What makes a contract legally binding?

What is a legally binding contract?

In contract law, the foundation of a legally binding agreement is the mutual consent of each party to the contract to be bound by the terms and conditions of the contract. Legal capacity is essential; each party to the contract must have the ability to enter a contract for it to be legally enforceable.

There is a distinction between agreeing on the terms of the contract and actually entering into a legally binding contract. It is important to recognise that parties may negotiate the terms and conditions, but a legally binding agreement is only formed when both parties intend to be legally bound. This applies to all types of contracts.

The conventional approach in contract law is to determine whether there has been a clear offer and acceptance. Acceptance is typically a final and unqualified agreement to the terms of the contract. However, entering a contract does not always require explicit verbal or written acceptance; acceptance may be inferred from conduct. For example, a party to the contract may accept an offer by their actions, making the contract legally enforceable even without a written contract.

In some cases, silence may indicate rejection of an offer, but under certain circumstances, silence combined with conduct may amount to acceptance. If a party to the contract knows the terms and conditions and takes the benefit of the offer, this may indicate a legally binding agreement.

For conduct to amount to acceptance, the character and circumstances must unambiguously show that the parties intended to enter a legally binding contract. The conduct must point to the existence of a contract in the terms alleged. Contract law recognises that a contract may be inferred from the acts and conduct of the parties, not just their words.

Another important consideration can be the ongoing relationship between parties. In dynamic commercial relationships, new terms and conditions may be added or superseded, and the whole relationship must be examined to determine whether a legally binding agreement exists. Post-contractual conduct may also be relevant to the formation of a contract and other contractual issues, as it can provide evidence of contractual performance and acceptance.

In summary, what makes a contract legally binding is the intention of the parties to enter into a legally enforceable agreement, the presence of legal capacity, and the mutual agreement to the terms and conditions, whether expressed in a written contract – including standard form contracts, or inferred from conduct.