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What Is a Contractual Agreement?

Two people sitting around a desk in front of a laptop looking at a contractual agreement

What is a contractual agreement?‌

Commonly called a contract, a contractual agreement between two or more parties allows or restricts them from engaging in certain acts by creating mutual obligations enforceable by law. Failure to abide by these obligations may be punishable by law in the form of monetary fines, community service, or even jail time. 

Contractual agreements happen every day, from accepting cookies on a website to signing a bank’s loan agreement. These legally binding documents are crucial for any corporation or brand as they legally formulate significant aspects of their operation. Simultaneously, contractual agreements can be complicated to manage due to the number of steps and intricacies involved.

6 elements of a contractual agreement

To be considered legally valid, a contractual agreement must meet all six of the following requirements.

  1. Contractual offer: Contracts are generally based on want and responsibility. Essentially, one party wants something that the other party has. Before an exchange takes place, specific terms are typically set, outlining the responsibility — or contractual obligation — each party must meet. An offer is made based on these terms.


  1. Acceptance of an offer: After one party makes an offer, it’s up to the other party to accept it. If someone offers you $600 to walk their dogs, for example, you enter into a contractual agreement the moment you accept their offer in exchange for your services.


  1. Awareness and consent: Both parties must accept the terms of the contract willfully and without intimidation or coercion. A contractual agreement is considered null and void if, for example, the other party resorts to extortion to force you to sign the document.


  1. Consideration: This factor relates to the expectation that the agreement holds an exchange of something of value. This article of value may be a service, money, a commodity, or any object or action that serves a particular purpose. 


  1. Competence and capacity: Only those with “legal capacity,” or the ability to fully comprehend the terms involved in a contract, can enter a legally binding agreement. Individuals who don’t meet this criterion typically include minor children, those deemed not of sound mind, those under the influence of narcotics, and those lacking in knowledge of the language used in the contract. In these cases, the individual may appoint or may be appointed a legal representative to act in their stead.


  1. Contract legality: A contractual agreement must abide by the laws of the jurisdiction where it was crafted, signed, and will function. Notably, certain federal and state laws don’t line up with one another. In these cases, the Constitution of the United States takes precedence and will be the leading authority. Examples of circumstances that render a contract invalid include:
    • Illegality and public policy: When a contract endangers public welfare.
    • Undue Influence, duress, and misrepresentation: When any signatory of the contract is forced to sign the contract because of intimidation, inaccurate information, compulsion, or inappropriate influence.
    • Unconscionability: When the terms of a contract induce a troublesome outcome or shock the conscience of the court.
    • Errors: When an oversight in the drafting of the contract results in “material effect” on the requirements and agreements that had initially been decided upon.
    • Force Majeure: When occurrences beyond the influence of the entities involved in the contract make the terms of the contract unviable.

Examples of contractual agreements

There are various types of contractual agreements. The kind that a business owner might need typically depends on the situation at hand. Here’s a brief overview of the common types of contractual agreements.

  • Non-disclosure agreements: Non-disclosure agreements, or NDAs, are confidentiality settlements that guarantee that a particular entity’s classified information is safeguarded. It prevents a brand or entity’s propriety information from being revealed. Celebrities often use these to prevent their private information from leaking to the public.
  • Partnership agreement: A partnership agreement defines each stakeholder’s role and their respective shares in a company.
  • Indemnity agreement: This type of contract releases a company from assuming responsibility for any harm or impairment undergone by a second party. Similar to a waiver of liability, an indemnity agreement is typically used by companies that indulge in high-risk activities, like bungee jumping, where customers are likely to endure injuries.
  • Lease agreement: These agreements exist between landlords and tenants and outline the terms of the rented property.
  • Employment agreement: An employment agreement establishes the terms of service under which an employee is hired. These generally include their salary, terms of employment, grounds for termination, and additional benefits from the job. 

Types of contractual agreements

There are three main types of contractual agreements: fixed-price contracts, cost-plus contracts, and time and materials contracts. These three, along with variations and combinations of them, are the most common types. Other types and variations are listed and explained below. 

  • Express contract: This contractual agreement is the most basic type of contract. Here, the terms are distinctly listed when the contract is first drafted.
  • Implied contract: This type of agreement contains clauses contingent on the actions, conditions, and conduct of the parties involved in the agreement.
  • Unilateral contract: Only one party is legally obliged to provide something to the others involved in this contract.
  • Bilateral contract: An agreement where two parties trade services or commodities. These include vendor and master service agreements (MSA).
  • Options contract: By exercising their right to an “option,” the parties involved in a contractual agreement may later enter into another contract. These are common in real estate settings.
  • Fixed-price (or lump-sum) contracts: Under these arrangements, the customer and merchant consent to a fixed price irrespective of the changes in costs and the amount of time required to see it to completion.
  • Aleatory contract: The terms of this contract are effective only after a particular event occurs. An insurance contract is a great example of this.
  • Unconscionable contract: In this sort of agreement, one party has an advantage over the other party.

Digital contracts

Digital contracts are mostly identical to their paper counterparts except for one thing: the entire lifecycle of a digital contract takes place online, from conception and execution to analysis.

Clickwrap agreements are a good example of digital acceptance. Also known as click-through agreements, clickwrap agreements request that users accept the terms of their offer by clicking on an “I agree” button or box. This action digitally records the acceptance of the contract. Most people engage in these contracts daily when they  click to agree that they acknowledge the use of cookies on websites.

Managing contractual agreements‌

Managing contracts is a multi-faceted process. It involves various stakeholders, which are generally the vendors, clients, partners, and employees. Many organizations experience business losses caused by inefficiently managed contracts. Automation can solve the various issues arising from poorly managed contractual agreements, specifically by software such as Ironclad’s Contract Lifecycle Management (CLM). This software streamlines the eight characteristic steps involved in the contract lifecycle management process. Those eight steps are:

  1. Creation
  2. Negotiation
  3. Approval
  4. Acceptance
  5. Fulfillment
  6. Analysis
  7. Optimization
  8. Renewal or Termination

Going digital

The contract management process can be complicated, disjointed, and messy. Not only do contracts rack up overhead legal costs, but they’re also time-consuming and painstakingly disordered. Each step of a contract’s lifecycle is important, with intricacies that can be tedious yet significant to your organization. Many businesses regularly lose thousands of dollars due to misinterpreted technicalities and vague legal jargon.

Digitizing contracts can help you and your business model remain up to date with the latest technology. It also makes your contracts adaptable to new tides in the business and legal world. Optimizing collaboration keeps all parties involved “in the know.” It makes retrieving relevant information undeniably smooth, all the while minimizing costs and risks as you are handed more control over risk-related issues.

Ironclad's CLM can help

With Ironclad’s CLM, your business can create, shape, access, and manage all of its contracts efficiently and effectively. Our powerful, seamless, user-friendly CLM software is the best in its class, allowing for customizable workflows. It also lets you track the progress of your contracts during the execution and approval stages, which can take months during the negotiation process.

Step into the future of digital, streamlined contractual agreements with the help of Ironclad. If you’re interested in collaborating with Ironclad, integrating our CLM software into your workflow, request a trial  here.

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