Legally Binding Documents: What You Need to Know

No matter your industry or the size of your company, you can expect to encounter some form of legally binding document in the ordinary course of business.

Legally binding documents are enforceable by a court and serve as one of the backbones of society, establishing the rules, rights, and responsibilities that govern the interactions between individuals, businesses, and organizations. They are the written promises and agreements that help ensure fairness and order in both our personal and professional lives.

From licensing agreements and real estate contracts to franchise agreements and restrictive covenants, a basic understanding of legally binding documents is crucial to mitigating risk and making sound business decisions.

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The Power of a Legally Binding Document

To be considered legally binding, a document must include the valid signatures of all parties entering into an agreement and outline all the duties and responsibilities each has to the other(s).

For example, when leasing office space, the legally binding document signed by the lessor and lessee will typically detail the square footage being leased, how the lessee may utilize the space, the amount and manner in which the lessee is required to pay rent, the lessor's responsibility for maintenance and repairs, and the terms under which the lease may be terminated.

It's important to note that an agreement does not necessarily need to be put in writing to be considered legally binding. Any written or verbal agreement between two or more parties can be legally enforced in court. However, absent a legally binding document, accurately determining an oral agreement's terms could be challenging, especially if the parties' recollections or interpretations diverge significantly over time.

On the other hand, the signatures on a legally binding document serve as concrete evidence that the parties agreed, understood, and acknowledged their rights and obligations upon entering into an agreement. A legally binding document can also provide a blueprint for accountability, helping to establish timelines, responsibilities, and expectations. In business, legal, and even personal matters, putting an agreement in writing fosters transparency, accountability, and peace of mind for all parties involved.

What is Needed to Ensure a Document is Legally Binding?

Although a document must be signed by each party to be considered legally binding, the mere presence of signatures does not guarantee that an agreement is enforceable in court. To be considered a legally binding contract or document, three critical elements must also be present: Subject, Consideration, and Capacity.

Element #1: Subject

A legally binding document must cover a specific matter or topic. The subject should be clearly and unambiguously defined within the document to ensure that all parties understand what is being agreed upon. Examples of subjects typically covered in legally binding commercial contracts and agreements include:

• Real Estate Purchase Agreement
  The subject in this agreement would be the property being bought or sold, including its address, legal description, and any relevant details about the land or buildings involved.
• Employment Contract
  The subject would typically be the terms of the contract of employment, including the job title, responsibilities, salary, benefits, and the start date.
• Non-Disclosure Agreement (NDA)
  The subject in an NDA would be the confidential information one party shares with another. This could include trade secrets, business plans, customer lists, or any other sensitive information.
• Loan Agreement
  In a loan agreement, the subject would be the loan terms, including the principal amount, interest rate, repayment schedule, and any collateral or guarantees involved.
• Partnership Agreement
  The subject in this legally binding document would be the terms and conditions governing the partnership, including the contributions of each partner, profit-sharing arrangements, decision-making processes, and the duration of the partnership.
• Lease Agreement
  The subject in a lease agreement would be the property or asset being leased, such as a residential property, commercial space, or equipment. It would include details like the location, duration of the lease, rent, and any specific terms or conditions.
• Purchase Order
  In a purchase order, the subject would be the goods or services being ordered, including their quantity, price, delivery date, and any specifications or quality requirements.
• Service Agreement
  The subject here would be the services to be provided, including a description of the services, the scope of work, payment terms, and any warranties or guarantees.
• IP License Agreement
  The subject would typically be the intellectual property being licensed, such as patents, trademarks, or copyrights, and the terms of use, duration, and any restrictions.
  

Element #2: Consideration

"Consideration" refers to something of value exchanged between the parties to an agreement. Examples of valid consideration in a legally binding document include:

• Money
  Payment of money is probably the most common form of consideration. For instance, when someone purchases a product, they are providing consideration (money) in exchange for the product.
• Goods or Services
  Consideration can also involve providing goods or services. For example, if a business hires a contractor to complete a project, payment for their services is the consideration.
• Promises
  Consideration can also take the form of a promise. For instance, employees signing a non-compete agreement typically promise not to work for a competitor in exchange for their salary.
• Forbearance
  Consideration can also involve refraining from a certain action. For example, if someone agrees not to file a lawsuit against another party in exchange for a settlement, the promise not to sue is the consideration.

Element #3: Capacity

For the purposes of a legally binding document, "capacity" refers to the mental and legal ability of a person or entity to understand and participate in the agreement-making process. Depending on the circumstances of the agreement, the element of capacity may encompass:

• Mental Capacity
  An individual must generally be of sound mind and able to understand the nature and consequences of a legal contract or other signed agreement. Someone with a severe mental illness or incapacitating condition at the time of contract formation may lack the mental capacity to enter into an agreement.
• Legal Capacity
  Legal capacity refers to whether the parties involved in an agreement meet the legal requirements for entering into contracts. For example, in many jurisdictions, minors under 18 lack the legal capacity to enter into certain contracts. Similarly, individuals under the influence of drugs or alcohol may lack legal capacity to contract.
• Corporate or Entity Capacity
  Any business entity entering into a valid contract or agreement must have the legal capacity to do so. This includes having the proper authority from its governing documents, such as bylaws or resolutions, and the legal status to enter into contracts.

Does a Legally Binding Document Need to Be Notarized?

Certain legal and financial transactions, such as real estate purchase agreements, powers of attorney, and wills, often require notarization to meet the legal requirements of the jurisdiction in which they are executed. However, it's probably a good idea to have any legally binding document notarized, whether or not a particular document is subject to such a condition.

A notary public is authorized by their secretary of state to act as an impartial witness to the signing of the contract or legally binding agreement. As such, they are required to verify the identity of all signatories through government-issued IDs, making notarization a powerful deterrence against fraud.

Knowing that a document has been notarized can also provide peace of mind to all parties involved. It adds an additional layer of assurance that the document is legally sound and the parties are bound by their commitments. If a dispute later arises, the notarized document and the notary's record can serve as compelling evidence of the document's validity or the authenticity of the signatures.