What Is a Contract?
When building any structure — whether it’s a skyscraper or a startup — you must first begin with a plan and a foundation. From simple deals to complex partnerships, businesses rely on contracts to establish the foundation of their professional relationships while also supplying the agreed-upon procedures that govern those relationships. With a contract, the parties involved establish how they will work together and how each party’s duties and responsibilities will be tracked and enforced.
Contracts are the foundational elements not just of every business, but of human cooperation and society. Contracts are agreements that enable people, businesses, and society to come together and collaborate towards their specific desires and needs. They are official agreements that we can be enforced to follow and are enforceable by law.
What is a contract?
So what is a contract? It’s an agreement, either written or spoken, between two or more parties that creates a legal obligation.
The terms of a contract are enforceable by law, with clearly defined penalties and remedies should the contract be breached. A contract breach is a failure, without legal excuse, to perform any parts of the contract.
A contract is created when there is an offer, consideration, and acceptance between two or more parties. Contracts must contain six essential elements in order to be enforceable:
- Offer: a promise by one party to another that they will or will not perform a specific action in the future. Example: I will give you $500 to rake all the leaves in my front yard.”
- Acceptance: usually mirrors the terms of the offer—an expression, through words or deeds, that both parties agree to the terms of the contract.
- Awareness: proof both parties clearly understand and agree to “the basic substance of the contract.”
- Consideration: entails something of value promised in exchange for the actions (or nonactions) defined in the offer, the most common of which is payment for goods delivered. distinguishes a contract from a gift because it removes the voluntary nature of the act/non-act by requiring something of value in exchange for the promise.
- Capacity: each signatory to the contract has demonstrated the “legal capacity” to understand what they are signing.
- Legality: all contracts are subject to the laws of the jurisdiction under which they operate.
Contracts are everywhere
Contracts are ingrained into everyday life, yet many times people don’t even realize it. You’re probably using several contracts right now:
- Your lease or mortgage
- Terms and conditions of your credit card
- Employment contracts
- Accepting cookies on the internet
- Terms and conditions when you sign up for a service
Contracts govern so many facets of life, from individual actions to the actions of a multinational company. Yet though their impact is profound, contracts often operate “under the radar,” quietly managing all manner of business and personal relationships. As an individual, there are contracts associated with a variety of day-to-day activities and responsibilities, from your lease or mortgage to your credit cards and bank account. Contracts are at the heart of every service you perform or receive. Your dry cleaner, mechanic, doctor, and even pet sitter, all operate under the duties and benefits assigned in a contract.
Common types of business contracts
Two types of contracts:
- Unilateral contract: Promise in exchange for a specific performance
- Bilateral contract: Promise exchanged for promise.
There are many other types of contracts, 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. The three most common types of contracts are:
Sales agreements: facilitate sales transactions and customer engagement.
Nondisclosure Agreements (NDAs): protect organizations key assets, reputation and business data.
Important things to know about contracts
Here are several important aspects of contracts that are worth noting:
Contracts can be terminated in various ways, including by mutual agreement, expiration of the contract term, or due to a breach of contract. Understanding the termination clauses and procedures is important.
Contracts are not set in stone. Parties can amend or modify them if both parties agree. It’s important to understand how to make changes to a contract and document those changes properly.
Contracts often include clauses for resolving disputes, such as arbitration or mediation. Knowing how disputes will be resolved can be crucial if issues arise.
Assignment and Novation
Contracts may include provisions regarding whether the rights and obligations under the contract can be assigned or transferred to another party. This can be important in mergers, acquisitions, or business transfers.
Contracts often contain standard or boilerplate clauses, such as force majeure, choice of law, and severability. These clauses can have a significant impact on the contract’s interpretation and enforcement.
Statute of Limitations
Each jurisdiction has a statute of limitations that limits the time within which a party can file a lawsuit for breach of contract. It’s essential to be aware of these time limits.
While this was mentioned earlier as something of value promised in exchange for the actions defined in the offer, it’s worth noting that consideration doesn’t always have to involve money. It can be a promise to do something, refrain from doing something, or provide anything of value.
Contract Records and Document Retention
Proper record-keeping and document retention are crucial for contract management. This includes storing copies of contracts, amendments, correspondence, and related documents in a secure and organized manner.
Contract Review and Legal Counsel
It’s important to emphasize the value of legal review and counsel, especially for complex contracts. Legal experts can help ensure that contracts are compliant with relevant laws and regulations.
Contracts involving parties from different countries may be subject to international laws and treaties. Understanding international contract law and potential jurisdictional issues is essential in such cases.
Insurance and Indemnification
Depending on the nature of the contract, parties may need to consider insurance and indemnification provisions to protect against potential liabilities.
Confidentiality and Privacy
Contracts often involve the exchange of sensitive information. Ensuring that confidentiality and privacy clauses are well-drafted is crucial to protect sensitive data.
Review and Negotiation
Good Faith and Fair Dealing
Many jurisdictions imply a duty of good faith and fair dealing in contracts. Parties should act honestly and fairly when performing under a contract.
Remember that contract law can vary by jurisdiction, so it’s essential to consult with legal counsel or experts familiar with the specific laws and regulations that apply to your situation. Additionally, contracts should be tailored to the unique circumstances of each agreement, and boilerplate language should be adapted as needed.
Effective contract management
While contracts may seem fairly straightforward, the creation, review, and management of contracts can be complicated and time consuming.
Traditionally, contract management relied upon hands-on tasks, like filing cabinets and spreadsheets, to control an organization’s legal agreements. As business agreements evolved, the complexity and volume of business contracts make contract repositories unwieldy and opaque. Many organizations end up not knowing what’s in their contracts at all, which is incredibly risky.
Contract lifecycle management (CLM) software helps organizations manage contracts at every stage of the process, from creation to storage. Enterprises need contract management to effectively manage every type of contract across the organization, extending access and control beyond Legal to the entire organization, from Sales and Marketing to HR and Procurement. Contract management creates a centralized hub for increased visibility and improves collaboration across the organization.
The future of digital contracts
Contracts often operate “under the radar,” quietly managing all manner of business and personal relationships. They are only noticed when something goes wrong. Un-managed contracts are a liability, but having transparent, accessible and consolidated contract management is an untapped business asset. Contracts reduce risk, mitigate liability and build strong, mutually beneficial relationships.
Contracts have the power to set your organization up for success and set the stage for growth through improved and optimized vendor relationships, sales agreements and revenue opportunities. With digital contracts, you can connect the people, processes and data involved in business contracts to execute smarter agreements and drive your business forward.
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.