Is your contract actually binding?

At a recent dinner, I was posed a question by a local business owner that put the realities of the law into plain view. He relayed a story of his friend who was embroiled in a contract dispute over the sale of a business. He then asked me a surprising question: “Are contracts actually binding?”

My answer, which may be the most common answer to a legal question, but which is also maddeningly unsatisfying to clients: “It depends.”

Most of us want to believe that contracts are always, universally, 100% binding. Contracts have been a part of society for thousands of years. In fact, philosophers dating back to Socrates have equated the relationship between individuals in a society to contracts. We collectively have long recognized the fundamental necessity of contracts.

The law is no different. Contract law is often a new student’s first class in law school — because we lawyers agree that contracts are foundational to a legal education. Theoretically, then, we have a moral obligation to enforce contracts — that is, to make sure they are binding. Otherwise, at the extreme, society falls apart.

But theory oftentimes gives way to practice. Which returns us to my original answer: practically speaking, a lot of variables impact whether a contract is actually binding, which is why we attorneys so frequently answer “It depends.” As attorneys, we have to evaluate:

Does your contract have teeth? In other words, is there an actual, identifiable consequence for breaking it? If not, there might not be any downside for a breach.

Are you willing to go to court to try to enforce it? Many states follow the “American Rule,” which differentiates us from our English common law forebearers. Under the American Rule, absent a contractual provision or a statute allowing for the recovery of costs to a prevailing party, a party is responsible for paying all of their own attorneys’ fees even if they win at trial. As a result, there exists an often unspoken undercurrent in contract litigation: Is the possible cost of pursuing litigation more expensive than the potential reward? If so, the juice may not be worth the squeeze.

How well written is the contract? We all want to believe that our contracts are ironclad, but any lawyer can attack even the most well-written contracts. A poorly written contract, on the other hand, might have more potential holes than a kitchen strainer. Without a well-written contract that tries to account for possible contingencies, a contract may not even be binding in court.

Is there risk to your business? Many times, a business may choose to forego trying to enforce a contract due to the risk to business relationships. This is particularly common where one party has unequal bargaining power over the other. It may not be worth it, then, to upset your business relationship.

These are just a few of the concerns that should be evaluated before deciding whether a contract is practically “binding.” Realistically, a well-written contract with clear consequences for breach should be both theoretically and practically enforceable. But that’s not always the case, and each situation calls for a thorough cost-benefit analysis to make that determination.

Contracts that are drafted and reviewed by attorneys are almost always better off than those the parties attempt to negotiate themselves. The same goes for form contracts you can find online. So, if you’re not sure that your contract is binding, it’s always best to consult with a lawyer before you sign it. Otherwise, you may find out you have problems only when your lawyer utters a client’s least favorite words: “It depends.”

Cole McLanahan is a trial attorney with McAfee & Taft.