Point of Contract | Concept Behind Contracts | Contracts Vs Agreements (2023)

Trust is an essential linkage within the organization, towards customers, and the internal team. True enough, it is not something you can easily get.

Trust within business partnerships, between organizations, and customers are something that you have to work through every day through minute interactions, experiences, and every delivered outcome.

Legal agreements and documentation are essential in establishing a system of rules and policies that govern the legal enforcement of promises in any industry and business partnership.

Building relationships with customers and other business stakeholders immensely contribute to a business’s success and growth. Whether it be for collaboration or for closing a deal, both parties involved must be protected in the commitment process.

Many organizations heavily rely on contracts to govern business relationships and transactions. Whether the reason behind the contract is to observe a common commitment or control future projects, the protection that contracts provide for the involved parties is beyond valuable in achieving successful business partnerships.

In fact, contracts can actually save your business from detrimental effects and make it survive.

More often than not, contracts can bring discomfort to some as it can be seen to get in between deals due to unavoidable circumstances such as negotiating clauses which can result in disagreements between the parties involved.

Contracts are seen to formalize negotiations under the rule of law and rely on the legal system implemented by the geographical location where the business resides. However, there is so much more to it than meets the eye.

This article will look into the ins and outs of contracts and everything you need to know about them! This may be pretty long, but we assure you that it will definitely be worth it!

Understanding the Concept behind Contracts

You often hear the word contract involved in the world of business. In different industries, contracts have become a staple concept.

It is no secret that a contract is a legally binding agreement between two or more parties or entities.

Therefore, once a contract is signed, the contractual agreement creates a pact that formalizes the agreement. It also indicates the different rights and obligations to be fulfilled by each party.

Contract terms make it imperative for parties to carry out the mutual obligations as stipulated in the contract’s terms.

Contracts are generally a part of everyone’s lives. In business partnerships, however, businesses take a somewhat different route when it comes to implementing the legally binding contract.

As mentioned above, contracts play a crucial role in businesses. But what is its primary purpose? Well, the purpose of a contract may be a few.

One key purpose of a contract is that it ensures that both parties are protected. Contracts focus on ensuring the safety of the parties involved, most especially when disputes arise. Another purpose of a contract is that it serves as legal documentation of obligations, rights, and mutual responsibilities of the people involved in transactions. Aside from enforcing the laws that govern the contracts, it creates the contractual relationship official in any business transaction.

Contracts vs Agreements

The terms “contract” and “agreement” are often used interchangeably in the world of business. Agreements are mutual understandings and deals that are not necessarily bound by a legal system. On the other hand, contracts are the type of agreements that are typically bound by legal agreements.

Oftentimes, an agreement is used in informal settings and meetings. This means that what is only necessary to make agreements work is that both parties should mutually agree on the transactions and projects.

However, the agreement between the two parties relies on trust and integrity. Thus, if there is one person that fails to meet the obligations based on the agreement, there is no legal recourse to be done toward the breaching party and deal with damages.

On the other hand, a contract is a formalized agreement. A written contract consists of legal obligations and other elements that enforce both parties to oblige. In certain circumstances that there is a breaching party, there could be a legal recourse carried out by the non-breaching party.

How does contractual agreement work in business partnerships?

In running a business, it is highly essential for you to prepare for the process of negotiating, drafting, and discussing business contracts. As a business owner, one must know how to utilize the processing of a contractual relationship.

Contracts in businesses are known as business contracts that focus on the need of business parties.

A business contract is a legally enforceable contract as dictated by civil court law. Many businesses view business agreements as the heart and soul of many organizations and companies.

In a nutshell, contracts are mainly regulated by statutory and common law, and private law. Statutory and common laws are those that are based on the judges and court decisions while private law is based on a private agreement. It specifically consists of the terms of agreements between the exchanging parties. Thus, it may overrule many of the laws and guidelines as dictated by the state law.

The American Law Institute consists of the majority of the principles of the common law which are stipulated in the Restatement of the Law Second, Contracts.

A contract is not just a legally binding agreement

For many business experts, it is essential to have a contract in place before setting up any kind of business with a partner. Contracts ensure that companies are not just bound by law, but all the parties involved benefit from the business relationship through a fair and standardized set of rules.

Contracts bring ease to many companies, especially in upholding the legal rights of a company. It prevents any friction with all the parties while managing business expectations and avoiding any liability.

