A “contract” is essentially an agreement between two or more parties that give rise to legally binding obligations. However, not all agreements are contracts that can be enforced in a court of law. For example, if two friends agree to play table tennis every Saturday, a married couple decides that one will cook and the other will wash dishes, or two actors sign a document on a Broadway stage during a play, these parties surely do not intend for their agreements to create legally binding obligations. Imagine trying to sue your friend for bailing on a table tennis game or taking your spouse to court over unwashed dishes! So, what distinguishes a contract from a non – binding agreement, and what are the requirements to conclude a valid contract?
The extra ingredient is that there must be a serious intention to create legally enforceable obligations, meaning that the parties should have intended for their agreement to be binding in law. In some cases, this intention can be difficult to determine, as it depends on the facts and evidence available.
Furthermore, for an agreement to be recognized as a valid and binding contract, it must satisfy the following requirements:
1. CONSENSUS
In order to reach “consensus”, the minds of the parties must meet (or at least appear to meet) on all material aspects of the agreement. For example, if one party is not serious about creating a legally enforceable obligation, but makes the other party reasonably believe they are, the law will protect that belief and uphold the contract. So, even if one person is just joking around, if the other takes it seriously, the law might say, "Joke's on you—this contract is binding!"
2. CAPACITY
All people, whether individuals or legal entities (like companies), have legal capacity, meaning they can hold rights and duties. However, not everyone has the capacity to perform actions that can change or end these rights and duties. This capacity depends on a person's legal status, particularly their age or mental competence. The law grants full capacity to act only to those who are considered sane, sober, and old enough to understand the nature and consequences of their actions. For example, a child under seven years old has no capacity to perform legal acts. Similarly, a juristic person (like a company) cannot have the same legal capacities or powers as a natural person to adopt a child, get married, or be appointed as the guardian of a minor.
3. FORMALITIES
In most cases, a contract can be formed without any specific formalities, as long as the essential requirements for validity are met and the parties clearly express their intentions. However, there are two important exceptions to this general rule:
I. Statutory Requirements: Certain types of contracts, such as those involving the sale of land or suretyship agreements, must adhere to prescribed formalities. These typically include requirements like writing, notarial execution, or registration.
II. Agreed Formalities: Parties themselves may agree that their contract will only be binding if certain formalities are observed, such as reducing the agreement to writing and having it signed by all parties.
It is often recommended to use an attorney in putting important contracts into writing. This helps in establishing the contract's existence and terms, which can be crucial when one party needs to prove the contract's validity later on, especially in complex or long-lasting agreements.
4. LEGALITY
The agreement must be lawful – meaning it must not violate statute or common law. This goes without saying, as it is an absolute rule that illegal contracts, which conflict with public policy or legal prohibitions, cannot be enforced. However, in certain circumstances, where the illegality only effects a part of a contract, the courts have allowed the illegal part of the contract to be severed from the rest, thus permitting the remainder of the contract to remain in force. Nevertheless, the courts have also, in some other instances, refused to do so, even if severance was possible. This refusal occurs because public policy views the actions involved as unacceptable, leading the court to declare the entire contract void. As such, it is crucial to consult an attorney to ensure that you do not enter into a questionable contract and risk potential legal costs and court proceedings to declare it void.
5. POSSIBILITY
In order for an agreement to be valid, the obligations entered into must be capable of performance, i.e., the parties cannot agree to do the impossible. As such, the general rule is that, if it the agreement is impossible to perform, then this will prevent the creation of obligations. However, please to bear in mind that the possibility requirement only relates to the performance itself, and not to achieving some underlying purpose. For example, a contract will be void due to impossibility of performance if the parties agree to the sale of an object that ceased to exist, such as an original painting which has been destroyed at the time when the contract was concluded, or if the object never existed at all. In such instances, the impossibility is so serious that nobody can tender performance, no matter how hard they try. However, in order to tender performance “impossible”, it is not enough that a particular party cannot perform. For example, if a person books an overseas tour, but unknowingly does not qualify for a Visa, then the booking will still remain valid, even though he cannot go on the trip.
6. CERTAINTY
Lastly, the agreement must have a definitive or determinable content, so that the obligations can be ascertained and enforced. In other words, the agreement must clearly spell out what each person involved has agreed to do. It can be somewhat challenging to determine whether a contract is void due to uncertainty, as the uncertainty can relate to the terms of the contract itself, or to the mechanisms used in the contract to determine performance. Nevertheless, if an obligation does not meet the requirements of certainty, then the obligation is invalid. As such, if the uncertain obligation can be separated from the other obligations created by the contract, then the other obligations will then remain in force. However, if it is not possible to sever the offending obligation, the contract as a whole is void. Therefore, it is important to use an attorney when drafting or reviewing contracts to ensure that all of the terms are clearly defined and enforceable, thereby minimizing the risk of uncertainty or invalid obligations that could potentially void the entire contract.
With all of the above elements in place, an agreement transforms from a mere understanding to a robust, legally binding contract.
