Signing A Contract – Introduction
Most people are all too familiar with the pangs of hesitancy and the apprehensions that accompany being faced with the dotted lines of a contract. After all, the signing of contracts is an act of immense finality.
It binds both parties involved in the contract and requires them to adhere precisely to the terms outlined. Stories abound of people signing a deal they haven’t agreed to, so it’s no wonder signing a contract takes so long.
This leads to questions: Is there a right way to sign contracts? Is there a set of procedures to follow to ensure that the parties signing an agreement will have no misgivings later on?
To answer this briefly, yes.
By using the criteria that make any contract legally binding and enforceable, parties can arrive at a few best practices that minimize the risks inherent to the signing of contracts.
These procedures will also ensure the signed contract is legally valid and holds up in a court of law.
But before outlining these procedures, a foray into the legal aspects of contracting – what makes a contract legally valid and enforceable – is required.
What Makes A Contract Legally Binding
A little legal theory is needed to understand what makes a contract binding or valid.
Some basic groundwork must be laid first, starting with what makes a contract.
A contract is a promise made between two or more parties. For example – When a retail store contracts a distributor to move produce from, say, a local farmer to the store’s fresh vegetable section, the distributor is promising that they will perform the actions stipulated by the terms of the contract (In this case, getting their trucks to the farm, loading on the produce, and getting it to the store on time)
Another way to consider this would be to consider what a promise between two people (or organizations) entails. A promise, once made, is also a duty that one party has to complete the obligations detailed in the promise.
With these in mind, we can proceed to the real crux of a contract.
Legal Validity – How To Understand What Makes A Contract
As mentioned, a contract is a promise and a duty between the two (or more) parties entering the contract. But as astute readers will note, merely making a promise does not make the promise binding.
After all, a promise made when the other party simply isn’t around to hear the promise cannot be considered to be binding in the legal sense.
Additionally, the promise isn’t binding if it’s made under coercion by the other party or anyone else.
These examples unearth two key criteria that must be fulfilled for a contract to be legally binding – consideration and mutual assent.
While mutual assent is relatively well understood, the concept of consideration is contested in courts of law even to this day.
Here’s where the long-awaited legal theory comes in.
The two main legal theories regarding the meaning of consideration in legal contracts have been well-established and studied.
- Benefit-Detriment Theory
According to this theory, two parties can only consider a contract when the promise made is either to the benefit of the receiving party or the detriment of the party making it, and this promise then fairly induces the other party to make a promise in return.
The Benefit-Detriment theory is concerned with the legal detriment involved in making a contract.
- Bargain-for-Exchange Theory
This theory states that consideration can be conceptualized in the following way: for adequate consideration, the party making the promise must have received something in return for making the promise.
The Bargain-for-Exchange theory contrasts the previous one in that it’s more concerned with the reason for making the promise or contract than the type of promise made.
While these theories create a firm basis for two essential conditions required to make a contract, modern contracts require additional elements to be considered legally valid and binding.
Elements Of A Valid Contract
For a contract to be legally valid, it must contain the following elements.
- Offer & Acceptance – Make an offer and make sure everyone accepts it
In a legal contract, something must be offered, and this offer must be expressed and intended. Once the offer is made, there needs to be a legally valid method to accept the offer. This is done through signatures.
- Consideration – Give something and receive something
As mentioned previously, the promise made in the contract must theoretically be in response to something. In other words, the contract must demonstrate a ‘give and take’.
- Mutuality – Everyone is mutually obliged to perform
The contract must make everyone’s duties and obligations explicit, and these must be codified as being mutual. This means that both parties must be required to perform their duties or contract promises, and the contract must not be one-sided.
- Competency – Everyone knows what they’re agreeing to
The parties agreeing to the terms of the contract must demonstrably understand the terms they’re agreeing to.
- Legality – What’s being agreed upon isn’t illegal
The parties drafting and negotiating the contract must make sure that the contract is in alignment with the laws of the jurisdiction in which they’re signed.
When Is A Contract Enforceable?
Contracts are enforceable in the US if the criteria of – offer & acceptance, mutual assent, consideration, competency & legality are fulfilled. Once contracts are signed and enforced, they’re subject to the governing law of the jurisdiction.
The laws that govern contracts are either state-statutory law or private law. The latter governs private agreements between consenting private individuals and, in most cases, overrides the former.
However, state-statutory law sometimes takes precedence over private law. For example – The US Statute of Frauds, a state-statutory law, requires that certain contracts be written, even if they are private agreements. These include contracts for land sale, deeds, commercial activities valued at more than 500 USD, etc.
When Should You Sign A Contract?
Once a contract has been determined to be legally binding and valid, both parties can safely go ahead and sign the contract.
When parties sign a contract, it means that they’ve read & agreed to the terms, they’ve signed it of their own accord, and they’re of sound mind when signing the contract. Therefore it’s understandable that most parties want to err on the side of caution before signing.
In such cases, the following can be a checklist to tick off before placing the all-important contract signature on the dotted lines.
Here’s what needs to be checked before signing a contract.