Legal agreements in businesses may apply to sole proprietorships, partnerships, and even multi-million dollar companies in different industries such as retail, manufacturing, and technology. Check out the detailed guide about EBITDA.

It is essential to understand that a business partnership operates with enforceable agreements that are the only ones that work. Drafting a well-written contract has been proven integral to small and large corporations alike.

Contracts focus on providing guidelines to address various problems encountered within the contract terms. Once you know the different contracts it is easier to pave the way for seamless business operations.

Seamless business operations can shield your business from potential legal issues that can exploit another party.

From collaborating with other businesses to working with influencers, and even your own employees, utilizing contracts focuses on ensuring that all other parties are aware of the expected deliverables and the repercussions of failing to do so.

There are two different theories or definitions considered when talking about contracts namely the Bargain Theory of Consideration and the Benefit-Detriment Theory of Consideration.

Benefit-Detriment Theory

In this theory, an adequate consideration exists only when a promise is made for the benefit of the pledged or to the loss of the beneficiary. This pushes the pledged to make a promise to compromise for something else to the beneficiary.

Bargain-for-Exchange Theory

Under this theory, adequate consideration exists when the promisor makes a commitment in exchange for something else. In this sense, the vital condition is that the promisor was given something to specifically ensure and enforce the promise being made. This means that the two parties’ motive for making the commitment and the parties’ mutual assent.

Laws that Govern Contracts

Since contracts are legal agreements, they are usually governed and enforced by the laws in the state where the agreement was made. Depending on what the subject matter of the agreement is such as whether it is for the sale of goods or property lease, a contract may be regulated by one type of state law.

There are two types:

The Common Law

The majority of the contracts such as employment agreements, property leases, and business agreements are all controlled by the state’s common law. These are based on tradition which is constantly evolving and are mostly made by judges based on court decisions over the years.

The Uniform Commercial Code (UCC)

The common law does not control contracts that primarily focus on the sale of goods. Because of this, contracts that are particularly for the sale of goods are controlled by the Uniform Commercial Code (UCC). The UCC is a standardized collection of guidelines that govern the law of all commercial transactions. The majority of the states have adopted the UCC as a whole or as a part of it, making the UCC’s stipulations part of the state’s codified laws that relate to the sale of goods.

The main articles that deal with contracts and contractual relationships include Article 1 (General Provisions) and Article 2 (Sales). Meanwhile, Article 9 (Secured Transactions) regulates contracts that assign the right to payment in security-bound interest agreements.

What you Need to Know about Contract Law and Tort Law

Contract Law

Contract law is a central area in the United States that is comprised of agreements between businesses, people, and groups.

Basically, when someone fails to follow the legal obligations as stated in the contract, it is known as a breach of contract.

The contract law allows the non-breaching party to settle the issue in court. From there, contract law attorneys and judges will deliberate the case to come up with a decent and equal solution.

The Basics of Contract Law

A contract is a legally enforceable agreement between two or more parties that creates mutual obligations on how to do or not to do particular actions. In this sense, the term “party” may be a person or a group of persons, and even a corporation.

As contracts are based on a legal right, if it opposes public policy, they simply cannot be carried out. General principles or mostly known as common sense make it complicated to address in times of dealing with breaches. However, a contract that goes against public policy will simply become null and void.

These may include contracts that would induce pain to another person or public services, agreements or contracts that entail corruption of a private person, contracts that will enforce obstruction of justice, and those that will promote transactions that break the law or certain rights.

As mentioned, both parties involved in contracts are “competent” enough to carry out a signed contract. Under contract law, it is required that the parties involved are not either minor or mentally incapacitated.

When one of the parties commits a breach of contract, and the non-breaching party decides to sue the former, then they can ask the court to enforce the contract. This may result in a court order for the breaching party to maintain their obligations as stipulated in the contract. If it still does not ensue, the breaching party may be asked to pay penalties or payments that are required to provide the non-breaching party the benefit they sought in the contract.

Tort Law

Tort law is another body of law that falls under civil law. It pertains to the duty that people have to exercise and care so as to not injure people or damage others’ property. When a person breaches the duty of care, they become liable to pay any damages to the party that has been injured or whose property is damaged. Tort Law is based on the presumption that people are liable for their negligent actions and is a wide category of law that includes different forms of personal injury claims.

