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What Is a Contract?

October 16, 2020 17 min read

Content Marketing

Two people working together on a contract

Short answer:

Contracts are pacts or agreements that enable people to come together and collaborate towards their specific desires and needs. They’re not just any pact or agreement… They are the most official agreements we can make, the ones that we can be forced to follow. We can even be punished by courts for not sticking to the contracts we make. 

Very, very long answer:

We’re going to a charming village in the middle of nowhere. A place where people disconnect and get away from the trappings of city life. The pace of life is relaxing and the air is a lot cleaner. People seem a little friendlier than their city counterparts. There’s even a marketplace where people sell their hand crafted goods and fresh produce to each other with a smile. Did I mention how cute it is? It’s so quaint that it feels like we just used a time machine. 

In the village, relationships are everything. All the families seem to know each other. If you stay long enough in the village you’ll realize that there are stories about everyone that lives there. There are tales of local heroes, local love, local business and of course, local drama. And if you stay even longer, you might even hear stories about local villains and strange residents that no one trusts. 

The ‘strange folk’ don’t really seem that strange to us but the locals are totally weirded out by them. They keep to themselves and hardly interact with anyone. The only stories about them are strange awkward encounters where they revealed nothing about themselves. So they go under the ‘strange folk’ category, not to be trusted. 

Trust is a big deal in this community. Trust keeps people comfortable, friendly and keeps the village thriving. Ultimately, trust helps people feel safe.

Communication is the vehicle for that trust. If you don’t communicate to people or have someone to vouch for you, you can easily end up as one of the ‘strange folk’. Strange stories and encounters might even be made up about you and spread through the grapevine.

Village Gossip

Trust in the village isn’t really equipped for large numbers of people—that’s why the village is small by design. If people keep moving in, communication is hard to maintain and the feeling of trust and safety inevitably breaks down. That is, unless you have systems in place.

Let’s go back to modern life in the city with hundreds of thousands of people living and working in close proximity. How does city life even work when trust is so fragile?

That’s where official pacts and agreements come in – or as we commonly call them, ‘contracts’. They help to scale that communication and trust.

What is a contract?

Contracts are agreements that come in all shapes, sizes and levels of complexity. They are expressed through writing or speech (sometimes actions). These agreements explain what things we need to do (and not do) for each other’s trust and cooperation. If they are not followed, contracts are enforceable by local or state authorities. 

Look around, contracts are everywhere!

Our civilization is built on contracts. Over the last several decades, huge growth in industry and technology created an explosion of contracts. They have become so ingrained into everyday life, touching every facet of our experience. You’re probably using several contracts right now as you read this.

  • Living somewhere? You’re probably using a tenancy, mortgage or real estate contract.
  • Purchased something with your credit/debit card? The terms and conditions of the card are a contract (there’s even your signature on the back).
  • In a job? You’re using an employment contract, or you’re freelancing (selling your labor and service, literally as ‘a contractor’).
  • Using the internet? You’re using a contract with an internet provider and you’ve probably accepted cookies while browsing the web on different websites (they’re contracts too).
  • Used any software or app recently? The terms and conditions you agreed to when you first opened the app are a contract.

Why contracts?

Contract comes from the Latin “con” (with, together) and “tract” (to draw). From these two root words comes the idea that contracts help to bring people together.

With all of that considered, contracts serve two main purposes: 

  1. A Powerful Communication Tool: They enable us to collaborate better by communicating our expectations clearly so that things get done how we want them.
  2. A Trust Exercise: Remember the village. We need contracts because we need ways to scale trust to feel safe together. Contracts provide a way to reduce risk and evaluate how trustworthy people or institutions are based on how well they follow these basic agreements.

Overall, contracts increase the likelihood of collaboration happening with mutual benefit to everyone involved.

If you were looking for a quick breakdown of the legal requirements of a contract you can skip ahead here to the final part of this article. But, if you really want to understand what contracts are at a deeper level and go down the rabbit hole with us, just read on.

The big problem of communication

The single biggest problem with communication is the illusion that it has taken place.

