Checklist: What to consider to ensure a contract is valid (USA)

Introduction

This checklist provides a practical overview of the key considerations and characteristics of a valid contract, including specific elements such as offer and acceptance, as well as other terms to consider when reviewing a draft agreement. The checklist provides guidance to in-house counsel and private practitioners to ensure that an enforceable contractual arrangement is in place prior to signature. The checklist considers:

1. Preparing for the contract review
2. Elements of a contract
3. Specific contractual terms
4. General contractual terms 

Explanatory notes corresponding to each requirement in the checklist appear at the end of the document.

This checklist can be read in conjunction with How-to guide: How to draft a supply of services contract and Checklist: International supply of goods contracts.

Step 1 – Preparing for the contract review

Step 2 – Are the key elements of a contract included?

Step 3 – Reviewing specific contractual terms for validity

Step 4 – Reviewing general terms

Explanatory notes

Legal framework

This checklist is designed to address common contractual issues in order to assist in determining whether a contract is valid.

The laws relating to the validity of general business-to-business (B2B) contracts in the United States are largely uniform across jurisdictions. With a few exceptions, as noted, the law governing contractual relations is state common law. Statutory law imposing or invalidating specific contractual terms or practices typically relates to consumer transactions. The one state exception is Louisiana, which uses principles set out in the Louisiana Civil Code, rather than common law rules, as the basis for its laws.

Unless noted otherwise, the citations to legal authority reflect the general rule that is followed in most jurisdictions.

The importance of legal review

The overall goal of legal review ahead of signing a contract is to avoid surprises and ensure validity. Legal review of a contract helps the reviewing party understand the contractual obligations and expected benefits of signing an agreement and the consequences of non-performance.

When is legal review necessary?

Any new contract should be reviewed before signing to ensure that it reflects the parties’ intentions and that it is valid and enforceable.

You should review a contract even if it has been used before or is a standardized agreement commonly used in an industry. Standardized agreements should be reviewed to determine whether they have been properly executed without changes or corrections, to ensure the agreement is applicable to the current transaction, and to assess whether updates or modifications are required. Other interested non-parties, such as lenders or insurers, may also require a legal review of an agreement as a formality.

You should also undertake a periodic legal review of any standardized form contracts your organization may use. Periodic review will provide an opportunity to revise old form contracts that might have become invalid due to changes in applicable law, and to update contracts to reflect your organization’s changing needs and goals.

Although verbal contracts are valid and enforceable in many circumstances, they will seldom be submitted for legal review until their validity has been called into question. Verbal contracts should be avoided as a part of general best business practices.

Basic principles

A contract is assumed to be an expression of the intention of the parties entering into the contract. Courts will view a written contract as the final expression of that intention. If the contract does not require a specific action, the general rule is that the action is not required. The law in most states, however, imposes on all contracts a general obligation of good faith and fair dealing. This obligation is twofold: each party must make good-faith efforts to perform its obligations, and neither party may interfere with the other’s performance. Dick Broadcasting Co of Tenn v Oak Ridge FM, Inc, 395 SW3d 653, 660 (Tenn 2013).

What are the possible consequences of non-performance?

You should consider all possible legal consequences of not performing contractual obligations, including how damages might be calculated for breach of the particular contract. These may include non-legal consequences of a breach, such as harm to the client’s reputation. While the possible consequences will not necessarily affect the validity of a contract, they should be part of the discussion on whether your organization wants to enter into the agreement at all.

Step 1 – Preparing for the review

1.1 Who requested the review?

As the reviewer of the contract, it is important that you are clear on who is responsible for the contract and who will, therefore, be providing you with instructions. This will make communication more efficient. You will also be able to make a better judgment regarding attorney-client privilege by communicating only with a few, defined people. If communications are with a large group of people and there is no defined control group, it may be difficult to claim attorney-client privilege for all communications relating to a contract.

1.2 Who is (are) the other party(ies) to the contract?

There are multiple reasons for knowing the identity of the other party to a contract. If the contract is between a business and a consumer, state or federal law may impose disclosure or plain language requirements, and consumer protection laws may prohibit or restrict certain clauses. For example, the US Truth in Lending Act, 15 USC section 1604, requires the disclosure of terms in consumer credit transactions. Failure to include the appropriate disclosures in a consumer contract or to display certain terms in a certain manner may make all or part of a contract unenforceable.

