Jump to Section
Need help with a Contractual Agreement?
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.
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.
Image via Pexels by Pixabay
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.
Get Help with Contractual Agreements
Do you have questions about contractual agreements and want to speak to an expert? Post a project today on ContractsCounsel and receive bids from contract lawyers who specialize contractual agreements.
Meet some of our Contractual Agreement Lawyers
Firm rated best ADR firm for Wisconsin and won an award for cultural innovation in dispute resolution from acquisition international magazine in 2016 and it was rated "Best of Brookfield" by Best Businesses in 2015. Attorney Maxwell C. Livingston was rated 10 best in Labor & Employment Law by American Institute of Legal Counsel and 40 Under 40 by American Society of Legal Advocates for 2016; he also won 10 Best by American Institute of Family Law Attorneys. He is licensed in Wisconsin in all state and federal courts, and in the 7th Circuit Court of Appeals, wherein he won a landmark decision in McCray v. Wielke.
Richard is a wizard at taking on bureaucracies and simply getting the job done. His clients value his straight-forward counsel and his ability to leverage a top-notch legal staff for efficient and effective results. Richard is a professional engineer, professor of law, and has been named among the top 2.5% of attorneys in Texas by the Super Lawyers®. When he is not driving results for his clients, Richard can be found with his small herd on his Texas homestead.
Experienced attorney and tax analyst with a history of working in the government and private industry. Skilled in Public Speaking, Contract Law, Corporate Governance, and Contract Negotiation. Strong professional graduate from Penn State Law.
I am an attorney admitted in NY, with over 6 years of experience drafting, reviewing and negotiating a wide array of contracts and agreements. I have experience in Sports and Entertainment, Real Estate, Healthcare, Estate Planning and with Startup Companies. I am confident I can assist you with all of your legal needs.
Rishma D. Eckert, Esq. is a business law attorney who primarily represents domestic and international companies and entrepreneurs. A native of both Belize and Guyana, she remains engaged with the Caribbean community in South Florida: as a Board Member and General Counsel for the Belize American Chamber of Commerce of Florida, and Member of the Guyanese American Chamber of Commerce. She holds a Bachelor of Laws degree (LL.B.) from the University of Guyana in South America, a Master’s degree in International and Comparative Law (LL.M.) from Stetson University College of Law in Gulfport, Florida, and earned a Juris Doctor degree (J.D.) from St. Thomas University School of Law in Miami, Florida. Licensed to practice in the State of Florida and the Federal Court in the Southern District of Florida, Mrs. Eckert focuses her passion and practice on domestic and international corporate structuring and incorporation, corporate governance, contract negotiation and drafting, and trademark and copyright registrations.
Mark A. Addington focuses his practice primarily on employment litigation, including contractual disputes, restrictive covenants (such as non-competition, non-solicitation, or confidential information restrictions), defense of wage and hour, harassment, retaliatory discharge, disability, age, religion, race, and sex discrimination.
Founder and Managing partner of Emerald Law, PLLC, a business law firm specializing in contract drafting and corporate transactions. Kiel worked as in house counsel for a variety of companies before launching his own firm, and most recently served as the Chief Legal Officer for an international private equity firm.