What is a contract?

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What Is a Contract?

A contract is a legal agreement between two or more parties that specifies actions they will or will not take. Enforceable by law, a contract binds both parties to the terms of the agreement and may specify the consequences if these terms are violated. Not all contracts are written. Any agreement in which both parties are expected to fulfill certain obligations is considered a contract.

A legally enforceable contract must include:

  • Mutual assent, which includes a valid offer and acceptance of that offer.
  • Adequate consideration, indicating that the terms of the agreement are fair for both parties.
  • Capacity, which indicates that all parties involved in the contract are competent to perform the actions they have agreed to.
  • Legality, meaning that all terms in the contract are lawful within the given jurisdiction.

The Parts of a Contract

Both oral and written contracts have several essential parts that make them understandable and enforceable. Written contracts are always easier to enforce than verbal ones, so you should execute a written contract whenever possible, particularly for complex business agreements. For example, you have executed a contract any time you specify:

  • An offer: A homeowner offers to pay an individual $50 for lawn care.
  • Acceptance of the offer: That individual agrees to complete the task.
  • Promise to perform: The individual specifies that the job will be completed.
  • Valuable consideration: Adequate compensation is agreed upon.
  • The time frame for the action: Weekly lawn care is requested.
  • Terms and conditions for the action: The details of the job are discussed.
  • Performance of the task: The lawn care is completed, and $50 is paid.

A written business contract always includes these aspects, though it is often far more detailed. The language of the contract will typically include:

  • Document title: The title at the top of the contract states the purpose of the document.
  • Preamble: The preamble summarizes the important features of the document. This identifies the parties involved and will include the state of the organization for a business contract.
  • Recitals: Recitals are options, but they may provide valuable details that add background information regarding the contract. The recitals are not a binding, enforceable part of the contract. They may simply help with interpretation.
  • Agreement: Also known as the consideration, the agreement states what is expected of the provider under the terms of the contract. This specifies that the parties agree to adhere to the terms that will follow.
  • Definitions: Under the definitions, you will find a detailed explanation of the phrases used in the terms of the contract. You may use this section to specify what is meant by terms like assumed liabilities, payables, or contracts.
  • Action sections: The actions section elaborates on the terms of the contract by specifying things like payment terms, late fees, due dates, and the rights of each party.
  • Representations and warranties: Warranties and representations assert the truth of the terms specified within the contract, such as the value of a product. If the warranties and representations are later proven to be false, this indicates misrepresentation.
  • Covenants: Covenants are incidental activities that the parties have to engage in to bring the terms of the contract to completion.
  • Conditions: Conditions specify instances in which the terms of the contract would change, such as an incident that would prevent one party from upholding all of their contractual obligations.
  • Provisions: There are two types of provisions. General provisions are boilerplate inclusions that deal with disclaimers, jurisdiction, limitations of liability, and other details. Endgame provisions specify the consequences for failure to uphold one's part of the contract.
  • Signatures: The final part of the contract is the signature block. The contract isn't binding until signed by both parties.

Here is an article that explores these parts of a contract in greater depth.

Types of Contracts

There are many important types of contracts that can help you protect yourself or your business while ensuring that everything runs as smoothly as possible. A knowledgeable contract lawyer can help you determine which contracts you need . Some common contracts that you may want to consider include the following.

Service Contracts

A service contract is executed between a customer or client and the company or individual providing the service. A contractor and homeowner might execute a service contract specifying what tasks are required in a remodeling project, who will purchase the materials, and how much the contractor will receive for the work. Other examples of service contracts include:

  • Maintenance contract
  • Event Planner contract
  • Performance contract
  • Vendor contract
  • Daycare contract

Read this article for details about extended warranties and service contracts.

Education Contracts

Educational institutions may execute contracts that specify the responsibilities of the school and the student or parent. These contracts clarify what is expected of each and the consequences, so neither parents nor students can argue that disciplinary action was unwarranted or unexpected. These contracts may include:

  • Attendance contract
  • Behavior contract
  • Scholarship contract
  • Internship contract
  • Safety contract

Financial Contracts

It's important to execute detailed contracts anytime you're dealing with finances. This is a potentially complex area and one where you could be more likely to encounter complaints or lawsuits. A contract provides a valuable means of protection for yourself and your financial assets. Some examples of helpful financial contracts include:

  • Personal loan contract
  • Investment contract
  • Business termination contract
  • Franchise contract
  • Business purchase contract

Real Estate Contracts

Whether you're a landlord or lessee, you should always make sure that a real estate contract is in place. This document details the length of tenancy, the tenant's responsibilities, the landlord's responsibilities, and what happens if the tenant wants to move out before the lease is up. This type of contract provides protection for both parties as well as the property. Types of real estate contracts include:

  • Rental contract
  • Agent contract
  • Roommate contract

Workplace Contracts

In the workplace, both the employer and employee must know that they're protected from unfair litigation, termination, or competition. There are many valuable workplace contracts that can help employees understand their responsibilities while protecting themselves from unfair treatment. Examples of business contracts are:

  • Noncompete contract
  • Employment contract
  • Independent contractor agreement
  • Confidentiality agreement
  • Termination agreement

Breach of Contract

A breach of contract occurs when a contract is broken. You may experience:

  • A fundamental breach: This occurs when one party clearly fails to uphold their part of the agreement. The other party can seek damages in court.
  • A minor breach: A minor breach occurs when only part of the contract is violated. This might happen if work is completed but falls short of the expectations included in the contract.
  • An anticipatory breach: If it seems evident that one party does not intend to hold up their end of the contract, one can file an anticipatory breach of contract. For example, if a contractor has not begun work on the project at the expected time, you could reasonably anticipate that he does not intend to complete the job by the date specified in the contract.

Having the right contracts in place will give you protection in a variety of situations and help you clarify your intentions and expectations. Working with a contract lawyer helps ensure that your contracts are executed properly and prepared to stand up in court.

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