1.3 What is the purpose of the contract?

A critical question to ask is what type of contract is at issue (eg, employment, sales or lease of equipment). It is important to determine if the contract is for the sale of goods, services, or a combination of both. The purpose of the contract determines what rules of law - the Uniform Commercial Code (UCC) or a state’s common law - will govern the contract. If the contract is primarily for the sale of goods, then it is governed by the UCC. However, if the contract is primarily for the sale of services, then it is governed by a state’s common law. To determine if a contract is primarily for the sale of goods or services, most states use the predominant purpose test. See, for example, Audio Visual Artistry v Tanzer, 403 S W 3d 789 (Tenn. Ct. App. 2012). 

It is also important to consider what your business intends to accomplish with the contract. When a court interprets a contract, it is guided by the principle that effect should be given to the intent of the parties. Thus, defining the purpose of the contract may support your client’s position regarding intent if litigation should arise later. Keep in mind that contracts must be for a purpose that was lawful when the contract was made. See, for example, Cal Civ Code § 1596; Panitz v Panitz, 144 Md App 627, 640, 799 A 2d 452, 459 (Md Ct Spec App 2002).

Beyond simply classifying the contract as goods or services, understanding the specific business objectives it aims to achieve is crucial. This involves identifying the precise deliverables, the expected outcomes, and the intended relationship between the parties. By clearly articulating the purpose within the contract itself, businesses can create a roadmap for performance and minimize potential ambiguities. This detailed definition of purpose not only helps to align the parties' expectations but also provides valuable evidence of their intended agreement should disputes arise, strengthening the contract's enforceability and guiding its interpretation in legal proceedings. 

1.4 What is the purpose of the review?

Most reviews aim to understand the mutual obligations of each party. You may have to review a contract as part of a formal requirement (eg, certifying that an agreement is complete and enforceable in order to obtain the financing for performance), or to confirm that a standardized form contract is current and lawful.

1.5 What are the main concerns about the contract or the other party?

It is important to address any specific concerns. For example, you may want to address the possible implications of contractual terms or concerns about the other party to the contract, such as whether that party is trustworthy or whether it has drafted the contract in a way that will allow it to take unfair advantage of your client.

1.6 On what assumptions is the contract based?

Most contracts are based on certain assumptions, some of which may be very basic. A contract for a musician to perform at a festival, for example, contains an implicit assumption that a public health emergency may cause the festival to be cancelled. The terms of a contract should be reviewed with these assumptions in mind. It may be necessary or helpful to list assumptions expressly in the agreement.

1.7 Are there any special circumstances to consider?

You should consider any special circumstances relating to the circumstances surrounding an agreement or its execution. For example, courts may void a contract that violates public policy in order to protect public welfare, rather than the interests of the parties to the contract. Courts have also become increasingly receptive to the argument that a commercial contract may be avoided due to economic duress. Pittard v Great Lakes Aviation, 2007 WY 64, 156 P3d 964, 975 (Wyo. 2007). 

1.8 Who drafted the contract?

As a general rule, ambiguous contract terms are construed in a manner less favorable to the party that drafted the contract. This could result in a term not being enforceable or being enforced against the party in a disadvantageous way. ‘Ambiguity’ is defined as a word or phrase that could reasonably have more than one meaning in the context of the contract. GMG Capital Invs, LLC v Athenian Venture Partners I, L P, 36 A3d 776, 780 (Del 2012). For example, a contract term calling for one party to pay a fee of $1 million for certain services becomes ambiguous if one of the parties is Canadian and the dollar to be used for payment is not defined further.

Step 2 – Are the key elements of a contract included?

An agreement must include the four elements of a contract, which are: offer, acceptance, consideration and capacity to be enforceable. The first step in any review is to ensure that all these elements can be identified and are in place.

2.1 Review the terms of the offer

An offer is a proposal to make a contract. The terms of the offer will often be important in interpreting the contract, as they are a manifestation of the intent behind the contract. A formal offer must be reviewed under the same conditions and for the same considerations as a completed contract. You should ensure that you understand the terms of the offer, as well as the time limits for acceptance of the offer and any restrictions or terms on the manner of acceptance.

2.2 Verify the acceptance

Ensure that you have adequately considered how the offer has been accepted and whether the acceptance is legally binding. Unless the offer states otherwise, an offer may be accepted in any manner that gives the offeror notice that the offer has been accepted. Acceptance may also be communicated by conduct or by beginning performance. If the offer states a particular manner or time for acceptance (eg, ‘written acceptance received no later than noon on April 25, 2022’), the acceptance must be made in that manner or within that time.

