How To Make a Legally Binding Contract Between Two Parties

Legally binding contracts are often found in everyday actions like subscribing to Netflix or shopping at a supermarket though we might not be aware of them or consider them legally binding. 

In a not so distant reality, however, there exist complex transactions that cannot be carried out without us consciously agreeing upon and signing a contract — real estate deals, business deals, are some examples.

In these cases, legally binding contracts remove ambiguity and protect parties from serious complications. Therefore, learning how legally binding contracts work and the essential elements that make them legally binding is crucial as it provides legal protection if things go awry.

In this article, we'll discuss both legally and non-legally binding contracts, elements of a legal contract, who can enter into a legally binding contract, and how to create legally binding contracts at scale.

Binding and Non-Binding Contracts

Picture this: Jerry offered to help Anthony, nurture his garden while the latter’s away for a one-month vacation. Three days into Anthony's vacation, Jerry called to say he could no longer keep their agreement because the work was more hectic than anticipated.

Anthony was aggrieved because this meant he'd cut short his vacation. Will the court listen to him if he takes legal action to force Jerry to keep his promise?

The simple answer is no.

Why? 

Because it lacked elements that make a contract legally binding, one of which is consideration. Consideration describes the  demands exchanged in the transaction, money and property for example, to make a contract valid, ensuring all parties have obligations.

Suppose the contract had consideration, their deal still missed another element—intention to form legal relations. The court believes that domestic or social arrangements such as those between friends, siblings, or partners are not often intended to be legally binding.

Lack of these elements makes the contract non-binding.  

While the example above is verbal and informal, written contracts can also be non-binding, especially those used to express agreements on common terms like:

• Memorandum of Understanding (MOU): A document describing a mutual agreement between parties. It outlines the terms and understanding but does not commit the parties towards execution obligations.
• Letter of Intent (LOI): This outlines the initial understanding between parties who intend to enter into a formal agreement. It indicates the parties' intention to negotiate in good faith but is generally non-binding.
• Term Sheet: It's commonly used in venture capital financing, mergers and acquisitions, and other types of investment negotiations for outlining the deal terms and conditions before drafting the main contract and it's typically unenforceable.
• Draft Agreement: A preliminary version of a contract under review and negotiation. Until it is finalized and signed by all parties, it remains non-binding. 

As this article points out, MOUs and contracts often have similar terms, and the key difference is “intention.” The same applies to other agreements—they’re created with the intent that they are legally non-binding. Hence, you must explicitly state it if you intend to make them binding.

In contrast to a non-binding contract, a binding contract is one that the court will enforce because it contains the essential elements of a valid contract.

Here’s a summary of the differences between binding and non-binding contracts:

What Do You Need to Make Legally Binding Contracts

An agreement between parties becomes legally binding when it includes the following elements: 

Offer and acceptance

One party must make a clear offer of a good or service that forms the subject of the agreement, and the other party must accept it after fully understanding the contract and without coercion or undue influence. For example, in the case of Jerry and Anthony, Jerry offered—to nurture Anthony's garden—and Anthony accepted.

Consideration

There must be an exchange of something valuable between the parties. This could be money, services, goods, or a promise to perform or refrain from performing an action, creating mutual obligations. For instance, if Jerry offered his gardening services as a business and Anthony paid him, their agreement would’ve been legally binding.

Capacity

Parties entering a contract must be legally capable of doing so. This typically excludes minors (under 18 years) and mentally incompetent individuals who suffer from  severe intellectual disabilities, dementia, or mental illness, or those under the influence of drugs or alcohol. An incapacitated person (or their legal guardian) can choose to affirm or void the contract.

Intention to form legal relations

This requires the parties entering a contract to agree to involve the court if necessary. However, because the court can't interpret terms and offer judgements based on assumptions, it judges intentions based on the circumstances surrounding the agreement. 

Commercial agreements are therefore seen as clear indications of the intention to form a legal bond. 

In contrast, for social and domestic agreements, the court assumes a non-legal intent unless proven otherwise, as in the case of Simpkins v Pays, 1955, where Ms. Simpson agreed to share the prize of her coupon competition with her boarder, Ms. Pays. When Ms. Pays refused to share the prize, Ms. Simpson sought legal action. The court found that despite the informal context, the nature of the agreement shows an intention to create a legal bond.

Legality 

The subject matter and terms of the contract must comply with the law and public policy. Contracts involving prohibited transactions, such as prostitution or drug trafficking, are not legally binding. Additionally, unconscionable terms—so one-sided or oppressive that they shock the conscience—are not enforceable.