Like contract law, tort law also aims to compensate for any damages, injuries, and losses that result from a person’s negligent actions. For example, if a person inflicts personal injury, the damaged person can retrieve money for damages to compensate for lost income, medical care costs, damage to property, and in some cases sustenance for their pain and suffering

.Another facet of Tort Law is the law of strict product liability. This is the body of law that pushes manufacturers, distributors, product suppliers, retailers, etc that cater to the public responsible for the personal injuries and property damage that the products may cause.

The claims to product liability do not depend on proving the negligence of the company being sued. Rather manufacturers and distributors of defective products can pay any damages for the injury and damage their products may have caused on a strict liability basis.

This means that the negligence may not be proven, rather a person can just show their injury to prove that the product was defective to cause personal injury or property damage.

Breach of Contract and Lawsuits

When a breach of contract occurs and one of the parties which can be considered as the aggrieved can file a lawsuit in a suitable civil court. Depending on the nature and the specifics of the breach, it occurs such as when a party fails to perform the duties on time or does not execute the actions specified in the contract.

Let us take a look at an example of when a breach of contract happens.

Say ABC delivery company has built its partnership with XYZ pharmaceutical company under a contract that clearly stipulates the scheduled time and date of deliveries.

If the contract states that the delivery should be carried out by Monday evening, and the products were transferred from XYZ pharmaceutical company on a Tuesday morning, their breach of contract may be considered inconsequential and ABC delivery company would not likely be entitled to any payment for damages unless they show proof that he was damaged due to the late turnover of the products.

However, if assuming that the contract strictly stated that the contract of their partnership explicitly stated that the time of delivery is non-negotiable, and the products from XYZ pharmaceutical company must be delivered on Monday and XYZ pharmaceutical company delivers the following day, then the contract will definitely be substantial making the pharmaceutical company’s liability more severe and likely to waive any charges of ABC delivery company.

If the non-breaching party files for a dispute especially when informal attempts for resolutions fail, the next plausible step is a lawsuit. Resolutions and fines for damages typically depend on the state. If the amount discussed is below a certain figure such as $3000 to $7,500 depending on the state, the parties may be able to resolve the issue in small claims court.

Courts and formal breach of contract lawsuits are not the only options during contract disputes. The parties can also agree to have a middleman that mediates the contract dispute or may come into an agreement to binding arbitration of a contract dispute.

Solutions for Breach of Contract

When an individual or a company commits a breach of contract, the other party within the agreement is entitled to relief or remedy under the rule of common law. There are a few solutions that the law requires during a breach of contract.

Here are the different solutions and remedies for breach of contract:

Damages

The payment of damages in any form is the most common solution during a breach of contract. But first, you have to understand that there are different kinds of damage which may include the following:

1. Compensatory Damages

This type of damage aims to place the non-breaching party supposing the breach had not occurred in the first place.

2. Punitive Damages

These are payments that the breaching party must make that go beyond the required amount to fully compensate the non-breaching party.

3. Nominal Damages

These kinds of payments are considered token damages which are allotted when a breach occurs but there was no proven and actual monetary loss to the aggrieved party.

4. Liquidated Damages

These are specific damages that were identified as stipulated in the contract, in the event that the contract is breached. Liquidated damages should be the feasible estimate of actual damages that might result in a breach.

Specific Performance

When damages are not enough to become a legal remedy, the aggrieved party may take another option which is known as specific performance. Specific performance is described as the breaching party’s court-ordered action of duty based on the contract.

This may be used as a solution for breach of contract if the subject matter of the agreement is uncommon, and damages would not be enough to place the aggrieved party in a good position.

Cancellation and Restitution

The aggrieved party may choose to cancel the contract and decide to sue for restitution if the aggrieved has given a benefit to the breaching party.

Restitution as a contract remedy means that the non-breaching party is put back in the position prior to the breach being committed. On the other hand, cancellation of the contract nullifies the contract and relieves all parties of any obligations as discussed in the agreement.

Governing Law vs Jurisdiction

Jurisdiction pertains to the location in which the dispute will be heard and resolved. The governing law indicates which rule or state law will be implemented during the dispute.

Therefore, choosing a state for governing law will not be a major point in the negotiation process. However, the selection of jurisdiction will be much more crucial in the process. If there is a dispute in the contract, the parties involved will most likely be required to go to the chosen jurisdiction to dispute the claims. This can cost money, especially if the location of the jurisdiction is distant.

Standardized vs Personalized Contracts

Different business partnerships require different types of contracts with their particular uses and purposes. Therefore, when drafting a contract, it is vital that you consider the kind of parties involved, the dynamics of the project, and the terms and legal requirements of the contract.

