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What is a Contractual Agreement?

A contractual agreement is a legally binding agreement between two parties. The contract's terms and conditions will require the parties to either do or refrain from doing specific actions. A contractual agreement is legally enforceable if it meets these specific requirements:

  • Offer and Acceptance: One party must make an offer, and the other party must accept that offer.
  • Mutual Consent: Offer and acceptance must occur mutually and without coercion.
  • Consideration: Consideration means that something of value is exchanged between the parties, whether money, goods or services.
  • Competence: Parties entering the contract must be legally competent. Parties cannot be under the influence of drugs or alcohol, mentally deficient, or a minor.
  • Legal Purpose: The contract cannot require any unlawful action.

Contractual agreements come in many different forms and are used for various purposes like employment contracts , business contracts , and sales contracts . Most people don't realize that something as simple as purchasing an item from a store is a contractual agreement.

If either party breaches the terms of the contract, the party not in breach has the option to file a lawsuit. If the judge determines that the contractual agreement was valid by meeting all the contract requirements, the court can order completion of the terms of the contract or compensation for monetary damages.

For a more detailed definition of a contractual agreement, click here.

Purpose of a Contractual Agreement

The purpose of a contractual agreement is to serve as a record of the agreement between the two parties. By entering into a contractual agreement, both parties are legally obligated to the terms of the contract. Contractual agreements protect both parties by ensuring that they both follow through on the agreed-upon terms and conditions .

Some things to consider when entering into a contractual agreement include:

Formalities: Although an oral contract can be enforceable in some cases, it is best to have a contract in writing. When terms are written, there is less of a chance of varied interpretations. Having a written contract also proves that the contract exists.

Signatures: Written contracts should be signed by both parties involved in the contract. The signer of the contract needs to be legally competent and cannot be under the influence of any substances, mentally ill, or under 18 years old.

Read this article for more information about the purpose of a contract.

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Types of Contractual Agreements

Several different types of contractual agreements can be used for different kinds of agreements and transactions. Some of the more common types of contracts include:

  • Express Contract: An express contract's terms are clearly stated, usually in writing at the time the contract is entered. This is the most basic type of contract.
  • Implied Contract: Implied contracts include terms that must be inferred based on both parties' actions, facts, and circumstances to show that they knew a contract was being created.
  • Unilateral Contract: When only one party promises to act or provide something, it is a unilateral contract. This type of contract is most often seen with a reward offer for a lost item being found.
  • Bilateral Contract: Bilateral contracts are formed when both parties agree to exchange items or services. These are the most common types of contracts.
  • Option Contract: Option contracts are most often seen in real estate transactions. Option contracts allow parties to enter into another contract at a later time by exercising the option.
  • Fixed Price Contract: Also called a lump-sum contract, in a fixed-price contract, the buyer and seller agree to a fixed price for a project regardless of the amount of time or cost of material it may take.
  • Aleatory Contract: This type of contract is an agreement that isn't triggered until a specified event occurs. An example is an insurance contract. The insured will pay a premium to the insurance company, and should a specified event occur, the insurance company will cover the damages.
  • Unconscionable Contract: An unconscionable contract gives more power or advantage to one of the parties over the other. This could be in the form of limiting damages in the event of a breach or limiting one party's rights. Whether a contract is unconscionable is decided by the courts. A judge can determine whether a contract is unconscionable and therefore unenforceable.

Examples of When to Use a Contractual Agreement

There are various examples of when to use a contractual agreement. Anytime two parties enter a business deal where money, goods, or services are being exchanged, a contractual agreement should be utilized.

Contracts legally bind both parties to the duties they have agreed to perform and provides a record of that agreement. In addition, the contractual agreement provides a recourse should one party breach and not perform their duties.

Some common examples of when to use a contractual agreement include:

Partnership Agreement. A partnership agreement is used when two or more people decide to go into business together. It will outline each partner's share in the company and all duties and responsibilities of each party.

Employment Agreement: Sometimes, when a company hires a new employee, the employee is required to sign an employment agreement . This contract will outline important employment details like pay, benefits, term of employment, and grounds for termination.

Non-disclosure Agreement (NDA): An NDA is a confidentiality agreement used to ensure one party does not share a business's proprietary information. This keeps confidential or sensitive business information safe within the company.

