With 29% of the workforce handling contract tasks, getting contracts right is crucial. As more people are involved, even small mistakes or oversights can quickly turn into major problems.
An invalid contract can disrupt business, waste valuable time and lead to expensive legal issues. The last thing you want is a critical deal falling apart or essential rights left unprotected due to missed details.
But what makes a contract valid?
In this guide, I’ll show you exactly that. We’ll walk through the key elements every valid contract needs. Plus, I’ll introduce you to Oneflow—a tool that simplifies contract creation and management, helping you create valid, efficient contracts every time.
What is a contract?
Simply put, a contract is a legally binding agreement between two or more parties. It establishes the rights and obligations of each party involved and provides a framework for performing those obligations.
It involves an offer made by one party, which is accepted by another party, resulting in a mutual understanding of the terms and obligations of the agreement. To be legally binding, a contract must have a valid offer, acceptance, consideration, legal capacity and the absence of factors like pressure, force or mistakes.
Importance of a legally binding contract in business
Contracts aren’t exactly the most exciting part of running a business. But, they’re necessary. Let’s say there’s a disagreement about someone’s rights or responsibilities at work or in a partnership. As a business, what can you do? Well, if there’s no valid contract in place, not much.
A well-drafted and clearly defined agreement can prevent misunderstandings, reduce the risk of disputes and provide contracting parties with a legal avenue for recourse if conflicts arise. By outlining the expectations and rights of each party, a contract creates a sense of security and trust, allowing for smoother business transactions.
Contracts in business can take various forms, depending on the nature of the relationship. An agreement between a company and its client may outline the scope of services, payment terms and any specific deliverables. On the other hand, a contract between a business and its supplier may address issues such as pricing, quality standards and delivery schedules.
A legal contract also protects businesses from potential liabilities. Including indemnification clauses allows you to shift the responsibility for some risks to the other party. For example, a contract between a construction company and a subcontractor may include an indemnification clause, stating that the subcontractor will be responsible for any damages or injuries resulting from their work.
In other words, contracts allow businesses to enforce their rights and seek remedies in case of breach. If one party fails to fulfill its obligations under the agreement, the other party may be entitled to seek damages, specific performance or other appropriate legal reactions.
Note that only carefully drafted, valid contracts reviewed by legal professionals ensure that they’re enforceable and protect your interests.
What makes a contract valid? Essential elements of a contract
A contract must meet certain essential elements to be valid and legally binding. This lays the foundation for the legal contract’s enforceability and provides certainty for all parties involved.
Offer
The first element of a contract is the offer. Think of it as a proposal. One party is willing to enter a binding agreement, clearly outlining what’s being exchanged, whether money, services or goods. For an offer to work, it needs to be clear, definite and easy for the other party to understand.
Once the offer is made, the other party can accept it, reject it or suggest different terms. If they propose new terms, the original offer is canceled, and the two sides negotiate a new agreement.
Note: An offer isn’t final until it’s accepted. It can be changed or taken back before acceptance. The offer should also specify how long the other party has to respond. If it’s not clear or the offer isn’t accepted, no contract is formed.
Acceptance
Once the requesting party makes an offer, the other party may accept it, signaling their agreement to the terms and conditions outlined in the offer. Just like the offer, acceptance must be clear. It also must be unconditional and match the terms exactly. If anything changes, it’s no longer acceptance but a counteroffer, restarting the negotiation process.
Acceptance can have different forms. It could be conditional acceptance, where the agreement depends on the offerer fulfilling certain conditions. It could be an option agreement, where the offeree agrees to the offer within a set timeframe and for a predetermined price. It could also be acceptance by action, where the offeree’s behavior clearly shows agreement.
Consideration
Contractual consideration is the price or promise each party gives in exchange for the other party’s promise. It’s an essential element of a contract, as it ensures that each party receives something of value for their obligations. This could be money, goods, services or even a promise to do or not do something. For a contract to be valid, the exchanged object must have legal value, meaning it’s something the law recognizes as worthwhile.
Take a SaaS company, for example. They offer software access in exchange for a monthly fee. The software (service) and payment (money) both have value, making the contract legally enforceable.
Consideration can be either executed, where the exchange happens right away, or executory, where it’s promised for the future:
- Executed consideration: A customer pays upfront for a yearly software subscription, and the SaaS company provides immediate access to the software.
- Executory consideration: The customer agrees to pay upfront for a subscription that includes future services, such as resolving issues or providing support during the software’s use. These services are delivered later, only if needed, but are already covered in the subscription.
Capacity
Capacity refers to a person’s ability to understand the nature and consequences of entering into a binding contract.
