What is a contract?
A contract is a legally enforceable promise(s). Usually a written document, a contract involves two or more parties agreeing upon a desired outcome. It defines their mutual rights and obligations, and enables them to collaborate to fulfill their specific needs.
Are verbal contracts legally enforceable?
Not all contracts are in written form. Contracts can also be drawn orally or verbally and do not require a signature to be enforceable by law. These agreements are often drawn based on trust and are called handshake agreements. But handshake agreements can be challenging to prove in court. Therefore, it’s advised to draft your contracts and get them signed.
Are all contracts legally binding?
While most contracts need to be signed on white paper or stamp paper to be legally binding, all contracts must contain the below-mentioned elements to be enforceable by law. These include:
- Offer and acceptance
- Awareness and consideration
- Capacity
- Legality
Let’s take a closer look at what each of these elements contains.
Offer and acceptanceAn offer is the first essential element of a contract because a contract comes into the picture when there is desire and responsibility. Simply put, Party A wants something, and Party B can fulfill that want. Now, Party A drafts a contract offering payment in exchange for the product/service delivered by Party B.The offer encompasses the duties and responsibilities of the parties entering the contract and must demonstrate an exchange of value.The offer exists only if the offeree, or in this case, Party B, receives the offer. Once Party A makes the offer, Party B can revoke, alter, or terminate it at any point after it is received.Party B should communicate the acceptance of the offer verbally or in writing. The acceptance must be absolute and should mirror the terms and conditions of the offer for it to be valid. Party B also has the right to extend a counteroffer. If such is the case, the original offer terminates because the parties are now negotiating for a new desired outcome.
Awareness and consideration Referred to as “a meeting of the minds,” the awareness element of a contract requires that the parties involved are aware of entering into a contract. All parties must acknowledge the agreement’s existence and freely agree to be bound by its terms and obligations. If any party agrees to the terms and conditions under duress or influence, the contract becomes void.The offer encompasses the duties and responsibilities of the parties entering the contract and must demonstrate an exchange of value.Similarly, the contract signed between the parties must have an associated value as consideration. For example: If Party A offers money to Party B to buy a house, the house is a consideration. This consideration value could be money, an action, or an item.
Capacity Every person signing the contract should have the legal capacity to sign it and must clearly understand its terms, obligations, and consequences. Only then will the agreement be considered valid. Usually, people who fall under one of these categories are deemed not to have the legal capacity to sign a contract:
- Minors
- Someone under the influence of alcohol or drugs
- Someone with a brain disorder, such as Alzheimer's disease or dementia.
- Someone who cannot understand the language used in the contract.
While there are workarounds to overcome these, such as translating the contract into the signatories’ language or using a court-appointed representative who can sign on behalf of a minor, it is not the norm.
Legality A contract is considered legally valid only if its lawful object is not an illegal product. This lawful object is not the same as consideration. For example: If the consideration is to buy and rent a house, the object would be the purpose of buying/renting the home, such as hosting events or gambling. The object of the contract is considered unlawful in the following cases:
- It’s forbidden by law.
- It goes against the provision of any existing law.
- It’s fraudulent.
- It involves harm or injury to a property or a person, among other things.
- If the court regards it as immoral and if it opposes a public policy.
Similarly, a contract that involves criminal activity is not valid.
Even after the contract is signed, if it defies local laws, say in the event of a new government regulation, the agreement is considered invalid.
How does contract management software aid in making contracts legally enforceable?
A contract lifecycle management (CLM) solution streamlines the contracting process from contract initiation to renewal or termination. Adopting a CLM solution often leads to increased productivity, improved governance, and better risk mitigation. It aids in making contracts legally enforceable in the following ways:
- The legal team drafts contracts using pre-defined templates and an extensive clause library of legally approved clauses.
- With automated approval workflows, stakeholders are aware of the risks and opportunities of the contract.
- Seamless negotiation with password-protected documents and tracking comments and changes ensures transparency in the process.
- Most CLM solutions come integrated with digital signature software with military-grade encryption. This ensures your contracts are legally enforceable.
- An extensive obligation module helps to assign and track obligations without ever having to leave the contract document. This way, you never miss contractual obligations.
Zoho Contracts is a comprehensive CLM solution with simple, yet powerful features to improve efficiency across all aspects of the contract management process. Click here to request a demo or to sign up for a free trial. You can also write to us at support@zohocontracts.com