Standardized Contracts

Standardized contracts focus on setting the same terms for large amounts of business agreements. Standard contracts are mostly used in business-to-consumer (B2C) agreements and leave little to no room for negotiations.

For example, non-disclosure agreements that are given to former employees who know about your company can be standardized to ensure that your company does not have to create different contracts every time an employee resigns.

Personalized Contracts

On the other hand, personalized contracts focus on special terms and conditions which are generated for specific business transactions that do not happen on a daily basis. For example, a company decides to merge with another company. These kinds of business partnerships may require a more personal approach to adding clauses that the parties think are necessary, such as premium privileges and voting in decision-making.

Oral vs Written Contracts

Contracts can be expressed verbally or spoken, a written contract, or a combination of both. However, in some types of transactions, such as in the real estate and finance industries, all agreements must be put into writing.

Written contracts consist of a standardized form of agreement or a letter that confirms the legal obligations expected within the business relationship.

On the contrary, a verbal agreement or oral contract heavily depends on the good faith of all the involved parties. However, it is important to emphasize that without writing, verbal agreements can be difficult to prove once there is a breach of the contractual relationship.

Therefore a lot of business experts still advise that business arrangements should be put into writing and avoid problems, most especially in trying to prove that a contract exists.

So when should a contract be put into writing?

As mentioned, verbal agreements can also enforce the rule of law. However, there are types of contracts and agreements that should be expressed as a written contract especially those that deal with sensitive information as required by the Statute of Frauds. Some of these common types of contracts include:

• Agreements that cannot be accomplished within the year from the date of the contract signing.
• Contracts that involve product and service sales amounting to more than $5000.
• Contracts that involve the sale or transfer of land or property.
• Promises under the constitution of marriage such as a marriage contract or a prenuptial agreement.

Unilateral vs Bilateral Contract

A Unilateral contract, in its simplest explanation, only involves one party or one person alone. Thus, only the offeror has the legal obligation to make a promise or agreement.

One example of a unilateral contract is giving away rewards such as when you lose something and you will be given a reward in exchange for its return. In this case, the offeror makes the promise to provide a reward to whoever returns the lost item. Another common example is the contract with an insurance company.

On the other hand, a bilateral contract involves both or all parties committing to a promise to execute the actions that are stipulated in the agreements.

But how are they alike?

Both of these contracts can be breached. Breaching of contract means that a contract is broken by a breaching party that is rooted in the failure to fulfilling its terms and conditions without any justifiable and permissible excuse.

So, for example in a unilateral contract, the offeror fails to provide the reward to the person who returned the lost item – it can be considered a breach of contract. An example of a breach in a bilateral contract can occur when an employee refuses to do the job assigned to them or when an employer fails to pay the employee a fair wage, among others.

Thus the non-breaching party can take legal actions and prove the breach of contract in court. The following factors are the ones that you need to prove should this happen:

• A contract exists – whether in writing or verbal
• There was a breaching party involved
• You incurred losses or suffered due to the broken contract
• The breaching party is the sole person responsible for breaking the contract terms.

Who is usually involved in Creating and Signing Contracts?

As mentioned, dealing with contracts is a natural part of either running a business or being part of sales. It is typical for you to have many contracts along the way which involve some type ofcontractual obligation or contractual relationship.

Here are some of the people involved in creating and signing contracts:

• A purchaser of Goods and Services Many businesses that directly sell goods and services to consumers often use contracts to protect both the buyer and the seller. Services such as money lending, rental service, and franchising.
• Supplier of Goods and Services Services that different quantities of goods and services such retail, wholesale, and independent contractors.
• Businessowners Businesses that spearhead partnerships, joint ventures, and merging. Managing contracts and business relationships remain vital.

The Different Types of Business Contracts

All kinds of contracts for businesses, whether, simple or complicated, should be well-documented. This ensures that all points and aspects of the business arrangements are covered and discussed. There are many contracts that are used by many businesses depending on their need. This is because different business partnerships may require different kinds of contracts to suit particular business needs.

Here are some of the contracts that many businesses in different industries can encounter:

1. Amendments

An amendment primarily stipulates a revised version of a business agreement’s definitions, terms, sections, and clauses. Once the agreeing parties reach a consensus, changes such as adding or removing contract terms can be applied.

Such type of contract is usually encountered when businesses overlook important facets of the business relationship or when there should be major changes need to be applied. One example would be when a client wishes to change their payment terms with their company.