Indemnity Agreement: An indemnity agreement , much like a liability waiver , protects a company from liability for any loss or damage experienced by someone else. These are often seen when businesses are involved in high-risk activities. When a person goes skydiving, they will sign an indemnity agreement where they release the skydiving company from liability in the event an injury occurs.

Lease Agreement: Lease agreements are used whenever one party is renting a property from another party. This can be seen in residential lease agreements or commercial lease agreements . This agreement will lay out terms like the property being rented, use of the property, rental cost, and who is responsible for paying additional expenses associated with the property.

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What Should Be Included in a Contractual Agreement

Although contracts will vary greatly depending on the parties and the agreement, an effective, legally enforceable contract should include the following key elements:

Element 1: Obligations and Conditions: The contract should detail the specific agreement and the obligations and conditions required by each party.

Element 2: Performance: Performance describes how each party is to complete their obligations and conditions.

Element 3: Payment Terms: Payments can be made monetarily, with goods, or with services.

Element 4: Breach of Contract: The contract should include repercussions if either party breach.

Some option elements that often be found in contracts but are not required include:

Arbitration Clause: Arbitration clauses prevent disputes from going to court and instead are handled by an independent arbitrator. These clauses are often seen in credit card contractual agreements

Force Majeure Clause: A force majeure clause voids the contract should an event occur that is out of the control of either party. For example, a natural disaster destroying a house that is in escrow.

For more examples of clauses that are commonly found in contracts, check out this contract clause guide.

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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.


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Business

Contractual Agreement

Michigan

Asked on Apr 14, 2022

Me and my friends are planning to start a business.but using using my Friend's place..so what type of contract should I look into??

Can I draft my own contract and take it to police to stamp it after reaching my agreement with my friend,?

David H.

Answered Apr 15, 2022

In most cases, contracts only need to be signed by the parties to the contract. The contract should have the key information related t the parties signing and the terms and length of the agreement to name a few clauses that need to be included. There are some contracts that need to be notarized. The police may have a notary, but your bank may also. There are many components to your question - ownership of the business, who does what in the business, business formation, is there a need for insurance to cover risks, and other items. There are tools online to help or you can use an attorney. With an attorney you will get specific assistance for your business, online it may be more generalized information you find.

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Dispute

Contractual Agreement

New York

Asked on Mar 22, 2022

Can I create a contract that bars any form of dispute resolution (Jury trial and Mediation/Arbitration) if a client fails to dispute an invoice within 7 days of receipt.

I own a growing security guard firm and all my clients sign a service contract before we provide services. In order to reduce the stress of collecting from a slow playing client, I want to create a new contract that makes it impossible to dispute an invoice after 7 days of receipt.

Donya G.

Answered Apr 19, 2022

While you may create a contract without dispute resolution, the issue is whether it would be enforceable by any court. Seeing that a contract is between two parties and disputes arise, by barring any resolution, it would essentially not afford a party an opportunity to be heard. I do not believe a court would allow of enforce such a position. If you need additional assistance you can find me on the Contracts Counsel website and I can provide my legal services to you. Thanks Donya Gordon

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Dispute

Contractual Agreement

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Asked on Aug 17, 2021

I am being harassed by a vendor for the balance due for product that i have not received yet. Can i take them to court?

After receiving the incorrect product, the vendor presented me with a fake contract with my signature copy pasted on it to tell me I i agreed on the replacement product for my order. They claim they had a second meeting with me and this new contract was signed but that never happened.

Donya G.

Answered Oct 12, 2021

I would suggest hiring an attorney in your jurisdiction to send a cease and desist letter to the vendor or have them simply call the vendor nd tell them to stop harassing you. For a cease and desist to have the effect that matters, it should be from a licensed attorney in that state who can file any case in court if the matter is not addressed or continues to happen. I am an attorney licensed in New York and Connecticut. There are numerous attorneys on this website from other states. If you would like me to assist, please contact me through the site or post your jobs for another attorney. All the best Donya Gordon

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Contractual Agreement

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Asked on Jan 26, 2022

Hi there. My boss has me as a 1099 employee. Is she legally allowed to give us a contract that I have to sign?

I am a hairstylist. I pay my own taxes every year as a self employed person. Yet my boss sets rules and takes 50% of my commission. I have no idea if any of what she’s doing is legal.

Kristen R.

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I would need a lot more info to answer this question.. is she directing how you do your job? Is there a contractor agreement in place? Just having you sign a contract is not illegal, however.

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