The Fundamentals to Understanding Contract Terms

The Fundamentals to Understanding Contract Terms

Written By
Joy Cunanan
Updated on
May 20, 2024
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minutes

If you’ve ever negotiated or read through business agreements, understanding contract terminologies and what they entail can be quite confusing. After all, these clauses are written in legal jargon or language that is unfamiliar to people without the expertise and proper knowledge. Jargon are special words or expressions used by or in a particular profession or group of people and can be incredibly difficult for other people outside of those groups or professions to understand. Much like any industry, the legal practice is saturated with contract jargon. Likewise, the tech industry among others is also riddled with confusing terms people may not understand.

Much like any industry, the legal practice is saturated with contract jargon. Likewise, the tech industry among others is also riddled with confusing terms people may not understand.

At Lexagle, we’re on a mission to make every aspect of contract management easier. We aim to make legal concepts and terms easier to understand for people who are confused and uncertain on reconciling an agreement with another party. Contract management software like Lexagle offers an efficient approach to manual processes and simplifies contract terms and clauses — ensuring you understand them with one click of a button.

Previously, we spoke about drafting contracts, electronic signatures, and various contract agreements. In this article, we’ll simplify and guide you through understanding some of the most common contract terminologies.

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What is a Contract?

Contracts are an essential part of your business. In essence, a contract is an agreement between two or more parties in written or oral form. However, written contracts are often preferred for for documentation, physical evidence, or a variety of other reasons. That being said, contracts may be open for court interventions in some necessary cases.

A good contract helps you account for all the potential risks your businesses may deal with and also reinforces a mutual understanding for both parties. To get a more in-depth understanding of contracts, the pros and cons of one, and the key elements that may raise doubt about a contract's legality, read our article here

What are the Elements of a Contract?

Now that you have an idea of what a good and valid contract is, let’s go through the important elements that should be included in one. Here are the five main elements of a contract:

  1. Intention of the Parties

One of the main requirements of forming a good and valid contract is to explicitly indicate the intention of the parties involved to ensure they are legally bound to it over the agreement duration. This intention to the agreement should be mutually concretely illustrated as well. 

  1. Offer and Acceptance of Agreement

Secondly, there must be an offer by one party and an acceptance of that offer by the other. When a contract is being drafted, it may be rejected or subjected to multiple revisions. Contracts may only be legally enforceable once both parties agree and confirm acceptance of the agreement. 

  1. Consideration

Thirdly, there must be a valuable consideration. What this means is that there must be an agreed-upon value that will be given to the other party. The consideration may range from a product, service, or other things that generally benefit the contracting party.

  1. Capacity to Enter

Fourthly, this element is crucial for a contract’s validity. The capacity to enter refers to whether or not the contracting parties are in a sufficient, capable, and reasonable disposition to participate in the agreement. For instance, individuals under the age of 18 in most countries do not have the capacity to enter into a contract as they are a minor and are to be lawfully protected. 

  1. Terms

Lastly, a good contract should include terms that must be sufficiently certain. The terms of a contract should allow all parties involved to receive their desired end goal which must arrive in good faith — which means no attempt of deception can be made. 

Next, let’s go deeper into discovering what exactly these contract terms are.

What are Contract Terms?

Contract terms are defined as conditions, warranties, or innominate terms. This may be specified in the contract, implied by its nature, or implied by law. We’ve broken them down below for you:

  1. Conditions - A condition is a term that, if breached, gives the aggrieved party the right either to terminate the contract or affirm it. In addition, the aggrieved party can also claim damages.
  1. Warranty - A warranty is a term that, if breached, does not give the aggrieved party the right to terminate the contract. Instead, it gives rise only to a right to claim damages.
  1. Innominate - In case of a contract breach, the remedy will depend on the effect of the breach at the time it happens. 

Contract terms are also either expressed or implied. We’ve also broken down what exactly this means below:

  1. Expressed - Expressed terms of a contract are the terms that have been specifically mentioned and agreed upon by the contracting parties at the negotiation stage. Expressed terms can either be written or orally agreed upon. 
  1. Implied - As the name suggests, implied terms are a set of default, silent, or unwritten rules for contracts. Sometimes there will be terms within a contract that have not been mentioned by either party involved. However, this does not mean that they are not enforceable.

Now that you understand what contracts and contract terms are, let’s go deeper. Contract terms and contract clauses can also be confusing as they may seem like they are the same thing — but they are not. 