2. Bill of Sale

Otherwise known as a sales agreement, the bill of sale is primarily used to indicate the transfer of property between two parties. It is a legal agreement that acknowledges the transfer of rights between the seller of a property and its buyer.

So if the need arises, the buyers can use the contract to prove their ownership of the property. Check out the guide related to gross revenue.

3. Franchise Agreement

Franchise agreements are usually between a company or a business which is known as the franchisor and a franchisee. This agreement summarizes the legal rights and obligations of both parties.

Some details of a franchise agreement include the following:

• The time period of the agreement
• Location of the franchise
• Operational procedures
• Fees and inclusions of investment for the franchisee
• Trademarks and patents
• Terms of franchise termination and renewal

4. Non-disclosure Agreement (NDA)

Non-disclosure agreements are primarily used to disallow parties such as vendors, suppliers, franchisees, employees, and others to divulge confidential and business-owned data and information to people outside the business relationship.

This puts businesses in power to take legal action when the other party reveals sensitive information that could put the business in peril.

5. Partnership Agreement

Non-disclosure agreements are primarily used to disallow parties such as vendors, suppliers, franchisees, employees, and others to divulge confidential and business-owned data and information to people outside the business relationship.

This puts businesses in power to take legal action when the other party reveals sensitive information that could put the business in peril.

6. Request for Proposal (RFP)

A Request for Proposal is a legal document that entails companies soliciting bids for complex and high-funded projects in order to gain attention from interested contractors to submit their bids and eventually work on a partnership project. This legal document is primarily used by a business or an organization that looks for specialized or technical expertise in a certain field. Explore the guide, lead to revenue management.

7. Security Agreement

Security agreements are most common among lenders and borrowers. Thus, security agreements are mostly applied when a person applies for a loan and forgoes the ownership rights of their collateral if there exists nonpayment.

8. Security and Privacy Addendum

Security and Privacy addendum is another legal document that outlines the terms and conditions of the security and privacy of personal data. It shows the contract terms of how a website collects, stores, uses, shares, and sells data gathered from its customers and visitors.

Some of the information that a website may collect include:

• Personal information such as name, age, birthday, and email
• Financial information like credit card number and expiry date
• Social media information such as log-in credentials
• Derivative information like browser ID and IP address

9. Security and Privacy Addendum

Security and Privacy addendum is another legal document that outlines the terms and conditions of the security and privacy of personal data. It shows the contract terms of how a website collects, stores, uses, shares, and sells data gathered from its customers and visitors.

Some of the information that a website may collect include:

• Personal information such as name, age, birthday, and email
• Financial information like credit card number and expiry date
• Social media information such as log-in credentials
• Derivative information like browser ID and IP address

10. Memorandum of Understanding (MOU)

A Memorandum of Understanding (MOU) is a written contract between two parties that acknowledge the consensus toward a common goal. The contractual obligation implies the business relationship between two or more parties.

Typically the MOU is used when two parties work together on a specific project. Some of the details that are outlined in an MOU are the following:

• Detailed specifics of the project or activity
• Funding
• The time period of the MOU
• Roles of each party

11. Employee Invention Assignment and Confidentiality Agreement (EIACA)

The EIACA is a legally binding contract that indicates the transfer of ownership and rights of an employee’s work during their period of employment. Employers typically utilize this type of legally enforceable agreement most especially in the development, engineering, and design industries. This enables them to secure intellectual property (IP) rights for easier patent and trademark processes. Find the guide for better employee engagement.

12. Non-compete Agreement

When an employee works for a company for years, it is inevitable that they get to learn their trade secrets, master the business operations, and then resign to start up their own business or join a competitor in the same industry. A non-compete agreement disallows the employee to compete with their former employer or join a competitor’s firm for a period of time.

13. Property or Equipment Lease

This type of business agreement contains the contract terms and conditions of a property lease or an equipment lease for a specific time duration. It primarily ensures the safety of the lessor’s investment and the lessee’s legal rights.

14. Property or Equipment Lease

This type of business agreement contains the contract terms and conditions of a property lease or an equipment lease for a specific time duration. It primarily ensures the safety of the lessor’s investment and the lessee’s legal rights.

15. Vendor Service Agreement

These types of business contracts provide the terms and conditions when hiring vendors to provide products and services. It clearly stipulates what is expected from them and the working conditions. This particular agreement outlines all the expected deliverables that business owners and planners including the date, location, and event or service time.

