind to be able to agree to the contract
• The two parties think they are agreeing to the same thing

Writing contracts isn’t rocket science, New York business lawyer Alexander Tuttle says about contract management best practices, but you do have to make sure everything you agreed upon and want covered is covered in the contract approval process. “Contracts mean something,” he says, “so take them seriously.”

3. Exchange

The parties must agree to exchange something of value for something else of value. You may hear the thing of value referred to as “consideration.”

For example, one person offers their car to another person in exchange for $5,000. Both the car and the money are “consideration” in the exchange of value. Many kinds of goods and services could be offered, and money isn’t the only thing that could be given in exchange.

For example, the parties might agree to exchange different goods or services, such as a baker giving their baked goods in exchange for a gardener’s produce. As long as something of value is given in exchange and the parties agree to it, the agreement is valid.

Some clients think contractual obligations are “supposed to make a person do a specific thing, when it’s rare you can actually force someone to do something,” adds New York business litigation attorney Steven L. Levitt. What should be in the contract, though, is how you get compensated when the other side does the thing you don’t want them to do.

“Make sure they realize the remedies in the contract are at least as important as the contract provisions,” Levitt says. “Is it more likely that you will want to enforce the agreement or want to get out of the agreement? Most people look at contracts as neutral, but they are challenging because you potentially need to put in an out clause to protect your client — and that clause will have to be hidden, so to speak, in plain sight.”

4. Offer and Acceptance

In the exchange, one party makes an offer, and the other party either accepts or rejects it within a reasonable period of time. The “offeror” can revoke the offer as long as it’s before the “offeree” accepts.

Once the offeree accepts, the agreement is binding. The offeree can also make a counteroffer. For example, the offeree could suggest paying a lower price than what the offeror initially asked. The original offeror would then have to agree to the counteroffer. This bargaining process can go back and forth multiple times before the parties reach a final agreement or walk away.

One party cannot be under duress when making their offer or acceptance. This would render the contract unenforceable. There may also be additional legal consequences for the party attempting to force the contract.

For the contract to be legally binding, the parties must act in good faith. Otherwise, misrepresentation can affect the legality and enforceability of the legal document.

Understand the True Force of Force Majeure

“Force majeure” is a standard contract clause that protects stakeholders from uncontrollable events, such as war or natural disasters, that interfere with normal business practices.

For obvious reasons, it was much-discussed during the COVID-19 pandemic, Faizakoff says. “We are adding more specifics to contracts now — like what ‘an act of god’ actually consists of.”

Putting the Contract in Writing

Not all contracts must be in writing. “A contract could be a handshake, an email, a phone call, as long as the parties agree to it,” says Gold. “A verbal agreement can create a binding agreement just like a written contract.”

However, there are very specific times when a contract has to be in writing. These situations are determined by state laws known as statutes of frauds:

• If the agreement can’t be done within a year, the contract has to be in writing
• Certain contracts for items over $500 — especially if they involve a business or consumer contract — usually have to be in writing
• Any contract involving real property, such as land or a building, has to be in writing as well

If there is a written contract, both parties must sign it for it to be enforceable. Otherwise, it’s just a piece of paper, says Gold.

Even if your agreement doesn’t involve real estate, items over $500, or a timeframe longer than a year, it’s always a good idea to put your agreement in writing.“Oral contracts are harder to enforce; it often becomes a matter of ‘he said, she said.'”

If you’re a business owner entering into a contractual agreement, having it all in writing could prevent major disputes down the road. On the other hand, if the transaction involved is small or straightforward, and a writing is not required, you may not need to worry about putting the agreement in writing. It will ultimately depend on your situation and the stakes involved.

Make The Contract Language Clear and Understandable

When writing a contract, legalese only adds clutter and confusion. “You need to understand what each provision really means in the context of how it could be litigated,” Tuttle says about contract terms.

Faizakoff agrees. “The contract has to be understandable not just by the parties but also by the court or a third-party arbitrator who doesn’t know the parties and what the deal is. If you understand it, but somebody else doesn’t, you will never get your rights enforced.”

What Is Contract Law Based On?

Generally, contract formation is governed by state laws and common law. Common law, also called case law, consists of courts’ judicial opinions or precedents. Because of this diversity, there can be significant differences in contract law across jurisdictions. This is one reason why having a lawyer review your contract is a good idea.

In addition to case law, “There is the Uniform Commercial Code (UCC), which has been adopted by all 50 states and has some basic rules regarding contracts. Most contracts under UCC are business or merchant contracts involving either merchant-to-merchant or merchant-to-consumer transactions or the sale of goods,” Gold says.

“The UCC functions as a sort of supplement to case law, because the UCC primarily sets forth how certain things are handled within a contract, while case law can be used to figure out how, if a contract has gone bad, it’s going to be handled in the courts.”

Why You Should Have a Lawyer Draft or Review Your Contract

A good contract is the cornerstone of a successful business, and contract creation also looks to the future. There are many types of contracts, from getting maintenance done to buying real estate, manufacturing a product, or even entering into an employment contract.

“As a lawyer, I am in the business of ‘what if,'” says Faizakoff. “I look at business terms and provisions and try to figure out how things can go wrong. I can’t prevent things from going wrong, but a good lawyer looks at what could go wrong and figures out ways to deal with them now in the agreement.”

Whatever your situation, getting legal advice about your contract from an experienced attorney can help you avoid disputes down the line. And if legal conflicts are unavoidable, having a lawyer review your contract will ensure you are in a strong position in the event of legal action.

Even if you plan to use a template, it’s best to have a lawyer conduct a contract review and make potential edits to standard clauses to ensure they match your specific needs. The bottom line is that you want to make sure everything is sound to avoid, as much as possible, disputes in your business relationships down the road.

Find Legal Help

Look for a contracts attorney in the Super Lawyers directory for legal help with your contract needs.