When does an Agreement become a Binding Contract?

One of the foundational components of a successful start-up is ensuring the start-up initiates and participates in contracts that are clear and legally binding. But when does a mere agreement between two parties become legally enforceable? Below are five key elements you should consider when drafting or signing your next commercial contract.

1. Offer and Acceptance.

As obvious as it may be, it is important to reiterate- a contract is only formed when one party has made an offer and the other party accepts it. Acceptance of the exact terms of the offer is crucial. If the offeree supposedly accepts the offer but on varied terms, no contract will be formed. As this will be seen as a counteroffer and if accepted be deemed the legally valid terms of the contract.

2. Consideration.

‘Consideration’ is the price given in exchange for goods or services under the contract. Usually, this is money but it can be anything of value. Consideration must be provided by both parties- an offeror cannot enforce a contract unless something is given in return.

3. Intention to be bound.

The parties must have the intention to create legal relations. This is particularly important in a commercial context, lack of mutual intention to create a legally binding arrangement will result in a non-enforceable contract.

4. Certainty of Terms.

Technically the parties do not have to agree on every single term of the proposed contract for it to be binding. But all essential terms must be agreed on and the contract, in general, must not be vague or ambiguous. Though it is always best to agree on all the important terms if possible, to reduce the chance of a dispute arising. However, if a dispute were to arise the courts will use a standard of reasonableness on the basis of previous similar cases or legislation to decide whether it is reasonable to deem the disputed contract legally enforceable.

5. Does it have to be in writing?

According to the law, a contract can be in writing, be made orally, be inferred by conduct, or be formed by a combination of all three. Because there must always be offer, acceptance, consideration, an intention to create legal intentions and certainty of terms, it is more convenient to evidence this all in writing. But in the absence of writing and these essential elements are all found, the contract will still be binding. However commercial solicitors very strongly advise that your commercial contracts are always in writing to reduce the risk of potential misunderstandings and disputes.

 

By referencing these factors to execute clear legally sound contracts, your start-up will be able to plan transactions more intelligently and avoid any potential pitfalls. ⠀

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