16. License Agreement

Otherwise known as a licensing contract, this kind of business agreement gives permission to other parties to use a particular product or service in exchange for a share of profit. Many businesses utilize license agreements to permit a party certain rights over their intellectual property which may include its respective copyrights, patents, and royalty percentages.

17. Beta Agreement

Beta Agreements are used by many businesses when providing users certain rights to use their product or service before its launch. It is more prominent among games and software products. These types of contracts focus on maintaining the confidentiality of the program and deter liability issues. Users, in return, will pitch in their feedback and ideas for improvement for the developers to make the necessary adjustments to the software.

18. Statement of Work (SOW)

A Statement of Work or SOW is a contractual agreement that is typically used in project management to define responsibilities, timelines, expected deliverables, and liabilities confined within the project.

Many businesses make sure that SOW is properly drafted to have aligned goals, especially when assigning projects to freelance and independent employees.

19. Purchase Order

A purchase order is a business agreement between a business owner and a seller. This type of contract stipulates that the buyer is committed to buying the product offered, with agreed payment terms and delivery dates. These contracts focus on averting conflicts that may create setbacks for the supply chain process.

20. Terms of Use

Terms of use are something commonly encountered in many businesses, usually between users and websites, software, and mobile apps to allow users to use their service. It primarily protects IP rights, limits a party’s contract liability, and restricts the abuse of such services.

Key Components of a Contract

A contract involves a number of different components. While there are some provisions that may be found in multiple types of contracts, it is primarily essential that the contract indicates the agreement of all parties to the stipulated terms.

The key components of a contract include the following to be acceptable under the rule of common law:

Offer and Acceptance

In drafting your contract, the offer should always be indicated as well as the part where the other party accepts the proposed offer. An offer states the willingness of one party to enter the contract and accept the contract’s terms. It is vital that an offer strictly indicates clear and firm terms. It is important to take note that the person who is making the offer is called the offerer.

On the other hand, acceptance is the part of the contract that states the offerer’s acceptance and agreement to the contract’s terms and conditions. Therefore, both parties must be able to meet halfway to understand what offer is being accepted.

In drafting the contract whatever is stipulated in the offer should mirror what is stipulated in the acceptance part to imply transparency and clarity in business transactions.

Competence

Another key component in making and signing contracts is competence. This means that both parties have sound minds in the discussion of the contract’s terms and conditions and are mentally fit enough to come to an agreement.

Therefore, it is important to consider that both parties are able to comprehend and have shown mutual assent and consideration. This is most important when the contract contains sensitive information.

This also includes that in signing the written agreement, all parties involved are not minors, not under the influence of alcohol, and are mentally deficient. If one party is not competent, then the contract becomes invalid and the non-competent party can ignore the contract signing.

Legal Agreements

This component pertains to the legal purpose of a contract. All contracts are subjected to laws of the jurisdiction in which the terms are signed to justify their sufficient legally binding agreement. In any case such as in the US where federal law and state law are not always aligned, the US Constitution will be the leading authority.

In terms of legalities and legal agreements, the court ensures that there should be no coercion involved.

What Makes up a Valid Contract?

According to the Civil Code, for a valid contract to exist, there should always be consent, object, and cause.

The element of consent is evident once one party and the other party agree on the laid-out terms and conditions of the contract. In practice, contracts are only enforceable when all parties have the capacity to participate in the transactions and accept the offer.

As mentioned, certain groups are assumed to not be able to sign a written agreement, specifically groups of people who are minor or mentally incapable to comprehend the terms and conditions contracts provide.

Other parties may only be considered in particular circumstances. A company can enter contracts and transactions if there’s a proven legal entity and the person who will accept the contract is the company’s authorized signatory. Failure to do so will nullify or put the contract void.

Another key factor that makes a contract valid, is when both parties are mentally sound to comprehend the terms and conditions of the stipulations within the contract. This means that both genuinely agree to the set of terms and conditions, particularly what they need to do and what they will receive in return.

In this sense, mistakes and falsification in any part of the contract can prevent parties from giving their genuine consent to accept the contract. Whether the error in the contract was accidental or purposeful, the wronged party may not accept the contract and may sue the offeror and void the contract. The nullification becomes possible as there was no clear understanding of the obligations and terms which makes it impossible to give consent.

Common Clauses Found in Business Contracts

Arbitration Clause

Arbitration clauses are substitute dispute resolutions. In this clause, both parties resort to an agreement to settle disputes outside of court through an arbitrator. Decisions that come from arbitration agreements can be legally binding contracts, not unless the parties both agree for it to be non-binding.