Usually, an acceptance must match the terms of the offer, or it will be regarded as a new offer. Under Article 2 of the Uniform Commercial Code (which has been adopted in every US state except Louisiana and every territory except American Samoa and Puerto Rico), a counteroffer in a contract for the sale of goods may constitute acceptance if it does not materially alter the terms of the agreement, the party receiving the counteroffer has not already objected to the new terms, or the offer does not state that it must be accepted exactly as made. UCC section 2-207.

2.3 Confirm the consideration

Ensure that the requirements of consideration are met. A contract must include some exchange of value between the parties. Generally, consideration will be adequate where the parties have made a change in position, either by promising to do something they are not legally required to do, or by promising not to do something they may otherwise be permitted to do. Although courts rarely consider the adequacy of the exchange (except in some consumer transactions), in some cases, inadequate or disproportionate consideration may be considered evidence of fraud or some other tort.

In most jurisdictions, a recital that consideration has been paid (eg, ‘For one dollar and other good and valuable consideration, receipt of which is hereby acknowledged’) may be rebutted by evidence to show that it was not paid. Irwin v West Gate Bank, 288 Neb 353, 360, 848 NW2d 605, 610 (2014).

2.4 Review for capacity

For a contract to be legally binding, the parties to the contract must intend to enter into the contract. Capacity is rarely an issue in B2B contracts. However, in most states, a corporation or limited liability company that has not made regular filings with the state loses its capacity to do business. See, for example, Fla Stat section 607.0128, under which an organization is no longer duly authorized to conduct business when it fails to make appropriate filings and pay required fees. If there is doubt that a business entity has capacity, the official records should be checked.

Step 3 – Reviewing specific contractual terms for validity

3.1 What is the purpose of the contract?

The purpose of the contract must be clear. When interpreting the terms and conditions, a court will always attempt to give effect to the parties’ intentions. The stated purpose is an effective way of determining those intentions. Knowing the purpose may also be a way of estimating the potential damages that could be anticipated if a contract is not performed.

3.2 How are words defined?

Contracts will usually have defined terms that govern the interpretation of the contract. Review these terms and ensure they are clear and easily understood to avoid any later confusion.

A contract may use terms which relate to a specific industry. It is important to check if the courts in your jurisdiction will give effect to these terms, or if they will apply some other construction or determine that the term is ambiguous. City of Springfield v Dept. of Telecommunications & Cable, 457 Mass 562, 568, 931 NE2d 942, 947 (2010).

3.3 Are there conditions that could affect performance?

It is important that the contract clearly articulates any conditions that could affect performance or the obligations under the contract. Any claim for breach of contract is likely to involve an analysis of whether the term that was allegedly breached is one that allows the innocent party to terminate the agreement and claim damages. This will depend on whether the term in question takes effect as a condition or a warranty, or whether the nature and consequences of the breach are sufficiently serious as to constitute a repudiation of the contract.

Many contracts are enforceable only if certain conditions are met. For example, it is common for contracts for the purchase of real estate to provide that the contract is not binding unless the buyer can obtain financing for the purchase. Any conditions that could affect performance or the obligations under the contract should be set out with clarity. It should be easy for either party to determine whether a condition has been met.

3.4 When does the obligation to perform begin?

Know when performance is expected to start or when it may start. The effective date of the contract may be different than the day(s) the parties executed the contract, however the effective date cannot come before the execution date. It is worth noting the effective date to understand exactly when the parties intend for their obligations to begin.

3.5 How long does the contract last?

The duration of the contract must be clearly set out. How long will the parties be obligated to one another? If the parties intend for the contract to end upon the happening of a particular event, that event should be clearly described.

Not every contract will have a defined duration, which may be the case where the parties intend for their agreement to carry on as long as possible. As a result, in some instances it may be unclear when, or whether, the contract ends. It is critical to be clear on the terms regarding the duration of the contract in order to assess any potential long-term obligations or risks.

3.6 Can it be renewed?

If the contract is for a specified duration, it may be desirable to renew its terms. If so, ensure that the terms include whether the contract may be renewed, and if so, a clear methodology for doing so. Is renewal automatic unless one of the parties opts out? Is an automatic renewal a one-time event, or is it set to occur on a particular schedule for a specified number of times/ years? A contract that is not designed to end may renew automatically without the requirement of notice to the other party, so it is critical to understand any provisions regarding renewal.

3.7 Is there an exchange of consideration?

‘Consideration’ is the exchange of something of value. ‘Consideration’ may be goods, services, or money paid to procure goods or services. Consideration is essential to the formation of a valid, enforceable contract. Even if the value of the consideration is nominal, there still must be some exchange. What is going to be exchanged? How much? When will it be exchanged? In some jurisdictions, it is sufficient to recite that an exchange of value has taken place. You should determine if this rule applies in your jurisdiction. Be clear about the requirements for valid consideration and make sure they are met in order to avoid a court potentially voiding the contract in the future.

