What is a binding contract?

A binding contract has the essential elements of a contract but requires capacity and legal purpose. The essential elements of a contract are mutality of obligation (comprised of offer and acceptance), definite terms and consideration. If these elements, or capacity and legal purpose are lacking, then the contract may not be binding.

Basic Elements of a Contract

The basic elements of a contract include mutuality of obligation, definite terms, and consideration. Mutuality of obligation, or meeting of the minds, is demonstrated by offer and acceptance. An offer is when one party (the offeror) proposes some sort of exchange with another party (the offeree). Acceptance is when the offeree assents to the terms of the offer.

Definite terms means that the terms of the contract are reasonably certain. This is because a court must be able to look at the bargain and determine the parties' obligations.

Consideration is what the parties agree to exchange. The consideration in the contract must be something of value, but it need not be a tangible or monetary item. Consideration can also be an action that one is not legally obligated to take, or refraining from doing something one has the legal right to do.

In addition to these basic elements of a contract, the parties must have capacity to contract and the purpose of the contract must be lawful. Otherwise the contract may not be binding.

Capacity

The parties must have capacity in order to create a binding contract. Capacity refers to an individual's ability to enter into a contract and covers mental incompetence, infancy, and the authority to contract.

A contract is not binding if a mental impairment prevented one of the parties from understanding the nature and consequences of the transaction. Mental incapacity can be the result of developmental disability, insanity, senility, or drug or alcohol intoxication. However, if voluntary drug or alcohol intoxication is the basis of the incapacity, the incapacitated party can only avoid performing on the contract if the other party had reason to know that, because of the intoxication, the intoxicated party was unable to understand the nature and consequences of the transaction or was unable to act in a reasonable manner in relation to the transaction.

Infancy refers to the age a person must be in order to contract and in most states, the age is 18. The fact that one of the parties is a minor does not automatically invalidate the contract but a contract made by a minor is generally voidable by the minor, even if he misrepresented his age. In addition, if the minor turns 18 (or the age of majority in his state), the minor can still void the contract within a reasonable time.

Lastly, a party must be authorized to enter into a contract. This means that if one party is acting on behalf of someone else, the person burdened must have given that party authorization to act on his behalf.

Legal purpose

In addition to capactiy, a contract must be for a legal purpose in order to be binding. A contract that requires one or both of the parties to do something illegal or that exists in order to complete an illegal objective is not binding on either party. In addition, the purpose of the law may not violate public policy. Examples of contracts that are not for a legal purpose or that are against public policy are contracts that involve a crime, that limit consumer protections, that interfere with family relationships, or that excuse a party from liability for harm cause by intentional or reckless conduct.