Essential Elements of a Legally Binding Contract: What You Need to Know

Contracts are the backbone of any business — they govern your infrastructure, they are the rule book for all your relationships.

00:57 21 April 2023

Contracts are the backbone of any business — they govern your infrastructure, they are the rule book for all your relationships. In essence, they help create a clear understanding between peers and parties, provide a legal framework for carrying out transactions and protect the interests of all those involved. Nevertheless, not all contracts are created equal. Some contracts are legally binding, while others are not. Understanding the crucial and unique elements of a legally binding contract is key to upholding that your agreements hold up in court, protect your interests, mitigate risks, and help you avoid costly litigation. In this article, we will discuss what makes a contract legally binding and the ins and outs, the elements that compose it. We will also dissect how legal contract management software can be a valuable tool in creating and managing that paperwork.

What is a Legally Binding Contract?

A legally binding contract is an agreement between two or more parties that creates enforceable legal obligations — that is bound in the minutiae of the court system. When parties enter into a legally binding contract, they are agreeing to uphold the terms of that contract or face the consequences. If one party fails to stick to their obligations, the other party may seek legal recourse to enforce the terms of the contract. 

In order for a contract to be legally binding, it must meet certain criteria — we’ll get to those in a bit.

History of Contracts

Contracts have been used for thousands of years to facilitate business transactions — they are the stock and trade by which civilized nations and societies interacted in commerce. In ancient cultures, contracts were often made orally or through simple written agreements. As societies became more complex, more bound by common laws, so did the contracts. 

The concept of a legally binding contract emerged during the Middle Ages, particularly for trade between nations, and modern contract law - the one that inspired today’s clauses and value system - has its roots in English common law. 

Today, contracts are an essential and vital part of all manner of business transactions and are used to create binding agreements for a variety of relationships, from simple purchases, to employment, to marketable trade, to complex international business deals.

Essential Elements of a Legally Binding Contract

There are six essential elements that make up a legally binding contract:

Offer

An offer is a proposal made by one party to another, expressing their willingness to enter into a contract on certain terms — and to uphold those terms.

Acceptance

Acceptance is called when the party to whom the offer was made agrees to the terms of the offer. Both parties are entitled to a lot of back and forth — to negotiate.

Contractual Consideration

In a contract, both parties must receive and give a consideration in order for the contract to be legally binding.

Intention to Create Legal Relations

The parties that sign a contract must have a genuine intention to create legal relations. This means that the both must honestly and with all considerations uphold the terms of the contract.

Capacity to Contract

The parties must have the legal capacity to enter into a contract — by the laws of the region, state or country the contract is being signed they have to meet certain criteria in order to sign a contract. For example, that they must be of legal age and have the mental capacity to understand the terms of the contract.

Legality of the Subject Matter

The subject matter of the contract must be legal — lawful. Contracts that involve illegal activities or are against public policy are not legally binding.

How Legal Contract Management Software Can Help

Legal contract management software can be an invaluable tool in creating and managing legally binding contracts — it can ultimately streamline creation, management, negotiations and revisions, and also provide a secure storage location for these crucial agreements.

Here are some of the ways legal contract management software can help:

Streamlining Contract Creation

Legal contract management software provides a series templates and standard clauses that can be customized to create contracts quickly and easily. This can essentially helps reduce errors and ensure that all key elements of a legally binding contract are included.

Managing Contract Negotiations and Revisions

Legal contract management software can also assist and supervise the negotiation and revision process — by tracking changes, alterations and ensuring that all parties are aware of the latest version of the contract.

Secure Storage

This type of software can give you a secure storage location for contracts - on different servers, protected, and in cloud mode - ensuring that they are easily accessible when needed and protected from unauthorized access.

Automated Reminders

Another great gadget and feature of this software can also provide automated reminders throughout the contract’s lifecycle— reminders of dates, such as renewal or termination, ensuring that all parties are aware of their obligations under the contract.

Analytics and Reporting

They can also provide analytic, data correlation, and reporting capabilities — this feature gives businesses crucial insights into their processes. This can help identify and pinpoint areas for improvement that are in dire need of a makeover. 

The Role of Legal Contract Management Software in Today’s world

Legal contract management software plays a crucial role in making sure that all manner of agreements are legally binding and effectively managed. By streamlining, and flexibilizing the creation process, negotiations and revisions, this type of software is taking the world by storm. Making businesses more effective, more cutting-edge, more competitive.

Legal contract management software is an extremely valuable asset and tool for all departments and businesses that want to create, manage and supervise their agreements in real-time and throughout its whole life cycle — with greater efficiency and confidence. It is a resource that can end up rapidly becoming invaluable, not only saving you money and time, but making sure all your ducks are in order, all your Ts are crossed, and everything is in tip-top shape.