Legal Contracts: Definition, Types, How They Work

What are Legal Contracts?

Legal contracts are legally enforceable agreements between two or more parties that govern what each person can or can’t do. When these legal agreements are drawn up, promises are made between the parties that are upheld in the court of law.

Legal contracts are useful because they protect each party in case of a legal dispute. They also set expectations so that anyone that signs the contract understands their rights and responsibilities within.

Main Types of Legal Contracts in Business Law

Legal contracts play a vital role when it comes to law enforcement. When parties sign a binding contract , it gives law enforcement and the court system a reference document to help make decision.

In law, there are several types of popular legal contracts:

• Service Contract : A service contract is an agreement between a contractor and a customer that covers service, maintenance, and repairs of purchased equipment for a certain period.
• Employment Contract : An employment contract is a contract between an employee and employer that defines rights, responsibilities, and expectations of both parties during an employment term
• Confidentiality Agreement : A confidentiality agreement requires that all parties to the contract agree not to share or sell private information
• Sales Contract : A sales contract is a contract between a buyer and a seller that defines the rules and responsibilities of each party of the agreement
• Independent Contractor Agreement : When a non-employee is contracted by a company to complete a job, an independent contractor agreement a signed contract that explains the work being done, work deadline, compensation information, and roles and responsibilities of contract parties.
• Loan Agreement : A loan agreement is a contract between a lender and a borrower that explains the amount of money being loaned, the repayment schedule, and any associated fees that accompany the agreement
• Partnership Agreement : A partnership agreement is a contract document that explains the management structure, roles, responsibilities, and daily operations of a business partnership

Here is an article where you can learn more about popular types of legal contracts.

How Legal Contracts Work

Legal contracts are essential documents that protect parties when disputes happen and explain certain roles, responsibilities, and terms that each party agrees to.

For a legal contract to be admissible in court, it must meet the following requirements:

1. The agreement must not require either party to do anything illegal. If an illegal act is required as part of the contract, the document would be considered unenforceable in the court of law.
2. Both parties must agree to all the terms of a signed contract ; this is called mutual assent.
3. There must be something of value exchanged that warrants signing a contract. This process is called consideration.
4. Both parties must be of sound mind and able to make their own decisions when signing the contract. This also requires each party to be of age to enter into the agreement.
5. No party may be forced into signing a contract. If the agreement is not made of the free will of both parties, it constitutes grounds to terminate contract agreements.

If a contract does not meet each of these requirements, the agreement is considered null and void and will not hold up in the court of law. When this happens, the contract is typically immediately vacated and neither party can be held responsible for the terms of the contract, regardless of their wishes.

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What is a Breach of Contract?

A breach of contract occurs when one or more parties fail to uphold the obligations that they agreed to upon contract signing. If a rule within a contract is broken, you can usually do one of the following:

• Sue
• Demand a remedy
• Terminate or amend the agreement

Let’s say you hire a mechanic to fix the air conditioner in your car. When you bring the car in, the mechanic does a quick diagnosis and informs you that the blower motor needs to be replaced and the freon must be recharged. You agree to the work and sign the work contract that allows the mechanic to complete the job.

A week later, you come to pick up your car and realize the air conditioner is still not working. When confronted about the situation, the mechanic states that he was unable to source the blower motor for your vehicle, so he just replaced the freon. However, the contract clearly states that the blower motor was to be replaced.

This situation constitutes a breach of contract.

While your car was in the mechanic’s shop, you were forced to use a taxicab to get around, and you missed hours of work as a result. Because of this, you can sue the mechanic for damages, which would include lost wages, taxi expenses, and a refund for the blower motor part and service.

Your second option is to demand a remedy. This would involve opening a discussion with the mechanic about the problem, demanding that he source the blower motor and fix the air conditioning. You could do this by sending a demand letter from a lawyer.

The last option is to amend the agreement. This might include removing the charge for the blower motor and the related labor from the bill and modifying the contract to include an agreement solely to recharge the freon in the car.

Check out this article to learn more about how legal contracts work.

Image via Pexels by Karolina Grabowska

Examples of Business Legal Contracts

No matter what industry a business is in, legal contracts play a vital role. Signing contracts helps customers and clients understand the services that businesses provide, and for companies, they provide vital protection, as well.

Business legal contracts typically cover one of three areas:

• General
• Employment
• Sales

General Business Contract Example

A great example of a general business contract is a partnership agreement. When a company creates a partnership agreement, it defines the roles, responsibilities, and liabilities of partners and shareholders in a company. Some of these usually include:

• Goals
• Operations
• Names and personal details of partners
• Decision-making procedures
• Partner contributions
• Profit and loss distributions
• Financial liability
• Tax liability

Employment Contract Example

Employment contracts are important to businesses because they govern the relationship that ownership and management have with the employees of the company. Employment contracts typically cover the following areas:

• Rights
• Responsibilities
• Obligations
• Compensation
• Scheduling
• Employment duration
• Benefits
• Confidentiality agreements

Sales Contract Example

Sales contracts govern the interactions between a buyer and seller. They are used to ensure that consumers fully understand the deal they agree to and that sellers can be held accountable for any unscrupulous business practices.

Here is a quick overview of what sales contracts can include:

• Selling price
• Product information
• Warranties or service contract details
• Contract duration
• Payment methods
• Sales agreement
• Purchase agreement

Get Help with Legal Contracts

Whether you need to draft a contract, get help with a contract review or get advice on a contract negotiation, there’s one person you can count on to get the job done right: a lawyer. Contract lawyers have special expertise in all areas of legal contracts and can help you make the most of your contracts.

Post a project on ContractsCounsel today to get matched with contract lawyers who specialize in legal contracts.