Laws that may be applied in this kind of contract may be based on local, state, and federal levels.

Examples of the arbitration clauses may include, settling disputes with insurance companies, issues between business partners, and personal injury cases that have elevated in the civil court.

Choice of Law Clause

Also known as governing law clauses, the choice of law clause is a provision in contracts that determine which laws or rules apply to the conclusion when a dispute arises. This clause is mostly found in most contracts.

These contracts focus on ensuring a structured clause that prevents conflict of law situations which makes forming conclusions and decisions more challenging for both parties.

This clause can be highly critical in industries like real estate for buyers and sellers alike.

Examples of choice of law clause can be adopting a child from another country, attending a university in another country, and interstate hiring of employees.

Confidentiality Clause

Confidentiality clauses or non-disclosure agreements prevent the signed party from divulging any sensitive data and information, personally identifiable information (PII, and trade secrets. This clause works for both written and verbal agreements.

Both parties can negotiate the terms and stipulations in the country which can be accepted by both ends.

Confidentiality clauses can either stipulate one-sided or mutual obligations. One-sided confidentiality clauses limit a party from disclosing information about the other party involved. On the other hand, mutual confidentiality clauses require both parties to not reveal specific information about each other.

Examples of confidentiality clauses include NDA from employees, limited disclosure of on-site business processes, sharing IP rights, and company protection when working with contractors.

Definition Clause

Definition clauses, otherwise known as contract definitions, are the terms that should be clearly defined within a legal document. Including the definition of terms alleviates the chance of having any misunderstandings and misinterpretations between parties.

It is imperative that writing the definition of terms should be clear and explicit, explained in plain and understandable language.

Definitions of terms in clauses can be many deemed fit for their purpose. These terms can greatly affect the outcome of your future relationships and disputes as well. As an example, in contracts, terms such as employee, full-time, pay rate, and liabilities should often be explicitly stated to convey a clear message of what it stands for to its readers.

It alleviates any confusion and can be helpful as contract parties can refer to these terms once confusions arise in signing the form.

Examples of definitions clauses can include, hospitals providing terms in an associate agreement, severance pay agreements, and business partnership agreements.

Indemnification Clause

An indemnification clause or hold harmless agreement is the clause that transfers the liability of a party’s action afar from the other party. It can include either mutual or one-sided indemnification clauses.

These clauses can define specific terms such as indemnity caps, covered events, claims terms, reimbursement terms, and recoverable damages.

These clauses are mostly found in various industries such as construction and insurance businesses.

Severability Clause

Severability clauses or also known as severability and survival clauses are the clauses that inform the courts that a contract remains valid even if one of the provisions is proven to be unenforceable.

Should a severability clause not be included, a judge has the power to nullify the contract. On the other if not, then the legal agreements are retained and will continue to be carried out.

Therefore, the severability clause keeps contracts unviolated and intact. So, instead of agreements ending based on a single party’s decisions, both parties have the power to continue to meet the other terms and agreements in the sections which are remained to be enforced.

Industries such as real estate and insurance often include severability clauses as part of their contracts.

Warranty Clause

Warranty clauses are often found in bought products among sales businesses. A warranty clause is a promise or a claim that specific information is true or will happen about the sold product or service.

Under contract law, this clause can mean more than one thing. Therefore, warranty clauses should be specific, concise, and clear.

Most warranty clauses are particularly fit for the purchased product or service. Oftentimes, these clauses include service performance, services, extended warranty offers, and others.

The Common Contract Structure

Generally, there is no specific requirement or template for creating a contract. The exact structure that you will be drafting depends on the kind of document you need to create and the nature of the business as well. However, contract lawyers that are experts in creating and dealing with contracts contain the same elements.

Understanding structures in contracts can give businesses leverage as it can easily lay out all guidelines and stipulations in a clear and logical way, making it easy to read and understand.

A typical business contract structure contains the following:

• Names and addresses of the parties involved
• Background of transactions or recital
• Definition of terms
• Conditions Precedent
• Obligations and rights of parties
• Terms
• Termination rights
• Disputes and resolutions

Let us have a closer look at each one of them.

Names and addresses of the parties involved

This section of the contract displays the basic information about the parties involved particularly their names and postal addresses. Once the names are declared in the contract, the signing party will then be addressed in the third person perspective throughout the remainder of the contract.

