What is a Contract?

A contract is a legally binding agreement between two or more parties that creates enforceable obligations. This agreement can be written or verbal, though written contracts provide better protection and clarity.

What gives contracts their power is that they’re enforceable by law. When someone breaks a contract without legal justification, it’s called a breach of contract. Courts can impose penalties and remedies to resolve these breaches.

What makes a contract legally binding

Contracts become legally enforceable when they contain six essential elements. Each element must be present for a court to recognize and enforce the agreement, and in most states, the court’s decision hinges on determining the parties’ intent as to contract formation as a factual question.

The six essential elements are:

Offer: One party promises to perform or avoid a specific action. For example, “I will pay you $500 to rake all the leaves in my front yard.”
Acceptance: The other party agrees to the terms, either through words or actions that mirror the original offer.
Awareness: Both parties clearly understand what they’re agreeing to and the basic substance of the contract.
Consideration: Each party exchanges something of value. This distinguishes contracts from gifts by requiring mutual benefit.
Capacity: All signatories have the legal ability to understand and enter into the agreement.
Legality: The contract’s purpose and terms must comply with applicable laws and regulations.

Common types of business contracts

Unilateral contract: Promise in exchange for a specific performance
Bilateral contract: Promise exchanged for promise.

Beyond this fundamental distinction, you’ll encounter many specialized types, such as express contracts (explicitly stated terms), implied contracts (implied by the circumstances), and executory contracts (not fully performed yet). Understanding the different types can be crucial in specific situations.

At Ironclad, we say that every business is a contract business, and we know contracts are essential to effectively running any business. In practice, the three most common types of contracts you’ll work with are:

Sales agreements: facilitate sales transactions and customer engagement.

Nondisclosure agreements (NDAs): protect organizations’ key assets, reputation, and business data. As one of the most common and standardized agreements, NDAs are negotiated only about 25% of the time and can be executed in an average of five days, as noted in The 2025 Contracting Benchmark Report.

Service and vendor agreements: optimize and manage business relationships with consultants, contractors and other counterparties.

Contracts are everywhere

While you might think of contracts as formal business documents, the reality is they’re part of daily life. You encounter multiple contracts every day through routine activities, often without realizing it.

Common everyday contracts include:

Housing agreements like leases or mortgages
Credit card terms and conditions
Employment contracts with your employer
Website cookie acceptance notices
Service agreements for apps and subscriptions

The scope extends far beyond personal transactions. In business, contracts govern everything from vendor relationships to customer agreements. Your dry cleaner, mechanic, doctor, and even pet sitter all operate under the duties and benefits assigned in a contract. This pervasive presence means contracts quietly manage relationships across every level of society, from individual actions to the operations of multinational companies.

Written vs verbal contracts

You might be surprised to hear that while verbal agreements can be legally binding, some oral promises may not be enforceable as contracts. In such cases, a party that reasonably relies on the promise may be able to recover damages on the basis of promissory estoppel. If you offer to pay a neighbor to mow your lawn and they agree, you’ve technically formed a contract. The problem isn’t whether it’s a contract; it’s proving it.

When a dispute happens, a verbal agreement turns into a messy “he said, she said” situation. What were the exact terms? When was the deadline? How was payment supposed to be handled? Without a written document, it’s nearly impossible to prove any of that with certainty.

That’s why in business, you always want it in writing. A written contract is your single source of truth. It eliminates ambiguity, clearly defines everyone’s obligations, and provides a clear roadmap for what happens if things don’t go as planned. It’s not about mistrust; it’s about creating clarity for everyone involved.

Effective contract management

Contract management has evolved significantly as business relationships become more complex. Modern organizations need systematic approaches to handle the volume and complexity of their agreements.

Traditional contract management relied on manual processes. Filing cabinets and spreadsheets worked for small volumes but became unwieldy as businesses grew. Many organizations lost track of contract details, creating unnecessary risk—in fact, poor contract management can cause organizations to lose between five and nine percent of their annual revenue, according to The 2025 Legal Operations Field Guide.

Today’s contract lifecycle management (CLM) software addresses these challenges. These platforms help organizations manage contracts at every stage, from creation to renewal, providing visibility and control. For example, one company’s use of an advanced analytics platform for procurement led to digitally enabled negotiations that helped increase the savings achieved by 281 percent. Enterprises need contract management to effectively handle every type of agreement across departments, extending access and control beyond legal to sales, marketing, HR, and procurement teams.

The future of digital contracts

The shift toward digital contract management represents more than just moving from paper to pixels. When contracts remain scattered across systems and file folders, they become a hidden liability. This is a common challenge; in fact, one McKinsey survey found that 21% of CPOs report their data infrastructure maturity is low, meaning less than 70% of spend data is stored centrally. But when you have transparent, accessible, and consolidated contract management, those same agreements become strategic business assets.

Well-managed contracts do more than reduce risk and mitigate liability—they build strong, mutually beneficial relationships and create opportunities for growth. Through improved vendor relationships, streamlined sales agreements, and better visibility into revenue opportunities, digital contracts can set your organization up for success. With digital contracts, you can connect the people, processes, and data involved in business contracts to execute smarter agreements and achieve your strategic goals.

Taking control of your contracts

Understanding what a contract is and what makes it tick is the first step. But the real power comes from how you manage these documents after they’re signed. Contracts are the foundation of your business relationships, and leaving them unmanaged in folders and inboxes is like building a house and never checking the foundation for cracks. By taking a proactive approach to contract management, you can turn these static documents into strategic assets that help you reach your goals.

If you’re ready to see how you can move from simply defining contracts to truly controlling them, request a demo today to see how a modern CLM platform can make a difference.

Frequently asked questions about contracts

What is the difference between a contract and an agreement?

It’s a subtle but important distinction. Think of it this way: all contracts are agreements, but not all agreements are contracts. An agreement is simply a mutual understanding between two or more parties. A contract is a specific type of agreement that is legally enforceable. It has those key elements—offer, acceptance, consideration—that give it teeth in a court of law.

What happens if a contract is broken?

When someone fails to do what they promised in a contract, it’s called a “breach of contract.” The consequences depend on the contract’s terms and the law. The party that didn’t breach can often seek a remedy, which might mean getting a court to order the other party to fulfill their duties, or more commonly, seeking financial compensation for any losses caused by the breach.

Can a contract be changed after it’s signed?

Yes, but it can’t be a one-sided change. For a modification to be valid, all parties involved in the original contract generally have to agree to the new terms. This is usually formalized in a document called an “amendment,” which is then signed by everyone and becomes a part of the original contract.

Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.

What is a Contract?

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