How to Determine if a Contract Is Valid

A contract is an agreement made between two or more parties that is enforceable by law. The enforcement aspect of a contract is important, because without the ability to enforce an agreement, neither party is required to honor the contract. Determining whether an agreement is enforceable is relatively simple.

Part 1

Part 1 of 4:

Checking for Valid Content

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If the contract is of substantial value, for example to buy or sell a house, an attorney should review the contract to ensure that nothing is overlooked. If you are ever in doubt, it is best to consult an attorney at the contract writing stage.
2
Determine whether the subject matter of the contract is lawful. A contract may be made for a wide variety of reasons, but to be valid, the contract must be made for a lawful purpose. Contracts to engage in illegal activity are not valid contracts and will not be upheld in court. ^{[1]XResearch source}
- Examples of illegal contracts are those for the sale of illegal drugs or agreements to commit a crime.
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If a contract contains misrepresentations (whether or not there was a specific intent to defraud), then the contract will be invalid. Double-check all information in the contract and be as specific and clear as possible to avoid possible accusations of misrepresentation or fraud.^{[2]XResearch source}
4
Identify an offer, acceptance, and consideration. For a contract to be valid, it must have these three basic elements: a specific offer, ^{[3]XResearch source Miller, Roger Leroy. Fundamentals of Business Law: Summarized Cases. 9th ed. Cengage: 2012.} acceptance of the terms of the offer,^{[4]XResearch source} and consideration, which is the agreed-upon exchange of goods or services. ^{[5]XResearch source}
- A valid offer must be sufficiently definite.^{[6]XResearch source} It must be clear, unequivocal, and direct.
- Make sure you have all the parts of a contract. Counter-offers are sometimes attached to a contract. However, the introduction of a counter-offer changes the contract. With most contracts, a counter-offer replaces the original offer and is treated as though it is a new offer.^{[7]XResearch source}
- There must be acceptance or, in the absence of formal acceptance, performance. Acceptance must be made in the mode or method established by the offeror,^{[8]XResearch source} and it must be made before the deadline in the contract.
- Although silence will not qualify as acceptance, certain actions may. For example, if a person sends in an order for goods, and the seller responds by sending the goods, then the seller has manifested acceptance of the offer.^{[9]XResearch source}
- A contract must contain consideration: mutual promises to do something or to refrain from something that a party has a legal right to do. Without this mutual promise, there is no valid consideration and the contract is illusory.

Part 2

Part 2 of 4:

Assuring Formalities Were Observed

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1
Determine whether the contract must be in writing. According to each state’s Statute of Frauds, certain contracts must be in writing in order to be considered valid. However, most other contracts need not be in writing to be valid.
- Contracts that must be in writing include: contracts which cannot be performed within one year, contracts for the sale of land, contracts for the sale of goods or services over a certain dollar amount (usually at least $5,000), and contracts to pay another’s debt.^{[10]XResearch source}
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Check for signatures. A valid written contract should have the parties’ full legal names and signatures. The signature should also be dated to indicate the date that the contract was entered into. ^{[11]XResearch source}
- A contract is also valid with electronic signatures.^{[12]XResearch source} There are different kinds of e-signatures. Some required only that the party typed its name into a field; others can scan a person’s fingerprint. Even clicking an “I Accept” button will constitute a valid e-signature.^{[13]XResearch source}
Additionally, witnesses or notaries are normally required for wills, deeds, mortgages, and marriage contracts, depending upon state law.^{[14]XResearch source}

Part 3

Part 3 of 4:

Ensuring the Validity of Execution

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1
Ensure the parties had legal and mental capacity. Individuals who enter a contract must be legal adults and of sound mental capacity; minors and certain individuals with mental illness do not have the capacity to enter a contract.^{[15]XResearch source} A contract entered into by someone without the legal mental capacity is void.
- Individuals who are intoxicated or otherwise impaired also lack the mental capacity to enter into a contract.
2
Confirm that neither party was coerced or signed under duress. Contracts are void if one party was coerced or forced into entering the contract. ^{[16]XResearch source} To the extent that you can, you should investigate the circumstances that surrounded the contract formation and see if any party exerted pressure on the other party.
- Duress can often occur when one party partially performs on a contract and then suddenly refuses to complete its obligations unless the other party pays substantially higher prices.^{[17]XResearch source}
- A contract will also be voided if one party exerted “undue influence” on another. Here, the influence stems from a special relationship between the parties. For example, if an elderly person makes a contract with his caretaker, then an opportunity arises for the caretaker to exert undue influence because the elderly person is totally reliant on his caretaker.
3
Look at the relative bargaining power between the parties. A contract will be considered “unconscionable” where there is a gross disparity in bargaining power between the parties and the terms of the contract are oppressive.
- For example, one-side terms that establish excessive prices or high penalties may qualify as unconscionable.
- It isn’t enough for the parties to have unequal bargaining power. The terms must also be grossly unfair. They should “shock the conscience.”

Part 4

Part 4 of 4:

Identifying Defenses to Performance

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1
Confirm that the parties are still living. A contract is revoked when one of the parties dies.
- If you do not personally know the other party, you can check for death records at the national Vital Records website.
2
Check if the contract is impossible or impracticable to perform. Performance will be excused if circumstances have changed so that it is either impossible or impracticable to perform. However, the changed circumstances cannot be the doing of one of the parties.
- Impossibility often occurs after a contract is created. For example, if you have a contract to have your house painted, but your house burns down, it becomes impossible to paint your house. ^{[18]XResearch source}
- Impracticality occurs when changed conditions would make performance increasingly expensive or difficult. For example, if you have contracted a wedding photographer for a local wedding then decide to elope to Hawaii, it becomes impracticable to expect that the photographer would honor the original contract under the new conditions. (Furthermore, you may be in breach of contract if the original contract specified a location). ^{[19]XResearch source Taylor v Caldwell (1863) 3 B & S 826}
3
See if the contract’s purpose has been frustrated. Frustration of purpose is a legal way to terminate a contract if the reason behind someone entering into a contract changes. It is necessary that both parties are aware of the purpose in order to claim frustration of purpose. ^{[20]XResearch source Krell v Henry [1903] 2 KB 740}
- For example, if you live next door to a famous rodeo venue, you may want to rent out your basement for a party before or after a rodeo takes place. If the rodeo is cancelled, the person who is contracted to rent your basement may be released from the contract due to frustration of purpose.
4
Identify a breach. If a party breaches a contract in a material way, then the other party is excused from performance. However, the breach must be “material”—that is, it cannot be minor. It must strike at the “heart” of the contract.^{[21]XResearch source}
- The non-breaching party must also be “able, ready, and willing” to perform. It is insufficient to merely claim that there is a breach if you are not prepared to perform your obligations under the contract.^{[22]XResearch source}
- For example, if you contract to buy a vehicle “as is” but request that improvements be made, you are not “able, ready, and willing” to perform. In fact, you are attempting to change the contract.^{[23]XResearch source}

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Warnings

Contract law regarding whether a contract must be in writing varies from state to state. When in doubt, always reduce an oral agreement to writing to ensure it is valid.
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