One aspect of legal capacity is age. In most jurisdictions, individuals must reach a certain age, typically 18, to have the legal capacity to enter into a contract. In most countries, minors lack the legal capacity to enter into binding contracts.
Mental capacity is also a consideration. Parties must have the mental capacity to understand the elements of a contract, its terms and the implications of the agreement.
Another aspect of legal capacity is the authority to sign a contract. In business transactions, the person signing the contract can do so on behalf of the entity they represent. Without proper authority, the contract may be deemed invalid and unenforceable.
Legality
Lastly, for a contract to be valid, its purpose and performance must be aligned with applicable contract law and federal laws and not contrary to public policy. For example, contracts involving the sale of illegal substances or promoting fraudulent activities are considered unlawful. Contracts made under pressure and ones that include fraud or false information also don’t hold up in court.
There also must be an intention to create a legal contract, which shows the seriousness of the agreement. This can be reflected in a written contract using formal language like:
- “This Agreement is binding.”
- “The parties agree to the terms outlined here.”
- “The state and federal laws of X will govern this contract.”
Create, sign and automate valid contracts with Oneflow
Now that we’ve covered the essentials of a valid contract let’s move to step two—creating and managing contracts efficiently.
The smartest way?
Use contract automation software like Oneflow.
Oneflow takes the hassle out of contract creation and management. It ensures your contracts are legally valid while keeping you fully informed and in control throughout the process.
Here’s how:
- AI-powered contract creation and management: Oneflow’s AI Review and AI Insights help you create contracts faster and get instant risk analysis. The AI Assistant also offers smart suggestions to improve your contracts, ensuring they are enforceable and compliant with regulations.
- Simple contract creation: Create, save and reuse contracts without needing to start from scratch each time. The intuitive contract builder lets you customize templates from our library or create new ones. See our guide to contract creation and contract checklist for top tips on crafting contracts.
- Real-time collaboration: Stay accurate and transparent throughout the process. Oneflow lets everyone involved view the contract and track feedback from others in real time. Permissions are controlled, so only the right people can comment or make changes.
- Secure and compliant e-signatures: With two-step authentication, Oneflow’s secure electronic signatures ensure your digital contracts are legally binding and compliant. This boosts enforceability and gives your company a trusted, compliant way to sign and manage agreements online.
- Automated workflows: Set predefined approval steps to ensure each contract meets required standards before finalization and party signing. Teams can track changes to keep things transparent and minimize the risk of unauthorized modifications. This helps preserve contract integrity and enforceability.
- Integrations: The platform seamlessly connects with tools like Salesforce, Hubspot, and Microsoft Dynamics. It makes transferring data into contracts easy and ensures all information stays accurate and up-to-date.
Our users get impressive results using these features.
On Capterra and G2, they share how Oneflow helps them create and manage valid and efficient contracts. With complete control over contracts, they can easily track follow-ups and ensure compliance.
The platform’s seamless integration with HubSpot and real-time collaboration on contracts reduce errors and streamline workflows. Users also praise customizable contract templates and easy customer access, which make managing contracts effortless.
Oneflow helps businesses stay organized and in control. It streamlines contract management and ensures valid contracts—all from one platform.
Ready to see the same results for yourself?
Conclusion
While knowing the essential elements of a valid contract is important, creating and managing legal contracts is still challenging. The smallest oversight can lead to significant issues, and with so many details to track, staying organized is no easy feat.
This is where Oneflow makes a difference.
The platform simplifies contract creation, management and signing, all in one secure, user-friendly platform. With templates, flexible e-signature options, and AI-powered tools for efficient reviews and edits, Oneflow streamlines your contract workflows and ensures accuracy every step of the way.
FAQs
What makes a valid contract invalid?
A contract becomes invalid if it lacks any essential elements: a clear offer, acceptance, consideration (something of value exchanged), the legal capacity of all parties and a lawful purpose. The contract may not hold up legally if the terms are unclear or one party lacks capacity, such as being underage. Agreements with illegal purposes, like engaging in unlawful activities, are also invalid.
How do I know if the contract is valid?
Look for clear terms and obligations to know if a contract is a valid, binding legal document. For example, a partnership agreement should outline profit-sharing ratios and responsibilities of business partners. You could also consult legal experts to be certain.
What makes a contract legally binding?
For an agreement to be a legally binding contract, both parties must clearly agree to its terms. For example, in an employment contract, the employer offers a job with specific conditions, and the employee agrees to perform duties in exchange for a salary. The contract must also comply with contract law and employment law and be free of pressure or mistakes that could invalidate it.
What are the 7 requirements of a valid contract?
The seven requirements of a valid contract are a clear offer, acceptance, the intention to create legal relations, consideration, legal capacity, free consent and compliance with the law.