What Are the Requirements for a Binding Commercial Contract?

What Do You Need for a Commercial Agreement to Be Enforceable?

The commercial world functions on agreements. Whether you set forth the terms orally or in writing, you want to know that your agreement constitutes a binding and enforceable contract. There are five minimum requirements to any commercial contract.

There Must Be an Agreement.

Though this seems simple enough, it involves a number of requirements:

• There must be a minimum of two parties to the agreement.

• There must be a valid offer and acceptance of that offer.

  The offer must not be made in jest, must be for something that the person or entity can actually do, and must be reasonable. For example, a person may not offer to take another person to the moon (unless he or she owns spacecraft capable of doing so)—such an offer would not be considered valid. Furthermore, a promise to deliver an astronomical number of products may be deemed unreasonable and not valid.

  When accepting an offer, a person or entity may not materially change the terms of the offer. Doing so constitutes a rejection of the initial offer and the making of a counteroffer, which the maker of the original offer can accept or reject. Once an offer has been accepted, it cannot be retracted.

• The terms of the agreement must be sufficiently clear.

  The parties must understand that they are entering into a contract and what their rights and responsibilities are under the terms of the agreement.

There Must Be Consideration for the Agreement.

“Consideration” is a legal term of art that means there is a bargained-for exchange. Each party to the agreement must either give something of value or must refrain from doing something they have a legal right to do. As an example of the latter, a party may agree not to engage in commerce with competitors—such a promise would qualify as legal consideration.

In most contractual situations, the parties exchange a promise for a promise, with performance of those promises to take place at some point in the future. For example, one party may promise to pay a certain amount of money in exchange for the other party’s promise to produce and deliver certain goods. Once the promises are made, they are legally binding, unless one of the parties fails to perform under the agreement.

The Parties Must Enter the Agreement Voluntarily.

All parties must knowingly and willingly agree to perform as specified in the contract. A commercial contract may be unenforceable if it can be proven that one of the parties entered into the agreement because of:

• misrepresentation of a material fact by the other party,
• coercion or undue influence, or
• fraud by the other party.

The Parties Must Have the Necessary Contractual Capacity.

All parties must have the ability to understand that they are entering into a binding agreement and to understand its terms. An agreement may be rendered invalid if:

• one of the parties suffered from mental illness or incapacity at the time of entering into the agreement;
• one of the parties was intoxicated or under the influence of drugs when entering into the contract, such that he or she didn’t know what it was a contract; or
• one of the parties was under the age of 18 at the time of the agreement.

A person who enters a contract before the age of 18 may invalidate the agreement either before they turn 18 or for a reasonable period of time after doing so.

The Subject Matter of the Contract Must Be Legal.

Courts will not enforce a contract to perform an illegal act.

The Contract May Need to Be in Writing.

Although many oral agreements are enforceable, it is advisable in a business context to conduct all significant transactions in writing. In many cases, in fact, an agreement is not enforceable unless it is in writing. The law governing these situations, known as the “Statute of Frauds,” varies from state to state.

Summary

To be enforceable in a court of law, a commercial agreement is generally created by a valid offer and acceptance supported by legal consideration. The parties must enter the agreement voluntarily and must have the legal capacity to understand that they are entering a contract, as well as what their rights and duties are under the agreement. The subject matter of the contract must also be legal. Under the applicable Statute of Frauds, which varies from state to state, certain agreements must be in writing.