George Bernard Shaw

As we saw in the village example, communication is a vehicle for trust. However, poor communication is everywhere. It’s in families, relationships, business, sports, politics, cute villages… If it’s an issue that involves human beings, you can bet there’s a communication problem somewhere. 

Communication is defined as “the process of understanding and sharing meaning.

Sounds easy enough, but there are so many factors at play that even the most basic messages and requests get lost in translation. 

The real struggle is in the interpretation. 

While words mean one thing, our body language and tone can mean something else entirely. 

To throw us off even more, our simple human languages are filled with “polysemy”, where words and phrases have multiple valid meanings, especially in different contexts. It’s a recipe for disaster. We are always thinking that we’ve understood each other when we actually haven’t. We listen and read messages and our brains automatically fill in any gaps in understanding with whatever we know.

conversations communication telephone

For communication to take place we need both clear expression and the willingness to listen carefully. Expressing yourself clearly and listening with the intention to improve your understanding are two different art-forms entirely, that can each take years of dedication to master. 

Contracts act as a powerful way to scale these essential parts of effective communication. More about that later.

The problem of trust

Contracts are also trying to solve a problem that all species face at some point: Trust.

Trust as a noun can be defined as “the belief of confidence, assurance, faith or hope in someone or something.” It’s an extremely valuable resource for humanity because it provides a confident framework for all of our interactions and behaviors. With enough trust in each other, ourselves and the outside world, people feel empowered, as though anything is possible to do and achieve. But with lots of blind trust, we are likely to be disappointed, hurt, deceived or taken advantage of. 

#blessed too much trust

With too little trust, we can be held back from opportunities in fear. There’s a careful balance to maintain, where our confidence in each other enables collective human potential but doesn’t put us in danger.

trust meter

Usually we need trust when we don’t know each other well enough, and sometimes because we know each others’ flaws a little too well. Our very own human brand of chaotic and unpredictable behavior traits has made it very difficult for us to trust each other over time.

Circles of trust

If you asked the average person to outline who they trust they might draw something like this: 

trust circle

This is a circle of trust. It’s a tool therapists and support workers use to help understand the support networks of their clients. The most trustworthy place is in the center. Most people would place themselves and anyone they believe has their best interests in mind here.

On the outer circles are the people and institutions who are trusted less in comparison to the center circle. The greater the unknown and uncertain you are about people, the more uncomfortable things get and the further out on the circle of trust they go. Those who you don’t trust are so far out they’re not even mentioned. 

The circle of trust is similar to the village model, where it’s all about the people you know and how much you know them over time. While this is useful and simple to explain, trust is actually highly contextual, very subjective and susceptible to change.

The power of contextual circles of trust

When we introduce a more specific context to trust, everything changes completely.

Here’s a personal example:

trust circle food

This is a trust circle about who I trust to make dinner that tastes good to me. Here I put myself at the outskirts because I’m nowhere near as good a cook as my mom and my wife. Based on the consistency of quality dining experiences, the two of them also beat all local restaurants and make it into my inner circle of trust. It’s important to note here that the individual I know the most (myself) is on the outskirts. And even strangers that cook at random local restaurants have more of my trust in this scenario than so many other people that I know better.

Here’s some circles of trust where complete strangers are in the center for me:

trust circle transport
trust circle music

The relatively unknown players in the examples above have more of my trust than people I claim to know well. I have the highest expectations of them for certain things and more often than not, they consistently deliver.

Changing trust through experience

So you’re on the outside of someone’s trust circle and you want to move into the center without spending years getting to know them. The good news is that we know it’s possible. Even absolute strangers in cars can provide the trust necessary to get inside and strap ourselves in for the ride. This is possible because contextual experiences add up to build trust.

Here’s how it works:

One late evening in 2014, I needed a ride home. My usual options weren’t available. A friend recommended a ridesharing app (Uber/Lyft etc.). I downloaded the app and agreed to the terms and conditions. A complete stranger came to my location. 

