Ensuring you have enforceable contracts is integral to protecting your business. You establish expectations and prohibit any shady behavior or agreement. Yet many are often unaware of their importance when making transactions.
An enforceable contract is essential for creating and maintaining successful relationships between individuals, organizations, and companies. It ensures everyone involved in a transaction adheres to their established predetermined agreement.
This article will cover the details and importance of having a legitimate enforceable contract in contract management so that your business’ success is unilaterally protected.
What Is an Enforceable Contract?
An enforceable contract is a legally binding agreement between two or more parties. It is a document that outlines the rights and responsibilities of each party and sets out their expectations for the transaction. It may also be called a “legally binding agreement” or “agreement in law.”
Certain key elements must be present for a contract to be enforceable, which will be further discussed in the next section. The contract must also not violate any applicable laws or public policy.
Enforceable contracts are essential in business transactions. They allow both parties to know exactly what is expected from them and provide legal recourse if either side fails to uphold their part of the bargain.
For example, suppose an employer promises an employee a certain salary for completing specific tasks. In that case, the employer must pay the employee that salary according to the enforcement contract’s terms. If they do not, they can be held liable under breach of contract laws should they fail to fulfill their promise.
Elements of an Enforceable Contract
What exactly makes up an effective contract? Here are the key elements found in all enforceable contracts.
Offer and acceptance
An offer expresses willingness to enter a contract, provided certain conditions are met. Acceptance is when the other party agrees to the terms of the offer, and both parties are legally bound.
For example, if you’re selling a car, you make an offer that includes the price and any other conditions you’d like to have (such as a down payment or trade-in).
The buyer would then accept your offer by making the specified payments and agreeing to your conditions.
Mutual agreement
For a contract to be legally binding, both parties must agree on all terms without coercion or duress from either party.
This means that both parties must willingly enter into the contract without any influence from the other party or any external factors such as fraud or undue influence.
For example, if Bob tried to persuade Sally into agreeing to his offer by using threats or lies, then no contract would have been formed as a mutual agreement wasn’t reached between both parties.
A mutual agreement can be verbal or written but must be clear as to what each party expects to do to make it enforceable.
Consideration
Consideration is when something valuable is exchanged as part of a contractual arrangement to bind both parties legally.
The currency can be money, goods, or services that each party agrees to provide in exchange for something else from another party.
In the example above, Bob is providing his service (mowing Sally’s lawn) in exchange for $50 from Sally every week – this is a consideration under a contract. It makes it legally enforceable should one party fail to fulfill their obligations under the contract.
Legal capacity
Both parties must have legal capacity for a contract to be enforceable. It means they must understand what they agree to and should not be under any form of disability, such as mental incapacity or minority status (under 18 years old).
In our example above, let’s say Sally was only 12 years old when she accepted Bob’s offer.
This would make her legally incapacitated, so no valid contract exists due to her lack of legal capacity, even though an offer and acceptance had occurred between both parties.
Legality of the subject matter
The final element of an enforceable contract is its legality. It means that whatever is being agreed upon should stay within public policy and should break any laws.
If either occurs, there will not be a valid contractual relationship between the two parties, regardless of the many other elements in their arrangement.
In our example above, let’s say instead of mowing Sally’s lawn Bob offered to sell her illegal drugs. It’s against the law, so creating a valid contractual relationship between them is impossible even though all other requirements, like offer, acceptance, and consideration, were met.
The Critical Role of Enforceable Contracts in Business
Enforceable contracts play a critical role in business by providing legal certainty and clarity to commercial transactions. They establish structure and accountability that help to protect both parties involved in a transaction.
Here are the other reasons its role is highly critical in any transaction.
- Provide legal certainty – Each party can clearly understand and agree upon the terms of their agreement and any possible consequences they may face if they fail to comply with those terms.
- Establish accountability between the parties – Each party knows what is expected of them and helps keep expectations reasonably. As a result, parties do not engage in overreaching behavior or attempt to take advantage of one another.
- Lay out predictive roles and responsibilities – An enforceable contract also helps build trust between the two parties by laying out the roles and duties they must fulfill for their agreement to be upheld.