Here are the differences between contract terms and contract clauses:

  • Contract -A contract is the entire agreement itself; it encapsulates the conditions of a business relationship, typically using legal jargon and language.
  • Clause - Clauses are essentially what a contract is composed of. Contract clauses are blocks of text within each contract section, used to address and explain each part of the contract for the parties in more detail. 

What are Important Terms to Include in Every Contract?

As previously mentioned, contracts are universal and crucial for the function of any business relationship — no matter what industry you’re in. They are used to document newly hired employees, partnerships with suppliers, and mergers with another company. 

We’ve compiled a list of the most important terms you should definitely be including in every one of your contracts:

  1. Assignment and Subcontracting

If you would not like the other party to assign or subcontract its obligations to someone else, you should expressly state this in the agreement. Contracts are usually assignable unless they contain a clause to the contrary.

  1. Attorney's Fees

It's always better to have a clause for payment of attorney's fees and other legal expenses in the case of a dispute. The party against whom the judgment is given should bear such expenses.

  1. Choice of Law

A business contract should also specify the laws that shall govern the contract. Companies usually designate a state whose law shall be used to interpret a contract. In most cases, the designated state is the one where the principal office of the company is situated.

  1. Choice of Court Jurisdiction 

Under this clause, the contracting parties agree to settle their claims and disputes arising out of the agreement within the exclusive place or court of jurisdiction set out in the contract. In case of a legal dispute, the parties will meet and settle in the court jurisdiction of a specified city or state.

Other important terms may include clauses pertaining to conflicts, force majeure, limited liability, notices, and compliance with legal requirements.

What are the Common Terms for Every Contract?

The previous section has helped you understand what terms you should be aware of when drafting a contract, but what exactly goes into these contracts? We’ve compiled a list of the standard terms most commonly found in a contract.

  • Confidentiality

A confidentiality agreement is what binds the two parties to an obligation not to disclose any sensitive or specified information and discussions surrounding their businesses with any third party. 

A confidentiality term plays a crucial role in protecting the information and discussions which may be a ‘trade secret’ or private to a company. The terms of confidentiality should thus be carefully drafted, including a clear statement of duration in which the confidential information will be made or given, and the time period during which the non-disclosure of information is effective. 

  • Termination

 A term of termination describes the procedures and remedies in the case that one party decides to end the contract. This term may describe the valid reasons for termination or the payment of damages to the injured counterparty. These terminations could be voluntary, involuntary, or mutual. 

Sometimes, as much as we plan and try, things don’t always go as planned, which is why it is a must to include terms of termination.

  • Force Majeure

This term allows both parties to be freed from any obligation of the contract in the case that an event out of their control has taken place which prevents them from performing those obligations.

Common force majeure events include pandemics like COVID-19, crime or property theft, and natural disasters. This clause is included to protect both parties from being flagged in a breach of contract in the event of an unforeseeable disruption.

  • Dispute

Even the most well-planned, seemingly perfectly written contract can result in a dispute between the parties involved. Contract disputes usually occur when a party breaches the contract, which means they violated or are no longer willing to fulfill what they have promised to do in the agreement.

A term of dispute allows both parties to sue for damages and/or have the terms of the contract legally enforced.

As you read through our blog, you should have a better understanding of the significance of contracts. They are fundamental parts of building and strengthening business relationships, as well as developing existing ones. However, with so many different aspects to consider in drafting and managing contracts, it is no surprise that it can seem like a very daunting and difficult task. This is where Lexagle comes in.

How Can Lexagle Help With Contract Terms?

Contracts are known to take very tedious work which may hinder efficiency. They involve lengthy manual processes, which is why legal teams across the globe feel like they are buried in low-value work. 

As your business grows, contracts will inevitably come piling in. If you aren’t already looking to implement a contract management system for your business, you will definitely be looking for one in the near future as your business grows.

Lexagle has a full suite of tools that can help you put together different contracts that will accurately depict your forthcoming projects, streamline your contract management process, and ensure that your contracts meet expectations while protecting your rights.

The Fundamentals to Understanding Contract Terms
Author
Joy Cunanan
Joy is the Digital Transformation Manager at Lexagle. As a marketing professional in the Tech and B2B industry for over seven years, she is always on the lookout for the next best solution in the ever-changing online world. With a passion for helping businesses thrive and optimize operations, she shares her expertise in the power of contract lifecycle management and its capacity of easing the contracting process for busy organizations worldwide.

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