To define a contract, is to explain what a contract is. Contracts are the foundational elements not just of every business, but human cooperation and society. A contract is an agreement (oral or written) that enable parties (individuals or businesses), businesses, and society to come together and collaborate towards their specific desires and needs. They are official agreements that are enforceable by law. In other words, a contract is a legal obligation. Keep in mind that some contracts are unenforceable or void under certain circumstances, such as contracts that are illegal or against public policy.
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 enforced.
Contract Definition
A contract is 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 breach of contract is a failure, without legal excuse, to perform any parts of the contract. In some cases, a party may have a legal excuse for not performing obligations under a contract, such as impossibility or frustration of purpose.
A contract is created when there is an offer, consideration, and acceptance between two or more parties.
Here is an article that further defines a contract.
Required Elements for a Contract
A contract 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 pay you $3,500 for the purchase of your vehicle.
- Acceptance. Usually mirrors the terms of the offer—an expression, through words or deeds, that both parties agree to the terms of the contract.
- Mutual Assent. 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. However, there are situations where the laws of other jurisdictions may apply, such as if there is a choice of law provision or if the contract involves parties from different jurisdictions.
Different Types of Contracts
Contracts are everywhere. You are probably using one or more contracts in your everyday life and do not even realize it. Following are some types of contracts used in our everyday lives.
- Your lease agreement or mortgage
- Terms and conditions of your credit card
- Employment contracts
- Rental car company contracts
- Service contract when you sign up for a service
- Cellphone contract
Contracts are at the heart of every service that you perform or receive. 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.
In business, the three most common types of contracts are:
- Sales Contract. Facilitate sales transactions and customer engagement.
- Nondisclosure Agreement (NDA). Protect organizations key assets, reputation and business data.
- Services Agreement. Optimize and manage business relationships with consultants, contractors and other third-party actors.
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Examples of Contracts
Listed below are examples of contracts.
- Bill of Sale. A bill of sale clearly outlines the basics of a sales agreement, such as the involved parties, the agreed upon price, and the terms of the deal. This type of contract will also prove the legal owner’s identity.
- Promissory Note. A promissory note is the legal version of an IOU and allows someone to borrow money from another person or business entity. The promissory note exists to keep a record of the loan and all its requirements, including penalties, interest, and terms of repayment.
- Employment Agreement. An employment agreement sets the terms of employment, with details such as termination causes, bonus structure, and compensation.
- Licensing Agreement. A licensing agreement allows an inventor to make money on their creation or idea by allowing another person or business to use the idea. The licensing agreement will include details about any restrictions on reproducing the product, which is especially useful if you hold legal protection on your intellectual property, but you need help from someone else to produce the item and make money. The agreement may include details about exclusivity and payment terms as well.
When Do I Need a Contract Lawyer?
Hiring a contract lawyer is not always necessary, however, before signing a business contract, always have a lawyer look it over and confirm that you are getting what you expected. This is especially true for contracts that involve significant rights, obligations, and financial implications. The lawyer should go over all the contract clauses before you sign it to ensure your rights and the contract is legally enforceable.
Whenever possible, hire a business contracts lawyer to help you negotiate the key terms of the contract. Some lawyers are excellent negotiators, and a good one can help you get a better deal. A finalized contract is less likely to allow additional creative solutions or proposals; most of the time, the lawyer will just go over the terms and clauses that are already present. However, if the lawyer actively participates in drafting and negotiating the contract, you are more likely to get a contract that meets your needs and advances your goals.
We have talked about when to hire a contract lawyer, now let us talk about why to hire a contract lawyer. Following is a list of reasons why you should hire a contract lawyer.
- To help you better understand the contract
- Identify potential liability issues and resolve them
- Ensure that the contract is valid and legally enforceable
- Ensure new regulations and applicable state laws are considered
- Offer new perspectives and make new suggestions
- Respond to a breach of contract
- Advocate on your behalf
- Terminate a contract
The terms and clauses in a contract can have direct financial consequence for your business. A well-written contract that is strategically aligned with your business interests is an incredibly valuable guarantor that the obligation to you will be met.
Every business deserves that peace of mind and contractual protection. To ensure your contracts will stand up to scrutiny, it might make sense to delegate the writing, reviewing, negotiation, or execution of your contracts to a contract lawyer. Delegating this critical task to a knowledgeable contract lawyer is one of the best ways to manage risk.
The consequences of a poorly written contract, or worse, not having a contract to begin with, can be severe. Hiring a contract lawyer is certainly a worthwhile expense for your company. Better to err on the side of caution, rather than not.
What is the average cost of hiring a lawyer to draft a contract ? Contract drafting costs range between $200 and $800 for a simple contract and $1,000 and $5,000 for a complex contract. Contract lawyers can offer hourly or flat fee contract drafting services. The cost of drafting a contract depends upon the scope and depth of your objectives and the complexity of terms and business relationship.
Getting Help with Contracts
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