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Contracts are a fundamental part of business, so it is crucial to have a working idea of how they function. A legally binding contract is a valid agreement that is enforceable in most cases. When you sign a contract, you agree to hold up your end of the bargain. If you do not, then the other party could pursue you in court for a breach of contract. You should always read through any contract thoroughly before you sign it. This ensures you agree to all of its terms. But in some instances, a signed contract may not be legally binding. You might not be bound by the terms that you previously agreed to.

This article explains how a contract works and when you may not be bound by one even if you signed it.

How Does a Contract Work?

Contracts can range from a written real estate agreement to buying milk from your local dairy. A legally binding contract is one that you have to honour, or you can face legal penalties. 

Although ranging in complexity, all contracts usually contain these elements in some way:

Offer

One party must make a clear offer to another party. This offer needs two things:

  • it needs to be sufficiently clear that you can accept it without needing further negotiation (but you can still negotiate if you wish); and
  • the person who makes it must intend to legally bind themselves to that offer as soon as you accept it. 

Acceptance

You must accept the offer that the other party makes. In a written contract, you indicate this with your signature. You finalise this, and the contract is legally binding when you notify the offeror of your acceptance. Electronic signatures count as acceptance.

Tip: In online contracts, like a website’s terms and conditions, ticking the “I Agree” box also counts as acceptance, and you are bound by those terms and conditions. 

Consideration

A contract is effectively an exchange of promises. Consideration is what you give in exchange for what the other party offers. For your business, this is usually an exchange of something of value. 

For example, if you pay someone to paint your shop’s walls, consideration would be the money you give as payment.

Intent to Create Legal Relations

For a legally binding contract, both parties must intend to bind themselves legally. The courts judge this from your words and actions. For most of your business contracts, a court can infer your intention from the commercial context you enter into a contract unless you explicitly state otherwise.

Certainty of Terms

Each contract has terms that are essential to its functioning. If these terms are not certain when you agree to the other party’s offer, then the contract may not be legally binding.

For example, a price for the sale of a business is essential to that contract’s performance. This means it would be a key term.

Party Capacity

Both parties to the contract need to have the legal capacity to agree. This means that they are of sound mind and over the age of 18.

For example, someone who is drunk would not have the legal capacity to agree to a contract.

What Happens If These Elements Are Not Present?

In most cases, if these elements are not present, then you have not formed a contract with the other party, even if you signed a written agreement. Without these elements, a legally valid contract does not exist. This will depend on the contract itself and the context of your signing. 

For instance, if the other party does not know about your written acceptance in a signed contract, a court may rule it as an invalid contract. They do not know about your acceptance, so you have not fulfilled that step.

Other Possible Situations

There are also other situations where a contract may not be legally enforceable, even if you signed it and all the essential elements are present. This usually involves some kind of objectionable conduct, such as:

Duress

Where the other party forced you to accept a contract by serious threats or pressure.

Undue Influence

Where the other party abused their power to gain an improper advantage over you. This can include the other party taking advantage of your close and personal relationship to make you sign a contract.

Unconscionable Conduct

Where the other party takes undue advantage of certain circumstances like illness, age, or illiteracy.

Key Takeaways

A contract binds you if you sign it and accept its terms in most situations. But, in some cases, that contract may not be binding. If you can prove that some elements of the contract are absent, or the other party forced you into it, then you may not have to fulfil your contractual obligations. If you would like more information or help with your contract’s enforceability, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Is a signed contract legally binding?

Yes, a signed contract is legally binding in most cases. However, if you can prove that one of the key elements of a contract is missing, or if the other party unduly pressured your acceptance in some way, then it may not be legally binding.

What elements do a contract need to be legally valid?

To be legally valid, a contract needs an offer, acceptance, consideration, an intent to create legal relations, certainty of terms and both parties to be legally capable of signing.

What is legal capacity?

Legal capacity refers to someone’s ability to legally sign a contract and fulfil their obligations under a contract. A minor does not usually have legal capacity, nor does someone under the influence of alcohol or drugs.

What is undue influence in a contract?

Undue influence in a contract refers to someone taking advantage of an unfair power imbalance to pressure you into signing said contract. This can include the other party using your close relationship to influence you.

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