In order to be considered an enforceable contract, the parties to the contract must exchange something of value. If a buyer contracts for lawn service, for example, the buyer receives lawn mowing service, and the seller receives money. Show Consideration must be mutual. Both parties must give something of value and receive something of value. If only one party receives value from an arrangement, the arrangement is generally defined as a gift rather than an enforceable contract. The consideration does not need to include money. For instance, an athletic apparel company may provide the Athletics Department with basketball shoes in exchange for the exclusive rights to advertise its logo on sports uniforms. Although no money exchanged hands, this type of arrangement would represent legitimate consideration to both parties. The market value of the consideration is, for the most part, irrelevant from a legal perspective. The law is concerned with whether the parties desired and assented to the contractual arrangement, not whether the exchange represented a fair market bargain.
So, when is a contract enforceable? Contract enforceability comes down to six essential factors: offer, acceptance, awareness, consideration, capacity, and legality. If your contract doesn’t have all of these elements, you may not have legal ground to stand on should something go wrong in a business relationship. If you have any doubts about your latest contracts, ask yourself these six questions to make sure all your bases are covered. 1. Were both parties aware that they were entering into an agreement?In order for a contract to be considered valid and enforceable, the parties to a deal must first be aware that they are entering into an agreement. This means the parties know that:
A contract can be void if the parties don’t have sufficient awareness. For instance, if one of the parties signed the contract out of misrepresentation or fraud, the contract will not be considered valid. 2. Does the contract have an offer?A contract is not enforceable until an offer is made and the other party accepts the offer. An offer does not technically exist until the requesting party or the offeree has received it. Even after it’s been received, the offer can still be changed or terminated any time before acceptance. The offeree can also make a counteroffer, which usually terminates the original offer. If there’s a counteroffer, the parties can start a new discussion about what they want to exchange. 3. Was there an acceptance of the offer?Once the parties have set up the offer, the offeree will then decide whether to accept or reject the contract, either in writing or orally. You can also communicate acceptance in the following ways:
Conditional acceptance is when the offeree accepts the offer, but there are still terms that need to be fulfilled before the acceptance is finalized. A counter-offer is usually considered a termination of the original offer, but in certain circumstances, it can be considered a form of conditional acceptance. The Universal Commercial Code (UCC), for instance, recognizes that new conditions to an offer are valid, so long as those conditions will not cause hardship or surprise and are clear to both parties. An option agreement is a way for offerees to make a non-binding offer. It allows offerees to back out of an offer if, for instance, their financing falls through. Unlike firm offers, option agreements usually require the offeree to pay a deposit. Acceptance by action is when a party accepts a contract through an action. For instance, if an offeror places an order to buy something at the given price, and the offeree ships the goods as a response to the order, the offeror’s action has signified acceptance of the offer. 4. Does the contract have consideration?A valid and enforceable contract must have contractual consideration. In the world of contracts, consideration refers to the value that the parties have agreed upon, whether that’s an action, object, or exchange of services. Consideration does not need to have a monetary component to be valid and can be money, goods, or services. For example, if you sign a contract to buy a car from someone for $6,000, your consideration is the $6,000, while the other party’s consideration is the car. There’s also consideration if you sign a contract to make sure you will not repaint your house in any color but blue, and the other party pays you $700 a year to keep your promise. By promising not to do something that you would otherwise be able to do, you have passed consideration. The other party’s consideration is the $700 per year. However, past consideration, or doing or giving something that predates the other party’s promise, is not valid. For instance, a contract is unenforceable if you promise to give $500 to another party in exchange for an act the other party did a year ago. The only exception is when there is a duty owed to a third party. 5. Did all parties have the capacity to enter into the contract?After making sure your contract has contractual consideration, you need to see if each party signing the contract has the legal capacity to understand what they are getting into. People in these categories may not have the legal capacity to enter a contract:
Of course, there are exceptions and ways to get around these hurdles. For instance, a minor can have a legal personal representative, and a certified translator can provide a reliable translation of the contract. 6. Is the contract legal?Finally, a contract has to be legal in the jurisdiction it will be operating in. A contract for an illegal product or action will not be enforced. Not knowing the law is not an excuse either: an illegal contract will still be held invalid even if the parties did not know that their contract was illegal. To determine your contract’s legality, check all applicable local, state, and federal laws. If local, state, and federal laws don’t match up, you can reference Article 1, Section 10, Clause 1 of the United States Constitution. The following circumstances will also render a contract illegal:
Software and automation can help you keep track of all elements of contract enforceability, from offer to legality. With systems like Ironclad, you can minimize your risk of getting caught in a bad contract, and ensure compliance across the board.
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An adhesion contract exists if the parties are of such disproportionate bargaining power that the party of weaker bargaining strength could not have negotiated for variations in the terms of the adhesion contract. Adhesion contracts are generally in the form of a standardized contract form that is entirely prepared and offered by the party of superior bargaining strength to consumers of goods and services. Adhesion contracts are commonly used for matters involving insurance, leases, deeds, mortgages, automobile purchases, and other forms of consumer credit. Because adhesion contracts do not afford consumers a realistic opportunity to bargain, the consumers are often faced with adhesion contracts on a take-it-or-leave-it basis. Under such conditions, the consumer has little to no ability to negotiate more favorable terms. Instead, consumers cannot obtain the desired product or service except by acquiescing in the form contract. Courts may look at the doctrine of reasonable expectations to determine whether to strike down an adhesion contract. The doctrine of reasonable expectations states that a party who adheres to the other party’s standard terms does not assent to the terms if the other party has reason to believe that the adhering party would not have accepted the agreement if he had known that the agreement contained the particular term. In other words, people are bound by terms a reasonable person would expect to be in the contract. Courts may also look at whether the provisions are written in clear, unambiguous terms when determining whether to strike down an adhesion contract. This is based on the doctrine of unconscionability. Procedural unconscionability deals with the contract formation process and whether the bargaining process was deficient. Some factors of procedural unconscionability include duress, fraud, undue influence, and fine print. Substantive unconscionability deals with the content of the contract and whether the nature of the contract terms is oppressive. Some factors of substantive unconscionability include inflated price, unfair disclaimers, immoral clauses, and contracts that contravene public policy. Electronic Adhesion ContractsThere are three types of electronic adhesion contracts: browse-wrap, click-wrap, and sign-in-wrap. Browse-wrap contracts may require consumers to click through multiple hyperlinks to read and agree to the terms and conditions. Therefore, courts usually do not enforce browse-wrap contracts because of the procedural unconscionability of buried terms. See Jerez v. JD Closeouts, LLC, 36 Misc. 3d 161. On the other hand, courts do generally enforce click-wrap and sign-in-wrap contracts. Click-wrap contracts require that consumers click “I agree” by means of an immediately available pop-up box. See Caspi v. Microsoft Network, 323 N.J. Super. 118. Sign-in-wrap contracts include a hyperlink, often labeled as “Terms of Service” or “Terms and Conditions,” that is located by a sign-up button. Sign-in-wrap contracts require that users electronically accept the terms by clicking “I accept” or “I agree” as the last step of the sign-up process before allowing consumers to use their products or services. [Last updated in December of 2021 by the Wex Definitions Team]
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What is a contract where one party either accepts or rejects the terms of a contract written by another party?
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