How to create a legally binding contract: key steps and requirements
Ever tried assembling IKEA furniture without instructions? That’s what running a business without a contract feels like—confusion, frustration, and pieces left over that don’t fit. Contracts are your instruction manual, ensuring every piece of your professional relationship clicks into place. From setting expectations to protecting interests, these agreements guide your business dealings to completion without a single Allen wrench. Let’s delve into how to craft contracts that make perfect business sense and leave nothing to chance.
Understanding contracts
Contracts are formal agreements between two or more parties that specify terms and obligations. They outline each party’s commitments and expectations, ensuring everyone is on the same page.
The primary purpose of a contract is to provide clarity and legal protection. When properly prepared, it becomes enforceable in court, which means it can serve as a safeguard against potential disputes. For entrepreneurs and small business owners, contracts are essential in setting expectations, avoiding misunderstandings, and maintaining professional accountability.
A legally binding contract acts as a road map for the relationship between the involved parties, reducing the chances of misunderstandings or disputes. It not only clarifies the expectations but also serves as a legal document that courts can enforce if a breach occurs.
There are many types of contracts, including service agreements, sales contracts, non-disclosure agreements, and partnership contracts. Each is tailored to specific business needs but shares the common goal of establishing mutual understanding and accountability.
Requirements for a legally binding contract
Not all agreements are legally binding. To ensure your contract has legal validity, it must meet the following key requirements:
All parties must be of legal age and mental acpacity: each party signing the agreement must be of legal age (usually 18 or older) and have the mental capacity to comprehend the contract terms. This ensures that the parties can legally and reasonably agree to the terms without misunderstanding or manipulation.
Lawful subject matter: the agreement must pertain to something lawful. For example, a contract for providing professional services is valid, whereas a contract for illegal activities is not enforceable.
Free consent: consent must be given freely and willingly. A legally binding agreement cannot involve coercion, undue influence, fraud, or misrepresentation. This ensures that all parties are entering the contract voluntarily.
Clear and agreed-upon terms: the terms of the agreement must be specific and clearly laid out in a way that all parties understand. This point eliminates room for ambiguity, making the agreement easy to follow.
Consideration (Exchange of value): a contract must involve “consideration.” This means that something of value (money, goods, or services) is exchanged between the parties. Without consideration, the contract would not be enforceable.
By adhering to these elements, you ensure that your contracts are not just agreements but legally binding documents that provide security and clarity.
Contracts are just the beginning. Enty’s suite of services also help you manage finances, automate invoicing, and streamline cash flow, making it the ultimate business companion for entrepreneurs and SMEs.
Verbal vs. written contracts
You might wonder if a handshake deal counts as a contract. The answer is yes, but it’s complicated.
Verbal contracts
Verbal agreements can be legally binding if they meet all the aforementioned requirements. However, they’re difficult to prove in court, which makes them unreliable, especially for significant agreements. While a verbal agreement might work for small, informal transactions, they’re not recommended for professional business dealings.
A significant risk with verbal contracts is the lack of tangible evidence. For instance, if one party denies the terms or conditions later, it becomes a "he said, she said" scenario, leaving the court with little to work with. This is why verbal agreements, while convenient, are better suited for minor, low-risk dealings.
Written contracts
Written contracts, on the other hand, are far more reliable. They provide clear evidence of the terms agreed upon and are easier to enforce. Some agreements, like real estate transactions or employment contracts, are required by law to be in writing.
Written contracts are particularly beneficial in business settings because they:
Outline detailed terms that protect both parties.
Prevent miscommunication by serving as a single reference point
Facilitate easier amendments or modifications, as changes can be documented explicitly.
For critical agreements, always opt for a written contract. It safeguards both parties and avoids misunderstandings.
How to sign a contract
The signing process is a crucial final step. Here are the primary methods for signing a contract:
1. Physical signatures
2. Electronic signatures
With technological advancements, electronic signatures (eSignatures) have become a widely accepted alternative. They are faster, often more secure, and legally recognized in many jurisdictions under laws like the ESIGN Act (U.S.) and eIDAS (EU).
Some advantages of electronic signatures include:
Speed up the agreement process.
Provide a secure and trackable signing method.
Reduce paperwork and the need for physical storage.
Implementation Tip: Use trusted eSignature tools such as Enty to manage and securely sign contracts online.
Why waste time printing and scanning when Enty’s eSignature service lets you sign and send contracts from anywhere? With encryption and legal compliance, Enty ensures your agreements are secure, fast, and valid in court. Whether you’re sealing deals locally or internationally, we’ve got you covered.
Tips for creating legally valid contracts
Creating contracts might seem intimidating, but following these practices will ensure your agreements are both professional and enforceable:
1. Include all necessary elements
Ensure your contracts meet the legal requirements mentioned earlier—clear terms, lawful subject matter, free consent, and consideration. Missing any of these can make the contract invalid. Additionally, avoid using overly complex legal jargon that may confuse the parties involved. A good contract balances legal precision with clarity.
2. Seek legal advice for complex agreements
If you’re drafting a complicated contract (e.g., partnerships, intellectual property, acquisitions), it’s wise to consult with an attorney. They can help you identify potential pitfalls, ensure the agreement protects your interests, and suggest clauses to address "what if" scenarios.
Not all contracts are created equal, and Enty’s template customization ensures yours are professional and tailored to your needs. Choose from pre-built templates for service agreements, NDAs, and more, then easily adjust clauses and formatting. Save time while creating contracts that reflect your business’s unique style and requirements
3. Allow sufficient time for review
If you’re drafting a complicated contract (e.g., partnerships, intellectual property, acquisitions), it’s wise to consult with an attorney. They can help you identify potential pitfalls, ensure the agreement protects your interests, and suggest clauses to address "what if" scenarios.
4. Don’t skip the signing process
Once the terms are agreed upon, obtain signatures from all parties. Without signed consent, the agreement is incomplete and unenforceable. Make sure the parties sign in the designated spaces, using their full legal names for added clarity.
5. Store contracts securely
After signing, store your contracts in a secure location, either physically or digitally. Digital storage tools with encryption capabilities offer better protection against unauthorized access. Consider platforms that allow you to set access permissions for sensitive agreements.
Final thoughts
A handshake or a verbal agreement might feel convenient, but they’re no substitute for a well-drafted contract. Contracts are the ultimate guardians of your business, ensuring expectations are met and risks are minimized. They allow you to focus on growth while protecting your interests in every partnership. So, whether you’re a startup founder or a seasoned entrepreneur, make contracts your first line of defense. Start crafting agreements today and watch your business thrive with the peace of mind only legal certainty can provide.
