What is a binding contract and how to make e-signed agreements legally binding?

What is a binding contract

Let’s take a deep dive into what makes an agreement binding or non-binding, how to ensure that binding contracts are enforceable by law and how the application of e-signing affects all this.

What is a binding agreement? Basic elements and meaning of binding contracts

In the simplest of terms, a contract is an agreement between parties to do or not to do something. When we say a contract is “binding”, it means it’s enforceable by law. To make an agreement binding, you must make sure that it includes the following five elements:

1. Valid offer and acceptance

Step zero of the contracting process involves one party offering something of value, such as goods, services or rights, and another one accepting it. This can happen in a number of ways. The Uniform Commercial Code (UCC), a set of laws governing all commercial transactions in the United States, specifically states that “an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances.” For example, a taxi driver plying on the road can be legally deemed a party inviting offers. In the same vein, a man standing on the street corner gesturing to hail a cab is technically making an offer to purchase transportation services.

2. Adequate consideration

Consideration ensures that all parties to the agreement bring something of value to the table. “It may be something that is or isn’t done or given. When a party agrees to do something (paint your house) or to not do something (not sell their house to anyone else for 30 days) they must gain something,” explains veteran trial attorney Jeffrey Steinberger on Entrepreneur. Under the UCC, consideration can be a promise, performance, forbearance, or property with legal value. The economic benefit, however, is optional. A gift or gratuitous promise doesn’t meet this criteria as they have no bargaining. Nor does any past performance due to the fact that there’s no exchange.

3. Mutual assent

Binding contracts, by definition, must be agreed to by all parties involved. The fact that the contracting parties have an intention to be bound by the agreement and deliver on their contractual obligations must be proven objectively and it’s often expressed by a valid offer and acceptance. To define legally binding agreements and the requirement of contractual intent in full, it’s important to note that the parties’ consent must be given freely. As in, not obtained through coercion, under false pretenses or by mistake.

4. Legality

No legally binding contract can contain terms that are illegal under governing law. This means that an agreement where one party is promised compensation for, say, stealing a car will not be enforceable in court.

5. Capacity

All parties who enter into a contract must be of age and sound mind. Meaning that the signees must have the capacity to understand and make a rational decision based on all relevant facts and considerations at the time of signing. Minors and mentally disabled people are typical examples of entities that don’t meet this criterion, but in some cases, unregistered businesses and voluntary organizations also fall into this category.

The main types of legally binding documents, explained

Bilateral contract

The most common binding agreement type, a bilateral contract requires both sides to exchange promises to perform. Under a sales contract, for instance, the buyer makes a promise to pay the price of goods that the seller promises to deliver. Employment contracts, leases and warranties are also examples of legally binding contracts that are bilateral.

Unilateral contract

Unilateral contracts are one-sided agreements created by an offer that can only be accepted by performance. In other words, the offeror only pays the offeree if the contractual obligation is performed. Unlike with bilateral contracts, in this case only the offeror has such obligations. Open requests and rewards are the most prominent examples of unilateral agreements.

What does non-binding mean in contract law?

A non-binding contract either lacks any of the key elements listed above or contains specific language stating that the agreement is non-binding.

A letter of intent (LOI) is a common non-binding agreement example. It refers to a document that constitutes a preliminary commitment of one party to do business with another and outlines the broad strokes of a prospective deal. Businesses often use LOIs to announce transactions such as mergers and acquisitions before the deal is inked, but job hunters and students may also send them to hiring managers or admissions officers, respectively, to get noticed.

The case for electronic signatures: what makes an e-signature legal?

An electronic signature, according to Gartner, is a traceable email or a biometric applied to a message. The biometric may be based on digitized handwriting that’s translated into a digital signature by cryptography or a biometric, such as a fingerprint, that can be combined with a hash or digest of the message to show the signer’s intent. Electronic signatures can’t be removed and applied to other documents.

Everyday examples of electronic signatures include users simply typing their names on a keyboard or drawing it with a mouse or touchpad to sign a loan agreement, entering a PIN code to submit their income tax returns, clicking ‘I agree’ to express consent to a website’s terms of service, or using their finger to create an electronic signature on a mobile or tablet touchscreen to sign for a package.

E-signatures have seen rapid adoption in the past decade. Especially in the US, where policymakers have rolled out not one but two laws to regulate electronic signature legality and to foster widespread use across industries.

The Electronic Signatures in Global and National Commerce Act, or E-Sign Act, was passed in 2000 to provide a general rule of validity for electronic records and signatures for transactions in or affecting commerce across state and country lines. The Uniform Electronic Transactions Act, or UETA, was signed into law the same year in response to the rise of electronic means of communication and doing business.

Similar electronic signature laws have mushroomed in all corners of the world. In 2014, the EU’s eIDAS was passed to secure cross-border transactions and create a predictable regulatory environment. In Switzerland, the Swiss Federal Act on Electronic Signatures and the Swiss Code of Obligation govern the use of electronic signatures, while in the UK, eIDAS was adopted as a legal framework with the same purpose.

Electronic signatures on contracts: what makes them binding?

The legal requirements for electronic signatures under the E-Sign Act and the UETA are the following:

1. Intent

A legally binding e-signature requires evidence of deliberation and informed consent on the signer’s part to enter into the agreement and accept its terms. Using a mouse, touchpad or touchscreen to draw their signature or typing their name into a document’s signature field are the most commonly used ways to accomplish that.

2. Record

According to law firm Tucker Arensberg, a record of the e-signature must be created at the time of signing and show the process by which the document was accepted by the signer. Online contract signing processes are often done via email, where the messages themselves usually tick this requirement as a record of the transaction.

3. Opt-in and opt-out

In the case of online contract signature, consumers are legally required to opt in to the electronic signature process in a way of expressing their consent to doing business electronically. Similarly, signers should also have the opportunity to say no to e-signing, in which case they must be advised on how to go the manual route.

But that’s not all. Depending on the jurisdiction in which the parties are based, wet signatures may be required by law for loan agreements, wills, adoption forms, powers of attorney, and so on. Traditionally signed documents can also be required by the signatories. The US Code, for example, specifically states that anyone can refuse to use or accept electronic records or signatures in contractual dealings.

E-sign your documents with confidence: eSign by Tresorit

Tresorit’s electronic signature for documents was designed with the same vision we had for all our solutions: to give users more control over their data. Securing a digital economy means securing all data assets the businesses manage, including documents that require a signature.

Use Tresorit eSign to:

  1. Electronically sign any document, whether it’s an asset purchase agreement, employment contract or non-disclosure agreement, faster without sacrificing security
  2. Create fine-grained access controls to documents and share them securely with internal or external signatories through encrypted email or with encrypted links
  3. Keep track of completed and pending requests in one place and set up a secure contract repository for collaboration across departments
  4. Take care of the signing process in three easy steps: create an eSign request, share the request link with your collaborators and get notified once they’re done