3.8 What will constitute performance of the contract?

Ensure that the terms and conditions governing the performance obligations are clearly set out in the contract, and that there is no ambiguity in the interpretation of these terms. This way, you will be able to judge the validity and enforceability of these obligations. This includes what the parties expect one another to do in the performance of their obligations.

It is also important in determining what a party is not required to do (eg, does a contract for a building design require the architect to supervise construction?). In the event of a breach of contract, the court will consider performance (or lack thereof) when deciding whether a party was justified in terminating the contract, or how much to award in damages if a termination was unlawful.

3.9 Are there standards for performance that must be followed?

You should consider any desired standards for performance the parties may have for each other, as well as whether these standards are explicit or implicit in the contract. If it is expected that a party’s performance conforms to certain standards, such as those of an industry group or trade association, these standards should be listed. Are the standards set out in the contract impossible for your organization to meet? Similarly, the consequences of not meeting that standard should be set out—is the contract void or is the underperforming party entitled to some compensation for its efforts?

Jurisdictions differ on the effect of a contract that provides that performance must be rendered to one party’s satisfaction. The question of whether a party’s dissatisfaction must be objectively reasonable depends on the type of contract involved. If the contract performance involves matters of ‘fancy, taste, or judgment,’ such as an employment contract, the courts will not consider the reasonableness of a claim of dissatisfaction. Silvestri v Optus Software, Inc, 175 N J 113, 122, 814 A 2d 602, 607 (2003).

3.10 Where will the contract be performed?

It is important that the location in which the contract is to be performed is clear. Often, this will be obvious. Keep in mind that the place of performance could have implications regarding the choice of law used in the event of a dispute. The place may also affect the performing party’s risk of liability to non-contracting parties, as well as the steps they must take to mitigate that risk (for instance, where the place of performance may necessitate the procurement of a particular insurance policy in the event that an injury occurs on that site).

3.11 Are other agreements incorporated into the contract?

It is important that incorporation by reference is successfully done to ensure that the incorporated language is part of a valid and enforceable agreement. Other documents, as well as standard terms and conditions, are often incorporated by reference into a written contract and, therefore, form part of the terms and conditions of such contract. Often, terms that are incorporated by reference include widely available published materials. An example would be a citation to a federal law. Where a document is not widely available, the parties may attach it to the principal agreement and include some type of acknowledgement (eg, initialing the pages of the incorporated document) that it was provided to the parties. Any documents to be incorporated should be clearly identified and reviewed.

3.12 When does the contract end?

You should consider whether there are any provisions that would allow a party to terminate the contract early or on the occurrence of some event. In some instances, a contract may indicate that one or more of the parties may terminate the contract by simply providing reasonable notice to the other party or parties. However, this may create additional risk, as the determination of what is reasonable may depend upon the particular facts, as well as what the court interprets as ‘reasonable’ in that jurisdiction.

Step 4 – Reviewing general terms

4.1 Notice

Provisions regarding notice outline the acceptable means by which the parties to the contract may send and receive notices to and from one another, and under what circumstances certain notices may be given or accepted. For example, a contract may specify that a notice of renewal is acceptable if it is sent in writing via mail, fax, or email, but not by any other means. Although notice requirements may appear to be unimportant, boilerplate provisions, it is critical to understand the notice requirements of the contract. Failure to understand what will and won’t be considered legally binding notice may result in the issue later becoming the subject of litigation.

4.2 Arbitration

Arbitration clauses typically state that any dispute regarding the performance of a contract will be submitted to arbitration in accordance with certain rules. Very often, an arbitration clause will state where the arbitration must take place and the rules that must be followed during the course of arbitration. Arbitration clauses allow for disputes to be resolved speedily and at lower cost to the parties, without placing an additional burden on the courts. As such, arbitration clauses are common and are almost always enforced. 9 USC section 2.

4.3 Choice of law

This clause states the applicable law that should be followed in the event of a dispute. While the US law of contracts does not vary significantly between jurisdictions, there are some differences that could be important. For example, in the area of employment contracts, some state laws bar or limit the enforcement of non-compete clauses. Cal. Bus. & Prof. Code section 16600. For this reason, when drafting an agreement, it is advisable to determine how the contracts are enforced in the jurisdictions that might be chosen. If a choice of law clause is not included, a court will analyze the choice of law rules applied by default in the jurisdiction in which the suit is brought.

