A legally binding contract occurs when the contract contains the essential elements. Basically, the parties to a contract must have capacity to enter into an agreement and mutual understanding regarding the contract terms. The parties must exchange something of value, and the contract must not violate public policy or any laws.
In general, most people and companies have the capacity to enter into a contract. In certain cases, minors and mentally impaired people may lack the capacity to enter into a valid contract. A contract with a minor is invalid, unless it involves necessities, such as food and clothing. If a mentally impaired person enters into a contract, a court will determine based on the totality of the evidence whether the individual possessed the required capacity.
Offer and Acceptance
A contract is enforceable when one party has made an offer and the other party has accepted the offer. Acceptance of an offer is based on whether a party to a contract actually accepted the terms of the offer. A counteroffer is usually not considered an acceptance. In most instances, a counteroffer is considered a rejection of the original offer. If an individual offers to buy another person's car for a certain amount, a valid acceptance occurs when the other party agrees to sell the car at the offered price. A counteroffer is considered a new offer which the original offering party must accept in order to form a valid contract.
A contract is legally binding when both parties have the same understanding of the essential terms of the agreement. For example, if one party understands that he is buying a pure-breed dog, and the other party has agreed to sell a mixed-breed dog, there is no meeting of the minds. Therefore, there is no contract.
Consideration is an essential element to establish a valid contract. Both parties must exchange something of value. Consideration can be money, a duty to do something or not do something, or anything else that has value. Contracts can be either bilateral or unilateral. Both parties to a bilateral contract promise to do something in the future. For example, if John offers to paint Joe's house and in return Joe offers to cut John's grass, there is a bilateral contract. In a unilateral contract, one party promises to give up something of value if the other party performs an action, but the latter party is not obligated to perform the action. For instance, Joe may agree to pay a certain amount if John paints Joe's house.
If one party to a contract has a prior obligation to perform his part of the agreement, there is no valid consideration. For example, if one party agrees to not drink alcohol until he turns 21, this is not a valid consideration because he is already legally obligated to refrain from drinking until age 21.
Any contract that contains illegal terms is unenforceable. In other words, if the essential terms to a contract stipulate the performance of illegal acts, the contract is invalid.