What makes a legally binding contract?

Many business transactions can be quick and simple, but some include protracted negotiations perhaps whilst you shop around for the best supplier or negotiate to get the best terms and conditions. 

Some businesses you interact with may have formal processes when it comes to constructing a contract, whilst others will be more relaxed for example ones you have a long-standing relationship with. 

It may be that some businesses that you work with have started to allow electronic signatures and you’re wondering if that still makes them legally binding and valid or if you have to sign in that format now. 

It’s important to have an understanding around what makes a legally binding contract, and why additional safeguards may need to be put in place. 

What makes a legal document? 

Calling a document ‘legal’ does not constitute legally valid material. For a document to be classed as a legally binding contract, it must contain certain elements:

• Offer and acceptance
  • It must contain a proposal of some kind and there must be clear acceptance of that proposal by the other party.
• Intention
  • All parties must understand and be willing to be legally bound together by the contract. Signing should not be achieved through deception or misleading them.
• Consideration
  • This is usually a cash payment, but it doesn’t need to be.  It could, for example, be the transfer of an asset.
• Capacity 
  • Parties entering into a contract must be over 18 and have full mental capacity to understand what they are signing.

5 steps to forming a contract

Contract law in England sets out 5 requirements in order for the contract to be legally formed:

1. An offer has to be made form one party to another
2. One party must accept the offer at the end of any counteroffers or negotiations
3. The price must be agreed
4. The two parties need to have the intention of entering the contract
5. Additional terms, if any, must be agreed by both parties

Do handshakes or oral agreements count? 

It is possible to complete the 5 steps listed above orally and ‘seal the deal’ with a handshake. However, an oral agreement is fine until there is an issue where you require clarity over each parties contracted obligations.  There must be certainty over the terms of the contract, or it won’t be enforceable. 

If the contract is broken, there is an increased risk of conflict as a lack of written terms means it is harder to hold either party accountable. It can also be difficult to show the agreed terms and without certainty over the contract terms, the contract could be invalid. 

Likewise, there is a risk that proof will be unavailable as to the exact terms or details from the oral agreement. It isn’t possible to remember each, and every statement spoken unless a witness is present or minutes are recorded and agreed.  That is why having a written contract gives each party more security.  This process also provides an opportunity to bring up any further details to be considered, negotiated or discussed, hopefully addressing potential areas of dispute before they actually arise. 

Paper versus digital contracts

Obviously, the main advantage to a written contract is that it provides clarity and reassurance over exactly what was agreed and therefore reduces the risk of disputes further down the line. 

It is possible to agree a simple contract through an exchange of emails without any formal signing of an agreement if the 5 requirements outlined must have been met.  That is why you need to be careful in your email exchanges and why having a separate written contract is the best way forwards.

The number of contractual disputes that appear in courts show that there is a huge scope for ambiguity in business agreements and in the interpretation of them. There’s also the risk of one party claiming that there was no intention to enter into a contract. This is why it’s advisable to have both parties confirm a written document by a signature or accept digital terms and conditions. 

If the contract in question is a high value contract or dependent on key personnel from either or both parties, getting terms drafted property and signed is not the only requirement in making the document valid. Checking the signatories’ authority to bind the contract could be a crucial pre-execution step.

Do digital signatures count on a contract? 

Digital signatures, if used, are binding and they have been recognised as a legal way to bind a contract since 2016.

If you wish to accept electronic signatures for your business contracts, then you should consider investing in a reputable software to ensure security and compliance with dad protection and privacy laws. This simple choice could help mitigate against fraudulent uses of digital signatures, for example, if someone uses your login details without authority.

It is advisable to discuss your position and sensitivities related to how a contract is validly executed with a solicitor who can help you navigate whether your circumstances suit using digital signatures to bind a contract or not.

Making sure amendments to a contract are legally valid

The way the contract in worded will determine how amendments become effective. With a written contract, signatures from both parties would be expected in order to assume an agreement has been made over any amendments.  You want to avoid a situation where a contract could be amended by accident – perhaps by junior employees from each contracting party having an email conversation between them.

In a contract drafted by a professional, clarity can be found in the execution clauses. For example, if the execution clauses state that the contract has to be signed in ink or electronically, then any amendments made in the future would have to be signed in the same way. 

How can Hegarty help? 

At Hegarty we have extensive experience in preparing and negotiating contracts covering a wide variety of circumstances in a wide range of sectors.  We also help our clients review and understand contracts, including those provided by other parties, so that our clients are best placed to understand the risks involved in any proposed contract and negotiate the terms and conditions to protect their business.