I was a little skeptical, but I got in. I kept a close eye on the direction they were going (just in case), and then I got home — on-time, unharmed and at a reasonable price. I was even able to rate my driver, tip and provide feedback through the app

The next time I needed a ride I remembered the ridesharing app. I used it and had a good experience with a new stranger this time. Again, on-time, unharmed and at a reasonable rate. I even got into a little conversation about the music playing in the car. From then on it was a no-brainer. If the price was right, I’d take my chances with strangers from newly trusted ridesharing apps all-day, sometimes even to avoid asking my own family and friends.

The moral of the story? With every short experience we have, we subconsciously place people, groups or companies on various contextual circles of trust. The next time we’re in a similar need, we use that information in seconds to decide if we want to experience it again or if we want another option. If we really like the experience we might recommend it to someone else. Just like telling a friend, who’s looking to get home on a late night, about your favorite ridesharing app.

If you’re willing to take the risk, the experiences we have with each other can provide a lot of contextual trust. We may never know each other personally, but the better these experiences are, the higher the potential for trust to build and the more willing we are to take the risk again. The problem was that very few people were willing to take that first leap of faith until contracts came along and changed things forever.

Contracts: The story of the invention that altered history

Once upon a time, our earliest ancestors realized they needed each other so they made agreements with people they didn’t know well. They agreed to exchange food and resources with each other. Then they started to loan things and exchange services. It didn’t always work out well and a lot of people were burned by others’ chaotic and unpredictable behavior.

Agreements were risky business

People forgot to mention important details when they were making agreements. Even if the details were mentioned, the other person might forget them or have not understood them properly. Some people blatantly cheated and stole. Others didn’t trust people so they ended up stealing in anticipation. And then some people just got sick or died after an agreement was made and no one knew what to do.

Agreements were risky business. There were lots of conflicts. People would get angry and violent when they felt injustices were inflicted upon them. If there were enough angry people on one side there could be an outright tribal war.

Oral contracts

Then at some point people got tired of the conflicts and started to think of preventative solutions. They started making oaths and pacts as promises of honor and trust. They also began to get more detailed about those promises and ensured there were witnesses around when they made them. This is when oral contracts began. 

These oral contracts worked well when everyone actually remembered the terms, but there were still disagreements.

Written contracts

When written contracts were first used, the technology spread quickly. For the first time people could agree in writing and place a unique mark on the document to show their acceptance of the terms. Now you could prove to lots of people that someone didn’t hold up their side of the deal because their hand print was right there for all to see. 

Written contracts brought a new level of detail and complexity to human collaboration that just wasn’t possible before. We didn’t need to rely on memory as much for complicated jobs. It was right there written in clay.

From the clay tablets in ancient Mesopotamia alone you can find remains of contracts for:

  • Labour / hiring people’s services (2200 BC)
  • Renting a house (2000 BC)
  • Loans and mortgages in Babylon (611 BC)
  • Power of Attorney (561 BC)
  • Inheritance (553 BC)

Justice 

Some ancient civilizations even had courts that would hold people to account for their contracts. It was a major improvement, tribal warfare and violence was less frequent. Contracts now relied heavily on other human systems working properly too, such as legal and judicial systems.

Growth & development

At first, the hope behind contracts was something like this:

contracts over time growth

It ended up looking more like this:

contracts over time

As more written agreements were made, there came larger promises and larger risks. Human civilization became increasingly complex. A whole new group of problems emerged from that complexity that we had to figure out ways to overcome. We even had to create new contracts to solve the problems that older contracts created.

Contracts

We took contracts and grew every industry known to man. Everything, from mining, agriculture and distribution, to arts, entertainment, financial institutions and technology. It wasn’t perfect, but something was working and it was completely transforming society.

Contracts: A powerful communication tool

The power of written contracts to improve society came from its process. We had to write something down that many people would need to understand. It forced us to stop and really think about what words (and symbols) really mean to other people.

Written Communication

When we collaborate on written contracts, we have a chance to negotiate on the language used, paying attention to phrasing that makes the most sense to all parties and the law. We can get really specific about how we want things to take place. If something doesn’t make sense we get to ask for clarification, improving both the expression of meaning and the understanding of what is being expressed. It’s a beautiful thing. 

Contracts revolutionized communication and completely transformed human collaboration. Contracts were used to coordinate some of the most complex and impactful projects mankind had ever undertaken. Huge shipments became standard practice and thousands of people could be employed. We finally had a tool that allowed us to be on the same page.