For example, ABC Company will be referred to as The Company throughout the rest of the contract document.

Background of transactions or Recital

This section, which may also be referred to as the preamble is a part that does not have any legal effect on the contract. Its main purpose is to explain to the contract’s readers the background of the transactions being discussed. If needed, it may also contain certain rights and information that may influence how the court will interpret the provisions included in the contract.

It is imperative that the content of the recital be treated as an integral part of the overall contract structure.

Definition of Terms

The definition of terms contains a list of terms that the reader may encounter throughout the contract. A definition is provided for each term, which represents the concepts expected to be interpreted by the reader under the rule of law or the supreme court.

For example, the term execution date shall mean December 12, 2007. Therefore, it is understood that the validity of the contract starts within the given date.

As mentioned, the definition of terms should not be vague as it can cause a lot of problems in the long run. Some problems can arise in the following situations:

• The definition used in the agreement is not clear and understandable based on the context being defined.
• The definition is too limited which can lead to illogical conclusions.
• The term defined can only be read a few times throughout the contract.

Condition Precedent

A condition precedent is an event or condition which must happen before a claim of rights and interest may arise.

The most common condition precedents are found in last will and testaments, trust funds, and insurance. In the context of business partnerships as ruled by public policy, condition precedents may influence the flow of activities as described in the contract.

Obligations and rights of the parties

In this section, the obligations and rights of both parties are enumerated in discussed. This section of the contract is segmented into articles or sections. Every action which would be expected from both parties is to be stipulated in accordance with the agreement.

Another important piece of information included in this section is the rights of each party which both will be committed to upholding until the duration of the agreement as agreed.

Terms

The terms primarily include the key information of the timeline or the duration when the contract shall be followed by the parties.

Typically, it involves the general statement of what is expected in terms of actions and their respective timeline.

Termination Rights

The termination rights discuss the different situations or circumstances that can nullify the contract or terminate it. Some information included in this section is the actions or activities that can be considered a breach of contract which can be committed by either party.

Ending contracts sometimes may be a mutual agreement between the parties involved. It may also happen when the contract cannot be pursued due to circumstances outside the control of the people involved such as acts of nature in construction or real estate industries.

However, it is imperative that these termination rights should also be bound by resolutions deemed fit in the situation of the agreement.

Disputes and Resolutions

This section consists of the possible disputes and the possible resolutions to be followed during the contractual relationship.

Usually, this section entails what responsibilities both parties will play when disputes arise and how they will be solved.

Steps in Writing Contracts: What every business owner should know!

Step 1

Take note during discussions about every vital detail of the business transactions. Make sure that all questions are answered to ensure that there is a clear understanding between the parties.

Step 2

Take a look at the agreement and identify the type of contract to be created. Begin drafting the contract. Provide an overview of the contract by writing the introductory paragraph, along with the information of the parties involved and the time period of the contract.

Step 3

Add in the definition of terms that will constantly appear throughout the written agreement to clarify all doubts and vague concepts.

Step 4

Discuss in the contract the overall scope of work throughout the given business transaction. Include all the necessary information such as the expected deliverables, the roles and responsibilities of each party, and the payment terms. Make sure that everything is clear and concise while being very specific. It is imperative that no detail is left unincluded to prevent any misunderstanding in the future.

Step 5

Have a section that primarily focuses on payment terms. Specify the due date, payment methods, and penalties. You may also include other information, such as incentives or deductions for missed opportunities to pay.

Step 6

Make sure to include clauses that discuss protective terms should any form of breach happens. This may include accountability, liability, confidentiality, dispute, resolutions, and other clauses that may pertain to legal obligations and actions that protect or penalize the parties involved.

Step 7

Provide an ample amount of time to both parties to review the draft of the contract. Oftentimes, this also includes a time when parties can negotiate over sections they wish to change. It is essential to make sure that everyone feels accepted and comfortable with all the details included in the contract to avoid mishaps in the long run. You may continue to revise the contract as needed to arrive at the most agreeable terms and conditions for both parties.

Step 8

Once all parties reach an agreement, the authorized representative should each sign the contract with the current date to make it a legally binding contract. Once finished, both parties must have a copy of the signed document.

Remember that despite verbal agreements being valid, they may not be enough to be shown in court once disputes arise. Therefore, a written agreement will mostly be helpful, especially in business partnerships. As business owners, it is always helpful to consult a contract lawyer to help you with your needs in creating and implementing contracts to make sure that both you and your partner are protected by the legal system.