Note: In some contract types, mostly non-compete and employment agreements, if certain terms are deemed unenforceable, courts may apply the blue pencil doctrine. This doctrine allows courts to modify or strike out the unenforceable part of a contract, leaving the remainder intact. However, in some countries, the doctrine only allows striking out without modification, and in certain U.S. states, it doesn’t apply at all.

Extra Steps to Ensure a Legally Binding Contract 

When entering into a contract intended to be legally binding, it's wise to take extra steps to support its enforceability:

• Use Written Form: Whenever possible, formalize agreements in writing to avoid ambiguity.
• Collect Evidence: Keep records of all communications and transactions related to the agreement.
• Include Parties Signature: Have all parties sign the contract to indicate their agreement and intention to be bound. E-signatures are a legally acceptable and convenient method for this.
• Ensure Fairness: Make sure the terms are fair and not deemed unconscionable.
• Clear Terms and Conditions: Avoid misinterpretation by clearly stating the terms and conditions and using simple words.

These practices enhance the enforceability of your contracts and reduce the risk of disputes.

Can Anyone Make a Legally Binding Contract?

Anyone can enter into an agreement, but not everyone can make a legally binding contract. Capacity rules require that a person entering a binding contract must be at least 18 years old and mentally stable. Also, businesses can only enter contracts through authorized individuals, such as CEOs and managers. 

Effect of Verbal and Written Contracts on Enforceability

If you hire a fridge repairer to fix your fridge, do they pull out a written contract for you to sign? Probably not.

Many agreements are reasonable to handle verbally and are yet enforceable. The enforceability is based on the parties' intention rather than the method of contract formation which is why these agreements are also termed implied contracts.  

But, unlike written contracts, which clearly outline detailed terms and intentions, verbal contracts are often vague. This lack of clarity makes verbal contracts harder to enforce, as they require careful examination to ensure the terms are obvious to both parties. Hence, verbal contracts often need additional evidence, such as texts, emails, audio recordings, video footage, or witness testimony, to support their enforcement.

However, certain statute of fraud contracts must be in written form to be legally binding. These include:

• Contracts for the sale of real estate
• Contracts that cannot be performed within one year
• Contracts for the sale of goods over $500
• Promises to pay the debt of another
• Contracts made in consideration of marriage
• Contracts for the sale of securities
• Contracts for the transfer of real estate and intellectual property

Suggested read:

Are Electronic Signatures Legally Binding?

Find out whether electronic signatures hold the same legal weight as handwritten signatures, and how they streamline modern contract processes.

How to Make Legally Binding Contracts at Scale for Businesses

If you're a business that frequently hires freelancers or employees, or deals in real estate, you're likely creating numerous contracts. To save time and money while ensuring legal enforceability, use contract automation tools like Docupilot.

Where Do You Start?

Use Templates: As “create once, use forever” resources, ensuring your template meets legal requirements is a worthwhile effort. If you can't draft a legally binding contract, consider hiring a lawyer to draft it, so you can simply upload it into Docupilot.

When you Sign in to Docupilot, click “Create Template”. 

Click “Online Builder” to draft templates from scratch.

Or import your lawyer-drafted template in the available formats.

Autofill Templates: Instead of copy-pasting details to customize your template, use autofill to streamline the process and reduce errors. To do this, identify parts of the contract that change constantly such as name, date, and address.

Replace them with tokens from the curly bracket button. 

Now, integrate your template with your data sources such as CRMs, Spreadsheet, and forms using Zapier or Make from “Bulk Merge”.

This way, new details added to your data sources, trigger docupilot to create a new custom contract.

Note: While data errors such as misspelt names or addresses may not render a contract invalid, they reflect poorly on your professionalism and can negatively impact your business reputation.

E-Signature: To finalize a legally binding contract, get signatures. Click "Delivery" and choose from the various e-signature tools including DocuSign, Signable, Yousign, Eversign, SignNow, and Dropbox Sign.

Once you set up your e-signature, Docupilot will automatically route your contract for signing after generation.

Protect Your Business With Legally Binding Contracts

With an understanding of how to create legally binding contracts, use non-legally binding agreements only when you don't desire enforcement. If enforcement is the goal from the outset, ensure your contracts include all essential elements and take additional steps to ensure enforceability, such as using a written format with signatures and incorporating clear and fair terms and conditions.

For businesses, especially those managing numerous agreements, Docupilot can accelerate contract generation while maintaining enforceability. 

Want to see how it works? Sign up for a free 14-day trial.