What Makes an Enforceable Contract?
Much of a business’s earning potential is driven by contracts. As such, many businesses spend a lot of time and money on their contract processes, ensuring that every contract is comprehensive, clear, and most importantly, enforceable.
Enforceability isn’t built into every contract, even those that are standardized and written in complex legal language. Even if every term and provision has been listed out and agreed upon, a written contract may still not be enforceable in a court of law.
Struggling to determine what makes a contract enforceable can cause problems for businesses and customers alike, preventing efficient contract execution and leading to a backlog of unexecuted contracts, which in turn can lead to unpaid bills, late payments, and in some cases, litigation. But there’s a better way to ensure contract enforceability.
How to determine if you have an enforceable contract
So, when is a contract enforceable?
Contract enforceability comes down to six essential factors: offer, acceptance, awareness, consideration, capacity, and legality. If your contract doesn’t have all of these elements, you may not have legal ground to stand on should something go wrong in a business relationship.
If you have any doubts about your latest contracts, ask yourself these six questions to make sure all your bases are covered.
1. Were both parties aware that they were entering into an agreement?
In order for a contract to be considered valid and enforceable, the parties to a deal must first be aware that they are entering into an agreement. This means the parties know that:
- The contract exists
- They are agreeing to be bound by the contract
A contract can be void if the parties don’t have sufficient awareness. For instance, if one of the parties signed the contract out of misrepresentation or fraud, the contract will not be considered valid.
2. Does the contract have an offer?
A contract is not enforceable until an offer is made and the other party accepts the offer.
An offer does not technically exist until the requesting party or the offeree has received it. Even after it’s been received, the offer can still be changed or terminated any time before acceptance.
The offeree can also make a counteroffer, which usually terminates the original offer. If there’s a counteroffer, the parties can start a new discussion about what they want to exchange.
3. Was there an acceptance of the offer?
Once the parties have set up the offer, the offeree will then decide whether to accept or reject the contract, either in writing or orally.
You can also communicate acceptance in the following ways:
- Conditional acceptance
- Option agreement
- Acceptance by action
Conditional acceptance is when the offeree accepts the offer, but there are still terms that need to be fulfilled before the acceptance is finalized.
A counter-offer is usually considered a termination of the original offer, but in certain circumstances, it can be considered a form of conditional acceptance. The Universal Commercial Code (UCC), for instance, recognizes that new conditions to an offer are valid, so long as those conditions will not cause hardship or surprise and are clear to both parties.
An option agreement is a way for offerees to make a non-binding offer. It allows offerees to back out of an offer if, for instance, their financing falls through. Unlike firm offers, option agreements usually require the offeree to pay a deposit.
Acceptance by action is when a party accepts a contract through an action. For instance, if an offeror places an order to buy something at the given price, and the offeree ships the goods as a response to the order, the offeror’s action has signified acceptance of the offer.
4. Does the contract have consideration?
A valid and enforceable contract must have contractual consideration.
In the world of contracts, consideration refers to the value that the parties have agreed upon, whether that’s an action, object, or exchange of services. Consideration does not need to have a monetary component to be valid and can be money, goods, or services.
For example, if you sign a contract to buy a car from someone for $6,000, your consideration is the $6,000, while the other party’s consideration is the car.
There’s also consideration if you sign a contract to make sure you will not repaint your house in any color but blue, and the other party pays you $700 a year to keep your promise. By promising not to do something that you would otherwise be able to do, you have passed consideration. The other party’s consideration is the $700 per year.
However, past consideration, or doing or giving something that predates the other party’s promise, is not valid. For instance, a contract is unenforceable if you promise to give $500 to another party in exchange for an act the other party did a year ago. The only exception is when there is a duty owed to a third party.
5. Did all parties have the capacity to enter into the contract?
After making sure your contract has contractual consideration, you need to see if each party signing the contract has the legal capacity to understand what they are getting into.
People in these categories may not have the legal capacity to enter a contract:
- Individuals under the age of 18
- Someone without a sufficient grasp of the language the contract is written in
- Someone under the influence of alcohol or drugs
- Someone with a disorder that renders them incapable of understanding the contract (i.e. dementia and certain developmental disorders)
Of course, there are exceptions and ways to get around these hurdles. For instance, a minor can have a legal personal representative, and a certified translator can provide a reliable translation of the contract.
6. Is the contract legal?
Finally, a contract has to be legal in the jurisdiction it will be operating in. A contract for an illegal product or action will not be enforced. Not knowing the law is not an excuse either: an illegal contract will still be held invalid even if the parties did not know that their contract was illegal.
To determine your contract’s legality, check all applicable local, state, and federal laws. If local, state, and federal laws don’t match up, you can reference Article 1, Section 10, Clause 1 of the United States Constitution.
The following circumstances will also render a contract illegal:
- When a contract violates public policy
- When fulfilling the contract will trigger results that are so one-sided and unjust that it will shock the court (unconscionability)
- When unforeseeable circumstances prevent the parties from fulfilling the contract (force majeure)
- When a mistake in the contract has a major effect on the responsibilities and duties that were initially agreed upon
- When any party signs the contract due to misrepresentations or false statements, threats, or coercion
Software and automation can help you keep track of all elements of contract enforceability, from offer to legality. With systems like Ironclad, you can minimize your risk of getting caught in a bad contract, and ensure compliance across the board.
How to create and enforce contracts using digital contracting
Now that you know when a contract is enforceable and what an enforceable contract is, you should consider using contract automation software and digital contracting tools to help ensure that every contract is enforceable.
Specifically designed to help in-house Legal teams revise and redline contracts, Ironclad Editor allows you to collaborate with your colleagues on any type of contract, from complex NDAs to sales agreements. This means your entire team can work together to make sure your contracts are enforceable, actionable, well-written, and contain all necessary clauses.
Unlike traditional contract management technology, Ironclad streamlines the contract process by putting all contracts in one place. This means all managers, stakeholders, and decision-makers will be able to manage, edit, track, review, and manage contracts as needed.
With Ironclad’s Workflow Designer, you’ll be able to set up a centralized location to answer all contract-related questions, as well as create contract workflows and templates that will always be in compliance with legal requirements and organizational policies.
Ironclad’s Contract Repository will allow you to secure, search, and use contract data to automate business, reduce risks, and ensure enforceability. It places all of your contract data in one centralized hub so you can quickly find the contract data you need and answer contract questions in seconds.
Ironclad also provides the following standout features to help you get the most out of your contracts:
- The ability to edit .docx files and collaborate with your colleagues on a shared platform with internal comments and @mentions
- Accept and reject changes like you would in Google Docs
- Advanced search system that lets you find important contract information in real time
- Easy-to-use contract hub
- Automated alerts that will remind you and your stakeholders of upcoming deadlines and milestones
- Template creation
- Sleek, modern user interface for administrators and business users alike
- Integration throughout your business, so that every department is on the same page, from Legal to Finance to Procurement
- Workflows that will speed up the business process
To learn more about creating and enforcing effective contracts, check out our guides, webinars, and more, or request a demo. Our sandbox demo will teach you how to deploy and configure a contract template and workflow as well as try out other functions. With Ironclad, you’ll be on your way to better contracting systems and more confidence in all your business agreements.