- The contract hasn’t been altered
Among the biggest worries for anyone facing the proverbial dotted lines of a contract is that the contents of the contract have been changed. Therefore the first thing to ensure before signing is that the contract hasn’t been altered. Essentially, you shouldn’t sign something you disagree with.
It’s tough to do this for a contract drawn up on paper, as this will require both parties to keep several copies of the contract. However, this crucial aspect is already handled with smart contract management systems that track edits and version changes.
- You’ve got copies of the contract
Copies of the contract enable parties to retain confidence and keep an audit trail for their reference in case of conflicts down the line. While making copies is a time-intensive and often wasteful task, contract lifecycle management (CLM) platforms offer an extensive contract history where every activity relating to the contract is recorded.
Following the completion of signatures on a contract, both parties should receive signed copies of the contract, too, for bookkeeping purposes.
- There’s a trail of all the changes made to the contract
Parties have often found that merely keeping copies of contracts isn’t enough if these copies don’t also highlight the specific changes made to the contents of the contract, who made them, and when they were made. Details like these will be essential if contracts are later breached or examined in a court of law.
As mentioned, CLM solutions pre-record all edits and suggestions made to a contract for precisely such situations.
- The contract is dated and placed in the right jurisdiction
Legal problems will abound if the contract isn’t dated and placed appropriately, resulting in contracts ultimately being deemed invalid. To avoid such circumstances, parties must ensure that every contract mentions the time and place of contract execution.
- The parties are signing in their correct capacities
The designations of the parties signing the contract must also be accurately and clearly mentioned. If there are mismatches between the capacities claimed and those represented, the legal validity of the contract will again come into question.
Once the points in this checklist are ticked off, parties can rest assured that they’ve adequately completed the due diligence required.
The next question naturally is – How to actually sign the contract?
How To Sign A Contract
When a legally valid contract is signed, it automatically becomes enforceable and binding for all parties involved. Therefore, contract signatures are a crucial aspect of contract and business management for individuals and organizations.
Knowing the right way to sign a contract also helps parties unsure of how to sign legal documents, which function the same way as contracts.
Contracts can be signed in a few ways since a contract signature essentially amounts to consenting to the terms laid out in the contract, and consent can be recorded in several ways.
Here are a few popular ways to sign agreements.
- Written Signatures
These are among the oldest and still most frequently used methods of signing contracts. Written or wet signatures are assumed to be unique and reproducible only by the person signing. This fulfills the uniqueness and verifiability criteria required of signatures.
However, as most people (including fraudsters) have figured out by now, written contract signatures are vulnerable to forgeries and are not the most secure option for the signing of contracts.
- No Signatures
Since there’s no hard and fast rule that every contract needs to be in written form, contracts can similarly be ‘signed’ without signatures. Oral contracts are enforceable, and oral consent can be submitted in court as evidence of consent to the terms of a contract.
However, the Uniform Commercial Code (also known as the Statute of Frauds mentioned previously) states that contracts involving commercial exchanges valued at more than 500 USD need to be in writing.
- Electronic & Digital Signatures
The online signing of contracts using electronic or digital signatures is a secure alternative to written signatures and a convenient way to sign contracts online.
E-Signatures, as they’re referred to colloquially, employ high-level crypto algorithms in the form of signature software that enables remote execution and signer verification. The former refers to the fact that parties can legally sign contracts from anywhere, even outside the jurisdiction of the contract.
Additionally, the parties signing can be verified by the eSignature software, making online agreement signing both fool-proof and fraud-proof. Businesses can also leverage online signatures for the legal signing of documents.
Here is a signed contract example, signed using E-Signatures.
Once a contract has been signed, apprehensions regarding the contract are only natural.
If these apprehensions are well-founded and one or all the parties want to terminate the signed contract, what options are available?
When Can A Signed Contract Be Terminated?
Most contracts will have clauses determining the course of action for terminating a signed contract. These usually involve compensations to be paid by the party seeking termination from the other parties.
Therefore, the contract’s termination cost must be considered thoroughly before proceeding. Especially in the case of business contracts, cost-effective contract termination is crucial, and legal teams will have to examine every scenario while drafting the contract.
If it’s more cost-effective to re-negotiate than terminate, then legal teams can pursue further rounds of contract negotiation.
If all these methods fail, the only recourse will be to prove in a court of law that the contract is unenforceable or was breached at some point.
To prove the former, legal teams must fall back on the criteria of – offer & acceptance, mutual assent, consideration, competency & legality and demonstrate that any of these have not been met.
Signing A Contract – The Right Way
The signing of contracts needn’t be as stressful and time-consuming as they usually are in business settings.
Parties need only ensure they follow the best practices described above and leverage a smart CLM solution with eSign integrations to sign contracts securely.
SignDesk’s smart CLM platform creates a robust audit trail for contract negotiations, offers a smart clause library to choose the proper clauses to make contracts legally binding, and enables high-level contract tracking for executives to always stay on top of key contracts.
Digital agreement signing and contract automation can help businesses upscale operations and completely automate their contract journeys.
Book an on-demand demo with our team of experts to see how your business can get contracts drafted and signed correctly.
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