Class Is in Session: What Makes a Contract Enforceable?

Contracts underpin nearly every significant business relationship. They allocate risk, define performance obligations, establish payment and termination rights, and provide a framework for resolving disputes. Yet a signed document is not necessarily a well-constructed or enforceable agreement. Today’s lesson tackles the parts of a contract that makes it enforceable. 

The Lesson: A Contract Is More Than a Signature

Contract enforceability varies depending on the circumstances, the type of agreement, and the law that applies. However, an enforceable contract generally requires a clear offer, acceptance, consideration, intent to be legally bound, legal capacity, and a lawful purpose. Some agreements must also be in writing or include specific terms. Note that fraud, mistake, duress, unfair terms, lack of authority, or ambiguity may still affect enforceability.

1. Offer and Acceptance. One party generally makes a clear offer—stating what they are willing to do and on what terms—and the other accepts. The agreement may be written or oral, as long as both parties clearly intend to accept the same terms.

A common misconception is that an agreement must be signed to be enforceable. In many circumstances, an oral agreement can be a binding contract. The bigger problem is often proving what the parties actually agreed to, particularly when important terms were discussed but never documented. Some types of agreements, however, are subject to laws requiring a writing, such as certain agreements involving the sale or transfer of real estate or agreements that cannot be performed within one year. Problems can arise when negotiations are incomplete or the parties understand the agreement differently. Emails, texts, proposals, purchase orders, and conversations may become important evidence. For this reason, even when an oral agreement may be legally sufficient, putting the agreement in writing is generally the better business practice. This is why it’s important to memorialize the final terms in one place and make clear which version controls. 

2. Consideration. Generally, each party must give or promise something of legal value, often called “consideration.” In a typical business transaction, this is straightforward: one party provides goods or services, and the other provides payment. Consideration can also include a promise to perform a service, deliver property, refrain from taking a particular action, or assume a legal obligation. A promise without the necessary exchange of value may not be enforceable as a contract, although the exchange does not always have to be equal in economic value.

3. Clear, Definite Terms. A contract should be specific enough that the parties (and a court, if necessary), can determine what each party was supposed to do. For a small business, that may include: (a) what products or services are being provided; (b) the scope of the work; (c) price and payment terms; (d) deadlines and delivery dates; (e) each party's responsibilities; (f) change order processes; (g) how and when the relationship can end. The more important the term, the less you should leave it to assumption.

4. Authority, Legality, and Capacity. The person signing an agreement must have authority to bind the business, and the parties must be legally able to understand and agree to its terms. This is especially important for businesses with multiple owners, managers, or employees negotiating with customers and vendors. Contracts also cannot require illegal acts and may need specific terms, disclosures, or a written format depending on the transaction.

Your Take-Home Assignment

Before signing a contract, take a moment to confirm at least:

• the parties’ legal names and contact details; 
• the type of goods and/or services provided 
• each party’s responsibilities, including for approvals, materials, and delays;
• pricing, payment terms, expenses, and late fees; 
• procedures for making changes, deadlines, and renewal and termination terms; 
• dispute resolution;
• the signer’s authority to bind the business

The SJS Law Firm can help your small business draft, review, and strengthen its contracts to protect your interests and reduce the risk of costly disputes. For a complimentary consultation, please contact us at (202) 505-5309.