4.4 Choice of forum

This clause states which court will decide disputes relating to the contract. If a contract is cross-jurisdictional, several courts may be able to hear a case. For example, if a manufacturer in New York has a contract to sell $100,000 worth of its products to a buyer in California, a suit for breach of contract could possibly be brought in the state courts of New York, the state courts of California or the federal district courts in either California or New York. The forum chosen must be one that would have been able to hear the case without the clause. Choice of forum clauses are usually upheld if the chosen forum has some relation to the contract or to the parties. Roby v Corp of Lloyd’s, 996 F2d 1353, 1363 (2d Cir 1993). 

4.5 Indemnification

One party may be made responsible for all or part of the other party’s actions in performing the contract.

4.6 Warranties

A warranty clause promises that a particular thing is accurate or that a specific thing will occur. For example, a business that purchases machinery from a manufacturer may want to include a warranty provision stating that the manufacturer warrants that the machinery functions in the way the purchaser needs it to function for their particular business, or that it functions for a specified duration of time. Warranty provisions should be specific, and you should be aware of whether the particular warranty potentially benefits or places additional burdens on your client.

4.7 Assignment

Assignment provisions create an opportunity for a party to transfer all or part of their obligations under the contract to another party. In general, contracts can be freely assigned, except where assignment materially changes the duty of the other party, materially increases the burden or risk imposed, or materially impairs the ability to obtain return performance. UCC section 2-210. In some instances, a merger or acquisition qualifies as an assignment of a company’s obligations. Therefore, it is important to review any provisions that pertain to assignment and to include a non-assignment clause if an assignment may negatively impact the client.

4.8 Force majeure

A force majeure clause eliminates one or both parties’ liability for failure to render performance due to unavoidable circumstances. Force majeure events typically include acts of God, war, employee strikes, and epidemics. However, in some jurisdictions, the occurrence of a force majeure event does not automatically excuse the parties from performance, unless the event was unforeseen and the party seeking to invoke the clause made an attempt to perform its obligations. Generally, parties to the force majeure must use reasonable efforts to mitigate the impact of the clause.

4.9 Integration or ‘entire agreement’ clause

Most courts enforce integration clauses according to their terms (eg, ‘This contract and the attached four pages represent the entire agreement between the parties’). See, for example, Tangren Family Trust v Tangren, 2008 UT 20 ¶17, 182 P 3d 326, 332 (2008). However, a significant number of courts have been willing to disregard these clauses and consider evidence outside the four corners of the written agreement. See, for example, Froines v Valdez Fisheries Development, 75 P3d 83, 89 (Alaska 2003) An integration clause may reference other documents that are considered incorporated in the agreement as if written out in the signed agreement.

4.10 Attorneys’ fees

Attorneys’ fees incurred during the enforcement of a contract will be paid only where required by either the terms of the contract or an applicable statute. Courts will generally enforce these clauses but will review the amount requested and decline to award an inflated or excessive amount. 1230-1250 Twenty-Third St Condo Unit Owners Assn v Bolandz, 978 A2d 1188, 1192 (DC 2009).

4.11 Electronic signatures

The Electronic Records and Signatures in Commerce Act, 15 USC Ch 96, states that a contract ‘may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.’ 15 USC section 7001(a)(2).Consumer contracts are subject to special requirements, such as requiring the consumer to affirmatively consent to an electronic transaction. 15 USC section 7001(c)(1)(A). If an electronically formed contract is a part of a consumer transaction, be sure that the necessary disclosures have been made and the required consent has been received.

4.12 Severability

The review of a contract consists largely of reviewing individual clauses for validity. The validity or enforceability of one clause may or may not affect the validity of the entire agreement, depending on the clause and its importance to the overall agreement. A severability clause will provide that the determination of invalidity of one sentence, clause, term or provision will not affect the enforceability of the remaining parts of the agreement. See Rollins Inc v Lighthouse Bay Holdings, 898 So 2d 86 (Fla. 2d DCA 2005) where the court found that while an arbitration clause was invalid, the presence of the severability provision evidenced the parties' intention to enforce the remainder of the agreement in the event any portion of it were to be deemed invalid.

Additional resources

Related Lexology Pro content

How-to guides:

How to draft and negotiate limitation of liability clauses 
How to effectively incorporate standard terms and conditions in a commercial agreement or transaction
How to manage the risk of contracting with a company in financial difficulty
Maximizing the use of boilerplate clauses to limit the risk of unforeseen events 
How to draft a confidentiality agreement and confidentiality clauses

Checklists:

International supply of goods contracts 
Reviewing a confidentiality agreement (receiving party) 
What to consider when terminating a contract

Clauses:

Contract

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