Enforceable contracts can provide a mechanism for dispute resolution should disagreements arise between the parties involved.
Common Challenges in Creating Enforceable Contracts
Creating enforceable contracts is a core part of conducting business. However, it is not always easy, as challenges can arise and create problems for both parties.
Ambiguous contract language
It occurs when the words used in an agreement are open to more than one interpretation. For example, consider a clause stating that “the contractor shall be paid upon completion of the project.”
While this may seem clear, it can be interpreted differently. Will payment be made when the project is delivered or after the customer has accepted it?
Such ambiguities can create conflict between the parties, resulting in costly legal disputes if not resolved quickly.
Missing essential elements:
Certain elements of a contract must be present to make it legally binding and enforceable.
These elements include an offer and acceptance, consideration (payment or other benefit given by both parties), intent to create legal relations, and certainty of terms.
Neither party should make any assumptions about the agreement they enter. All essential elements should be clearly outlined and agreed upon before signing.
Issues with capacity or authority
Each party must have the legal ability to enter into such an agreement, known as capacity or authority.
Both parties must have reached full age and possess legal rights in their name that allow them to enter into contracts without someone else’s permission (for instance, if they are minors).
If either party lacks such legal capacity, the contract may not be held up in court.
Illegal or unenforceable clauses
An illegal or unenforceable clause will render an entire agreement invalid. It makes it difficult for either party to claim damages from the other under normal circumstances.
One example could include a non-compete clause prohibiting employees from working with competitors after leaving.
These clauses may not necessarily be illegal but may only apply for limited periods and specific geographical areas so as not to undermine competition laws by overly restricting trade and the movement of people within a given industry sector.
Tips for Crafting Enforceable Contracts
Below are five tips to help craft effective and binding contracts.
- Put it in writing – Have it written so both parties understand their obligations. Use plain language that all parties can easily comprehend. Be sure to include essential details such as timelines, payment information, and any required signatures.
- Include all essential elements – Every contract must have certain essential elements to be considered valid and enforceable by a court of law. These include mutual agreement between the parties, consideration, and legality capacity.
- Ensure mutual understanding – Before signing the contract or taking any actions related to its terms, ensure both sides fully understand what each party agrees to do. If anything is vague or confusing, clarify these points before signing on the dotted line.
- Consider state laws – All states have laws regarding agreements and contracts. Ensure you know applicable regulations in your area before drafting a contract. You don’t end up with an unenforceable agreement due to non-compliance with local statutes.
- Have an attorney review it – Get a qualified lawyer specializing in business law to review your document before signing off. Check if everything is properly laid out according to your state’s laws. Leaving no room for misinterpretation or legal disputes.
How Fill Can Help Create Enforceable Contracts
Fill is an intuitive contract management platform that can help companies create enforceable contracts efficiently and accurately. With Fill, businesses can access the following key features:
- Automated Templates – Create a tailored contract from pre-existing templates or build one from scratch. The custom templates are designed to be legally compliant in any jurisdiction.
- Seamless Editing – Easily edit contracts with no prior coding knowledge required. Designed with a user-friendly drag-and-drop interface, users can quickly make modifications without slowing down their workflow.
- Electronic Signing – Send contracts for review and signature electronically, eliminating unnecessary paperwork. With Fill’s built-in eSignature feature, users can securely manage documents with just a few clicks.
- Secure Storage – Store documents in the cloud with built-in security features that keep confidential information safe and secure. Files are also backed up automatically. You don’t have to worry about losing data if anything happens to their devices.
- Audit Trail – Track changes made to documents with an easy-to-read audit trail feature that shows who viewed and edited documents and when they were last updated. This helps ensure transparent oversight of business processes and reduces the potential for disputes.
Using Fill’s streamlined process and intuitive design, businesses can easily create enforceable contracts that protect their interests while cutting costs associated with manual document management processes.
Plus, know your data is secure thanks to Fill’s advanced security protocols and automated backups.
Request a demo and see Fill in action – today, make contract management effortless.
