To Make Your Contract Enforceable, Ensure These Components Are Included
Last week, we gave you three reasons to write out your contract rather than relying on a verbal agreement. This week, our contract lawyers are back with an explanation of how to craft a written contract that will hold up under scrutiny.
A valid, legally enforceable, contract in Michigan will have 5 essential elements:
- Competency
- Proper subject matter
- Consideration
- Mutuality of agreement
- Mutuality of obligation
Let’s take a closer look at each requirement so you can understand why it’s necessary and how to make your contract compliant.
Competency: The Ability to Consent
No court will enforce a contract if it’s clear one of the members was unable to understand it or was coerced into signing. Everyone bound by a contract must be:
- A legal adult (over 18)
- Of sound mind and sufficient mental capacity
- Free from restraints (in this context, restrictions that affect their ability to freely consent)
It’s easy to understand why the courts have these requirements for legally binding contracts. Anyone who was forced or tricked into signing a document has not actually agreed to what it says—they’ve just done what they were told. Minors, likewise, are not considered able to enter contracts because of the potential for manipulation. However, a parent or guardian can sign on their child’s behalf.
Proper Subject Matter: No Illegal Terms
A contract that violates public policy or a specific statute will not be enforceable in Michigan courts. This one is self-explanatory: The state will not compel anyone to take an action that is against the law. We hope you’re not making this type of contract anyway, but there are some situations in which unscrupulous individuals or organizations attempt to convince signees they’ve forfeited certain rights.
For example, contracts absolving a medical provider of liability (exculpatory agreements) that are entered into prior to medical treatment are not enforceable. Even if you’ve signed one, you still have the right to bring a medical malpractice claim if your treatment did not meet the standard of care. The courts would deny any attempt to invoke the contract because its terms violate public policy.
Consideration: The Promises Each Party Is Making
Consideration is defined as a legal detriment that has been bargained for in exchange for a promise. Typically, consideration consists of a party promising to do something they are not legally obligated to do or a party promising not to do something they have a legal right to do. In plain speech, this means you are making a bargain that is not already compelled by law.
For example, if you backed into your neighbor’s car as you were pulling out of your driveway, your neighbor would have the right to sue you for the damages. However, say your neighbor agrees not to sue you if you pay him $2,000. This agreement provides for adequate consideration because your neighbor is giving up his legal right to sue you for the damages and you’re giving them $2,000 that you otherwise would not be legally obligated to give.
Mutuality of Agreement: A Common Understanding of the Terms
A valid contract requires a “meeting of the minds.” This means that there must be mutual assent (agreement from both sides) to the material facts of the contract. When courts analyze this element, they look to whether there has been an offer and an acceptance.
An offer is an expression of willingness to enter into a contract on certain terms. While intent matters in that the offeror’s purpose must be understood as a contract proposal, this person does not necessarily need to say there is a contract in place. What matters is whether a reasonable person would have perceived the offeror as intending to enter into a contract. Of course, when you are writing out your agreement, it would be hard for anyone to argue against their intent.
Acceptance, on the other hand, is the other party’s expression of assent to the terms of an offer. An offeror can require the acceptance to be in a certain form, such as in writing. If an offeror chooses to do so, the offeree must meet their requirements for the contract to be valid. If no form is specified, acceptance can be communicated in whatever manner the offeree prefers.
As an example, let’s look back at the contract we outlined in the previous section, where you and your neighbor came to an agreement after a car accident. Because of the relatively high stakes of your deal and your legal savvy, we’ll assume you both agree the contract should be written out. If you were the one who proposed the contract,
- the offer would be your willingness to pay $2,000;
- the certain terms would be your neighbor’s agreement not to sue you; and
- the acceptance would be your neighbor’s signature on a document that explains the offer and the terms (you would sign it as well).
If your neighbor proposed the contract, the specifics of the offer and certain terms would switch places. This would not make any difference in the contract itself; it’s simply a matter of who is considered the offeror versus the offeree.
Mutuality of Obligation: Conditions for All Signees
Mutuality of obligation means that both parties to the contract are bound by its terms. Mutuality is not present if one party is obligated to perform, but the other party is not. A contract will be found void if it lacks mutuality of obligation.
It’s easy to understand why this would be an issue: If your neighbor asked you for $2,000 after you backed into their car but did not waive his right to sue, why would you have reason to pay? Because you have no legal obligation to do so outside of the contract and would receive no benefit from this one-sided arrangement, no court would hold you to those terms—your neighbor would have to file a lawsuit if he wanted compensation.
A Complete Contract Doesn’t Have to Be Complex
Making a contract that has all 5 of the elements listed in this blog does not mean going deep into legalese. If you were in a situation where you and your neighbor had an unfortunate car accident, the example we laid out would meet all the requirements so long as your neighbor could be considered competent to sign. We might suggest adding some additional terms such as a timeline for fulfillment, but the basics of an agreement can be laid out in just a few sentences.
Even if your agreement is relatively simple, it’s a good rule of thumb to consult an attorney before you sign any contract to ensure you aren’t unknowingly forfeiting any rights or agreeing to terms you’re not comfortable with. If you’re dealing with a more complicated matter like a business agreement, you’ll probably want to leave the drafting of the contract itself up to an attorney.
Thanks for coming along with us to learn about what makes a valid contract. Next week, we’ll discuss breach of contract—or what happens when someone breaks your agreement.
Our contract attorneys can answer your questions and help your draft an enforceable legal agreement. Schedule your free consultation today by calling (888) 211-5798.
