The 5 Elements That Constitute a Binding Contract

In order for a contract to be legally binding, a few key elements must be demonstrated. In certain instances, additional features may be added to cover the best interest of the signing parties, but these five points will cover the major requisites.

  • Offer
  • Acceptance
  • Consideration
  • Mutuality of Obligation
  • Competency and Capacity

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Legally Binding

Before analyzing the elements, it’s important to understand what is meant by legally binding. A legally binding contract is much more than a simple agreement between two parties. A casual promise between friends, for example, would not be considered legally binding.

Commercially based agreements are intended to create a legal bind; one in which both parties are committed to follow, with the law acting as a mediator in case of any breaches.

It’s for this reason contracts must include the above features in order for them to be considered legal and binding.

Offer

By definition, an offer is a promise to act, and in some cases to refrain from acting – in exchange for agreed upon terms.

Offers can be verbal or written. While verbal offers are difficult to defend in case of litigation, one should be careful about entering into terms with a verbal approval.

Acceptance

Similar to offers, acceptances can be made verbally. In commercial contracts, the terms of acceptance will almost always be written, with the terms made clear.

In order to avoid any ambiguity, the details of the offer should include points that affect acceptance, such as expiration date of the offer, rights to revoke, and the details of what constitutes acceptance.

Consideration

The value that each party brings to a contract is referred to as a consideration.

Considerations can be monetary as well as promises to perform certain acts. The performance of acts or duties can be defined as “expected to do” or “expected to refrain from doing.”

In each instance, considerations should be clearly outlined, since the law has its own interpretations as to what constitutes a legally binding consideration.

Mutuality of Obligation

Known as the binding agreement to the terms of consideration, mutuality of obligation will ensure both parties are equally bound.

In cases where one party controls certain leverage, such as the rights to cancel, the courts may consider mutuality of obligation has not been met. These imbalances can result in the court invalidating the contract.

Competency and Capacity

The very basis of a contract demands that both parties are legally competent and have the capacity to undertake its terms.

A minor or a mentally incapacitated person does not have the competency or capacity to be legally bound by a contract.

The Protection of Professional Counsel

At Lee Shome & Kennedy we specialize in the counsel surrounding contracts for corporate & business law as well as mergers & acquisitions and real estate in the San Diego area. In each case, we apply our extensive experience and understanding of the law to ensure your protection – during and after contract execution.

Need legal assistance for your new business in the San Diego area?

At Lee, Shome & Kennedy, LLP, in San Diego your solution starts here.

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