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What Is a Contract Agreement?
No matter the size of your company, a contract agreement is an essential part of conducting business. A legal contract is a document that all parties agree to. Contract agreements typically lay out the terms and conditions of an agreement, clearly explaining all parties' expectations. This often includes specific details about important aspects like payments, materials, and timelines as well as how the parties can resolve disagreements.
Contracts vs. Agreements
You will often hear the terms contract and agreement used interchangeably. However, it's important to note that contracts and agreements aren't exactly the same things. Agreements create mutual understandings between parties, while contracts are agreements that create enforceable obligations.
When Do You Need a Written Contract Agreement?
Verbal contracts are technically legal in most cases, though there are specific situations when they are not. Still, most businesses create written contracts today. Contracts include many details to try to cover all possibilities and eventualities as clearly as possible.
Most contract agreements never get to a courtroom. Theoretically, they could, therefore, be verbal. However, should something go wrong, a written contract better protects all parties involved. If a party to a valid and enforceable contract thinks the other party has in some way broken the contract (in other words, they've breached the contract), the harmed party can bring a lawsuit using the written contract for support.
While verbal contracts can still have the force of law, certain types of contract agreements are required to be in writing. This includes long-term contracts as well as contracts for marriage, or prenuptial agreements. ( Here is an article with further information about prenuptial agreements.)
It is also possible to have an implied contract. A party can enter into a contract unknowingly and still be forced to fulfill the contract's terms.
What Makes a Contract Agreement Enforceable?
A contract must be clear and specific to be legally enforceable. It also must meet certain criteria. If a contract agreement is legally enforceable, it can be used in a court of law to support a decision if a dispute arises between the parties to the contract. However, if a contract does not include certain key components, it will not be legally enforceable and thus will not stand up in court.
If a contract is valid, litigation (the legal process) can determine if a contract has been breached or if there are circumstances negating the breach. However, a court will only consider a contract dispute if the contract itself is valid.
Essential elements for business contracts relate to both the agreement itself and to the parties entering the agreement. However, it is not illegal for someone to enter into a contract that does not include all of the essential components. A court simply cannot enforce a contract that doesn't include the necessary elements.
Components needed to create a valid contract include:
Offer, Acceptance, and Mutual Consent
All valid contracts must have a specific offer. An enforceable contract must also include acceptance of the specific offer.
Further, both parties to the agreement need to consent to their free will. That means neither party can be forced or coerced into signing a contract. Both parties to the contract must also clearly agree to the same terms.
The conditions of the offer, acceptance, and mutual consent also imply that the parties intend to create a binding agreement. That means if one of the parties (or both of them) aren't serious, there isn't actually a contract.
All contracts must include consideration, or something of value being exchanged between the contract's parties, to be valid. That thing of value can be either services or money. However, both parties must be giving something. If not, you have a gift, not a contract.
Here is an article about consideration in contracts.
Parties to an agreement must all be of sound mind for a contract agreement to be legally enforceable. In other words, the agreeing parties must be able to understand the situation and what is being required of them. Competence also requires that:
- Neither parties are minors
- Neither parties are mentally deficient
- Both parties are sober, i.e. not under the influence of alcohol or drugs, when they sign the contract
If a party to a contract is not competent, that means the contract is not considered valid. The party that is not competent can ignore, or disavow, the contract in that case.
For a contract to be enforceable, it must be a contract for a legal purpose. In other words, a contract for something illegal, such as prostitution or selling drugs, is not enforceable in a court of law.
Other Important Aspects of a Contract Agreement
While the above components are required to make a valid contract, there are other important aspects that anyone creating a contract should be aware of. Things to keep in mind include:
Researching Local Regulations
Contracts should incorporate local regulations that could apply to the specific situation of the agreement. Industry and/or union regulations may also apply and should be included in the contract. Examples to consider include:
- Requirements for insurance
- Noise and other restrictions
- Required fees
- Required licenses or planning permissions
Defining Specific Details
Good contracts don't leave anything to chance. You'll want your contract to include all details relevant to the agreement you're entering into. Even if something seems obvious to you, it may not be clear to the other party, so make sure your contract defines any key terms as well as exact services or products.
Important details to cover include:
- Contact information for all parties
- Time period the contract covers, including start and end dates
- Definitions of key terms
- Services of products you are providing or receiving
- Liability requirements
- Insurance requirements
- Terms of payment, including due dates, milestone payments, and/or part payments
- Interest and/or fees required for late payments
- Dispute resolution processes
- Breach-of-contract processes
- Any other special conditions
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Types of Contract Agreements
Various categories of contracts exist. Examples include:
These contracts are usually one-sided. One party makes all promises in this type of agreement. Item repairs and maintenance agreements are examples of this type of contract.