Here’s the math:

effective collaboration communication and trust

That equation really applies to all things that require coordination and collaboration. From relationships, to sport, to business, to society at large.

Contracts: A trust exercise

Contracts also acted as basic trust exercises, where we learnt how well each party kept up their end of the bargain. We realized that we could limit the risk we were taking by agreeing on specific details from the beginning. We could build trust by openly anticipating worst case scenarios, acknowledging and negotiating the risk involved, setting clear expectations and giving each other a chance to follow through. 

Even if someone didn’t follow through, with the contract we were protected by legal systems or local courts that we could prove our case to. It was the safest way to collaborate. 

We began to learn things about each other through these experiences that we wouldn’t have known otherwise. We could place individuals and entire companies on different contextual circles of trust based on how our agreements panned out. Was it a pleasant experience using their service/product? Was everything according to the agreement for everyone involved? Was it mutually beneficial? Or, was there a feeling as though someone got the short end of the stick? Did someone forget or hide important facts that we should have agreed about in the contract? Maybe we needed to remind someone of the terms of the contract or even get the courts involved to enforce them.

If we had a bad experience, the agreements we made in a contract could protect us. We could warn others and we could learn from the experience. If we had a good experience, we knew who to collaborate with again and we could put ourselves out there for more riskier, larger opportunities with each other.

If we didn’t have contracts protecting us along the way, many of our ancestors might have avoided taking the risk of collaborating with people that they didn’t know personally. But contracts proved that most of the time we could trust each other if we made an official agreement and there were systems of accountability.  

Contracts spread quickly. More resources were traded, more money was loaned, more services were sold, and before we knew it our villages had turned into cities. The contracts we made had improved in every industry, encouraging more people to get involved. Contracts were the invention that helped us to trust strangers— the potential was endless.

What is a contract today in America?

It’s pretty cool that we came up with something like this as a framework to run human civilization on. However, contracts have changed a lot over the centuries. We have moved further and further away from the initial purposes of basic communication and trust.

The modern crisis of consumer contracts

Today, when it comes to everyday products and services, most people don’t even read the contracts anymore. We just accept the terms and conditions and get on with our lives, hoping it doesn’t come back to haunt us later. 

The terms of contracts have become so long-winded that nobody has the time to go through all of the agreements they make on a daily basis. The language has mostly become gibberish, full of legal jargon that few people can translate. In addition to this, the parts of contracts that are the most risky for the consumer are usually the most difficult to understand.

Fine print

There’s a whole recent history of deceptive contract terms, usually called ‘fine print’. These are the most unfavorable terms, written in intentionally small font (sometimes tiny). It’s a really sneaky move that is widely used in consumer advertisements and agreements. There are even reddit and Quora threads dedicated to horror stories about ‘fine print’. 

Fine print, fraudulent practices and the complex language used in contracts, have understandably made people very suspicious. It’s contributing to a whole new type of distrust in society— a growing feeling of powerlessness and discontent with the systems that exist around us. 

Average consumers can not be expected to understand the contracts that most large companies, systems and organizations require them to agree. Even the sales people or admin staff who are asking us to sign the dotted line can’t explain what the T&Cs actually mean. To make things worse, there’s an underlying pressure to accept contract terms without careful, thorough explanation or consideration. Nobody has the time, skills or patience to review every contract they agree to in this new fast-paced world.

 

Where did we go wrong?

In the B2B business and commercial world, where there are a lot of large moving parts, the language of contracts needs specific legal and industry terms. Companies make huge purchases and wide-impacting deals all the time. This is usually a lot more upfront, transparent, negotiable and collaborative than contracts for consumers. But even business owners have a hard time understanding exactly what’s being said in these contracts without help. For this, legal experts are essential parts of any business when it comes to explaining the jargon in contracts.

The problem: businesses write contracts in legal language for other businesses, not the average person. While businesses have the legal resources to translate the information, spot risky terms and sift through long documents, the average person doesn’t. Somehow everyone is expected to know what they are signing up for.

