How to Create an Enforceable Contract
Since the founding of Jim Beam Whisky in the late 1700s during the early days of American capitalism, contracts have been an essential part of doing business. In those early days, far fewer deals were put in writing, with business owners relying on a firm handshake instead.
Fast forward a few hundred years, and a lot has changed in the world of business contracts. While verbal agreements are still enforceable (in most cases), the large majority of contracts today are in writing, and have become increasingly lengthy and complex, as companies and their lawyers try to anticipate all possible outcomes and eventualities. For this article, we’re going to put those complexities aside and focus on one simple question: What are the essential elements of an enforceable contract?
A contract must meet certain threshold requirements in order to be considered a legally valid and enforceable agreement. A legally enforceable contract can be used in court to support an alleged breach by either party to the underlying agreement. If that agreement is not enforceable for failure to meet the requirements of a valid contract, the parties will have few, if any, avenues for redress in the event of breach.
Elements of an Enforceable Contract
There are four fundamental requirements of a valid contract – offer, acceptance, mutual assent, and consideration. The agreement must include each of these four elements in order to create an enforceable and legally valid contract.
Every agreement memorialized in a written (or verbal) contract starts with an offer. An offer is a promise, the mere acceptance of which by the other party creates a binding contract. To constitute an offer, the statement must contain all necessary terms of the agreement, leaving nothing open for further negotiation. An offer is distinct from a general willingness to do something in the future upon the happening of a particular event.
Whether a communication contains an actual offer, or simply an expression of intent, is determined by what a reasonable person in the receiver’s position would have been led to believe. For example, if you approach a friend out of the blue and say “hey, let me buy your convertible!”, this is not an offer. The essential terms, such as price and time of delivery, must still be negotiated. However, “I’ll buy your convertible today at 5pm for $900 cash, as-is, without an inspection” would constitute an offer.
An acceptance is an agreement to the offer, on the exact terms of the offer. An acceptance typically must conform precisely to the offer and must not change, add, or qualify the terms of the offer – it must be unconditional, unequivocal, and unambiguous. Using the same example, if your friend says “sure, I’ll sell you the convertible today at 5pm for $1,200” that is a rejection and a counteroffer.
Meeting of the Minds and "Mutual Assent"
Mutual assent, often referred to as a “meeting of the minds”, is the process by which the parties come to an agreement on all essential terms of their contract (i.e., price, quantity, time of performance) in order to form a legally binding contract. Mutual assent is brought about through a valid offer and acceptance between the parties.
Finally, there must be something of value exchanged between the parties. The “thing of value” can be money, a service, or the forbearance of something a party had a legal right to do. If there is no mutual exchange of consideration, then whatever is given will be considered a gift.
Contracts that must be in Writing
In most instances, the contracts your business creates with various parties can be enforced, so long as they contain the four elements above, whether they are verbal or in writing. However, as noted above, some contracts are legally required to be in writing in order to be enforceable. Under Oregon law, the following agreements must be in writing to be enforceable:
- Contracts for the sale of interests in real property.
- Agreements that by their terms cannot be performed within a year. For example, a contract entered into between McMenamins Edgefield and Band of Horses on June 1, 2020, for Band of Horses to perform at Edgefield on August 1, 2021, must be in writing to be enforceable.
- Real estate broker contracts.
- Prenuptial Agreements.
If you need legal assistance or simply have questions about contracts for your business, or if you have other questions concerning a startup or small business, please contact us.