Both parties make promises in this type of contract. Bilateral agreements can give parties access to new markets. Real estate contracts are typically bilateral contracts.
Executed and Executory Contracts
An executed contract is simply a completed contract, typically made between two or more individuals. Executed contracts are also possible between a person and entity, or two or more entities. The purchase of a service or product is an example of an executed contract. The terms of an executed contract must be fulfilled right away.
Executory contracts, on the other hand, are contracts with terms that will be fulfilled later on.
Contracts Under Seal
Some agreements require the use of a seal to show the contract is official. This seal can be a wax seal, a seal created using a special stamp to emboss the seal onto the document, or the attachment of adhesive paper.
Working with an experienced contract lawyer can help you make sure your contract includes all the necessary components to protect you and your business given the specific circumstances of your agreement. This way, you'll know that your contract is valid and will stand up in a courtroom if a dispute arises.
Meet some of our Contract Agreement Lawyers
Corporate counsel with years of in-house experience working with and reporting to board / executive-level and upper management, along with extensive regional / national law firm background in commercial transactions and contracts, complex commercial litigation, and employment matters. Skilled at executing corporate priorities, driving profitability by implementing goal-oriented processes to achieve revenue and productivity targets, and managing company litigation and outside counsel. Recognized for creating policies and practices to address ethical dilemmas and resolving misconduct.
T. Phillip B.
Attorney creating plans and strategies to help individuals create, build, protect and pass on wealth.
Keidi S. Carrington brings a wealth of legal knowledge and business experience in the financial services area with a particular focus on investment management. She is a former securities examiner at the United States Securities & Exchange Commission (SEC) and Associate Counsel at State Street Bank & Trust and has consulted for various investment houses and private investment entities. Her work has included developing a mutual fund that invested in equity securities of listed real estate investment trusts (REITs) and other listed real estate companies; establishing private equity and hedge funds that help clients raise capital by preparing offering materials, negotiating with prospective investors, preparing partnership and LLC agreements and advising on and documenting management arrangements; advising on the establishment of Initial Coin Offerings (ICOs/Token Offerings) and counseling SEC registered and state investment advisers regarding organizational structure and compliance. Ms. Carrington is a graduate of Johns Hopkins University with a B.A. in International Relations. She earned her Juris Doctorate from New England Law | Boston and her LL.M. in Banking and Financial Law from Boston University School of Law. She is admitted to practice in Massachusetts and New York. Currently, her practice focuses on assisting start ups, small and mid size businesses with their legal needs in the areas of corporate and securities law.
Jim Slattery most recently served as General Counsel at Regional News Network, a large owner of broadcast television stations. Jim is an experienced attorney with broad-based expertise. He is a seasoned negotiator who has been involved in negotiations as complex as the Olympic Games. Jim spent 18 years as Vice President for Business and Legal Affairs at NBCUniversal. Previously, Jim worked in the media industry in various roles at All American Television. Jim’s success can be attributed to his ability to properly analyze data, manage projects, lead teams, develop creative solutions for complex problems, focus on strategically optimizing assets, manage/allocate risk and collaborate with divergent constituent groups to achieve objectives. Jim received a J.D. and a B.B.A. from the University of Notre Dame.
Retired Dentist transitioned to Law, with a special interest in Commercial Real Estate, Startup businesses, Asset Purchase Agreements, and Employment Contracts. I love to help dentists and physicians with legal issues pertaining to licensing, credentialing, employment, and general business-legal questions.
I’m an attorney focusing my practice on concierge corporate and intellectual property law for startups and high-growth companies. I also serve as outside General Counsel to several businesses in various sectors. Since founding my practice I've worked with hundreds of clients across a variety of industries. My experience as a former General Counsel of a premier edtech company gives me unique insight into the challenges my clients face and how to resolve them efficiently and cost-effectively.
The Law Office of George K. Fuiaxis, from the very beginning in 2002, has built a reputation with its clients as an unmatched, diligent, hands on law practice that is always on duty to find the best course of action for its clients. With a supreme pledge of exceptional service to its clients in the areas of Real Estate (Commercial & Residential), Loan Modifications, Intellectual Property, Corporate Law & Business Transactions, Wills, Trusts & Estates, the Law Office of George K. Fuiaxis creates solutions for the many faceted problems faced by its clients. The office represents several various clients, including well known lending institutions, foreign and domestic corporations, sellers and buyers of residential and commercial real estate, residential and commercial landlords and tenants, well known restaurant and business owners, automobile dealerships, airline companies, well known fashion, sports and entertainment industry individuals and corporations, information technology (IT) startups and well known IT companies.