Most contracts are created without the average person’s understanding or communication needs in mind at all. The main priority is to protect the organizations who create the contracts. Even when intentions are well-meaning, there’s poor communication happening and there’s a lot of pressure to accept the terms or sign the dotted line.

New trust economy

It’s not all doom and gloom though. We’re in a transitional phase right now and there’s a lot of change happening. One sign of hope on the horizon is that the way we are doing business is changing. The digital age has brought about something called the ‘new trust economy’, where consumers have far more power than they used to. There’s more peer-to-peer services and transactions happening than ever before. In this new economy, reviews and business reputation is everything and the fuel is experience, communication and trust. If we continue down this road, building new ways of working together, with these priorities  at the center, we should be ok. This might even help us accelerate the new phase of contracts with digital collaboration, providing greater understanding and accessibility.

This last part is for anyone who wants to know the legal requirements of a contract today. 

As we explored at the beginning of this article contracts come in all shapes and sizes. You might wonder what makes a pact or an agreement an actual legally binding mechanism that can be enforced by the law if necessary…

Today, to have a contract that holds up legally in court requires six things:

An Offer

Someone has to make an offer to exchange something. For example, a company or a person offering their goods or services for your money.

Something to be Considered

Also known as ‘Consideration’. Where each party has something they are willing to exchange, usually money, goods, an action or a service. This means if there’s only one party willing to exchange something it’s not a contract, it’s a general promise (which most courts can’t help you with).

Acceptance

A clear unambiguous acceptance of the offer made. Usually a signature or the words “yes, I agree!” or “I accept!”

It cannot be a “maybe” and it cannot be a “yes, but also…” The latter is  called a counter offer and nothing is official until there is full acceptance.

Capacity

You cannot make a contract with people that don’t have the ability to agree to a contract. This is usually:

  • A child (someone considered a minor in your state given the context of the transaction)
  • Someone who isn’t able to understand you. Either they don’t currently have the mental ability, they don’t speak the same language, or they’re under the influence of drugs/alcohol. In any case, they’re not considered to have the ability to get into legally binding agreements.

Awareness & Choice

This is sometimes called ‘signatory awareness’, ‘mutuality’ or a ‘meeting of the minds’. All of those terms are really fancy legal ways of saying that all of the people involved must come together out of choice and know what they were doing by accepting the contract. They can’t be forced by anyone and they can’t be drugged or lied to.

Legality

This one’s self explanatory. US courts aren’t going to validate any illegal activities no matter how many contracts you make around them.If you run a mafia or cartel you probably have a different way to enforce your pacts and agreements than the court system anyway. 

If you would like to read more about this topic in legal terms you can see our blog on Understanding the Six Elements of a Contract.

Conclusion: The future of contracts

Contracts are a story about how we found a way to scale the unscalable — communication and trust. Through contracts, our ways of collaboration fundamentally changed. Levels of risk were negotiated and reduced. Our communication became much more specific. We could collaborate without conflict in ways that our ancestors thought were impossible. 

However, there’s a major twist in the story. Today, it’s clear that some contracts have played a significant part in creating distrust in modern society. The language we use in contracts is not accessible and a lot of everyday consumers have been burned by this.

At Ironclad, we believe the story of contracts is not over. It’s just starting. New ways of doing business centered on consumer trust and reviews are helping us to move in a much better direction. Technology is improving and we are entering a new phase of contracts with digital collaboration, clear communication and trust as the fuel. If we stay true to the initial purposes of contracts, the new digital age of contracts could be the start of something much greater and beneficial for everyone.

More about Ironclad

Ironclad is the leading digital contracting platform for legal teams. By streamlining contract workflows, from creation and approvals to compliance and insights, Ironclad frees legal to be the strategic advisors they’re meant to be. Ironclad is used by modern General Counsels and their teams at companies like Dropbox, AppDynamics and Fitbit to unlock the power of their contracts data. Ironclad was named one of the 20 Rising Stars as part of the Forbes 2019 Cloud 100 list, the definitive list of the top 100 private cloud companies in the world. The company is backed by investors like Accel, Sequoia, Y Combinator and Emergence Capital. To learn more, visit our homepage.

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