People enter into contracts daily without even thinking about it—when we fill up with gas, go to the hairdresser, sign up for a gym membership, etc.
So, what exactly is a contract? It’s an agreement between two or more parties: one party accepts what the other party has to offer, in exchange for something else.
While a contract can be either written or verbal, the vast majority of contracts never get written down or accepted with a signature. Instead, accepting a contract is usually done by exchanging money for a product or service, like purchasing something from a store. But, when it comes to complex contracts that involve multiple terms and conditions, it’s best to get the agreement in writing.
If you create or enter into a contract and want to be sure it’s legally enforceable, the contract must comply with several legal formalities in order to be valid.
For instance, if you’re creating a Service Agreement, you must have all the basic elements of validity in place so you can successfully resolve any disputes that arise. Without a valid contract, you won’t be able to enforce any of its terms (such as receiving reimbursement for work-related expenses or retaining ownership of your intellectual property).
In this post, we’ll explain the key elements that make up a valid agreement, the factors that make a contract void or voidable, and the steps you can take to carry out your contract correctly.
Read more: The Elements of a Valid Contract
The Basic Elements of a Valid Contract
Most contracts are routine and easily fulfilled. For instance, it’s implied that when you go to the hairdresser they’ll give you what you asked for, within reason, and won’t simply cut off all your hair (unless, of course, that’s what you’d asked for).
It’s only when the terms of the contract become more detailed—and the contract is less routine—that people should write them down and indicate acceptance with a signature.
To create a valid, enforceable contract under state and federal laws, you must include the required elements.
- Offer and Acceptance: A contract must have an offer and acceptance. One party makes an offer (such as selling goods or services for a quoted price) and the other party accepts the terms of the offer (often by making a payment or by providing their signature in writing).
- Legal Object: The object (i.e. the subject matter of the agreement) cannot be illegal; for instance, the law will not uphold an Employment Contract that requires someone to commit a crime, such as theft.
- The Capacity of Parties: The law uses age as a threshold for capacity, setting 18, 19, or 21 years as the age of adulthood. Once an adult, mental competence comes into play. The parties must demonstrate their legal capacity to enter into a contract; this means they have a complete understanding of the nature and effect of the contract.
- Consideration: Consideration is a price or value that’s exchanged for an offer. Although it’s usually monetary, consideration can be any right, interest, or benefit—as long as there is an exchange of something of value. Notably, consideration doesn’t have to represent a ‘good deal’ for either or both parties; that is a matter of judgment for the parties entering into a contract.
What’s the Difference between Void and Voidable Contracts?
When a dispute arises between the parties to a contract, it’s up to a court to decide whether the contract is valid, void, or voidable. The main difference between void and voidable contracts is that a void contract is invalid from the beginning, while a voidable contract is initially valid but may become void later at the option of one of the parties.
What Makes a Contract Void?
If a court or tribunal rules a contract void, it means the contract has no force or effect, so neither party is bound by it and neither party can rely on it. Usually, this is because:
- The object of the agreement is illegal or against public policy (unlawful consideration or subject matter)
- The terms of the agreement are impossible to fulfill or too vague to understand
- There was a lack of consideration
- Fraud (namely false representation of facts) has been committed
If an employee signs an Employment Contract and is then asked by their employer to perform an illegal job, such as smuggling prohibited goods across a border, the agreement is immediately void because the subject matter is against the law.
When is a Contract Voidable?
A voidable contract is a valid contract that is binding to only one party; the other party may choose to either reject or accept it.
A court or tribunal may rule a contract voidable under various circumstances, including:
- A party was coercing or threatening the other party into signing the agreement
- A party was under undue influence (one party dominated the will of another)
- Mistakes are present in the contract that affect whether one or both parties can carry out their obligations
- A party breaches the terms of the contract
The party affected by the particular circumstance may choose to either set aside the contract or continue with it.
For instance, if you buy a brand-new vehicle from a car dealer and sign a Sales Agreement detailing the payment plan and warranties and later discover that the dealer sold you a used car instead, you are the party affected by the mistake and you can elect to void the contract. Alternately, you may decide that you got a good deal for the car and proceed with the agreement anyway.
Read more: Can You Be Forced into Signing a Contract?
How to Review a Contract
Contracts can have serious financial and legal consequences. It’s important to evaluate an agreement carefully before you decide to enter into it.
Whether you’re creating a contract or signing one, you can feel confident about the agreement by following these tips:
- Read the entire contract: Don’t just click “Accept” when you see those dreaded Terms and Conditions. Contracts can be lengthy and may include several complex clauses, but by taking the time to review its contents, you avoid missing any important information.
- Be clear with descriptions: The terms of the contract, including the offer, must be clear and specific. When selling a vehicle, for example, there should be a detailed description of it (including the make, model, year, etc.).
- Understand and clarify: Make the effort to understand your role in the contract. If there are any phrasings, definitions, or terms that you’re unclear on, be sure to ask questions. You should also ensure the other party to the contract is also clear on the terms of the agreement.
- Write it down: While oral contracts may be valid, written contracts are much easier to enforce because they provide solid evidence of the agreed terms. Plus, written contracts serve as helpful guidelines for actions such as payments or services that both parties may refer to throughout the life of their agreement.
- Pay attention to acceptance details: If there is an acceptance date on the contract, make sure to accept or reject the offer before its expiration.
- Know who you are dealing with: Whether you are leasing a property, entering into a partnership, or simply buying or selling an item, you should always confirm the other party’s identity before signing anything.
Think Before You Sign
Having an idea of the basic elements of a valid contract is a step towards avoiding legal disputes when you enter into a contract. Read reviews, take referrals from people you know and trust, and inform yourself of the basics of any relevant law before you go into a contract.
If you end up in a contractual dispute, consult with a contract lawyer for guidance.