The Elements of a Contract
Elements & Anatomy of a Contract Explained
A contract must include all of the working parts not only to be enforceable but to survive in a court of law.
Whether it’s for the sale of goods, or the procurement of services, every contract has some standard elements. So, what makes up a contract? A contract must include all of the working parts not only to be enforceable but to survive in a court of law. Under contract law, the courts do not recognize void or invalid contracts. Therefore, it is important to have a general understanding of how a contract is constructed and what it needs to run efficiently.
Like the human body, contracts can be hard to understand, but they do not have to be. It is important to discover the essential components of a legally binding contract and how they work together to form a legal document.
Creating a Contract
Drafting a valid contract can seem overwhelming. However, once we break down the elements, it will become easier. It is all about designating roles to key players, designating responsibilities, and establishing the ground rules that the players involved must follow. So, what are the essential elements of a contract? Remember, for a contract to be enforceable it must have three quintessential elements. Offer + Acceptance + Consideration = Contract.
Who are the Players in a Legal Agreement?
The players or parties to a contract are two or more individuals entering to some sort of agreement. There are several types of contracts. Each player, or party, will have a title such as “client,” “contracting party,” “company,” “service provider,” “promisee,” “promisor,” “offeree,” “offeror,” or “freelancer.” The titles will vary depending on the type of contract. The actual name of the players will be at the top of the contract and will be referenced throughout by their designated titles, as listed above.
Next, What Will Each Party Do?
Each party must be given a duty or responsibility. This is how the contract functions and turns into a binding agreement. Without assigning a duty or obligation, the contract could not function. This is usually referred to in many contracts as the Scope of Services. The scope of services outlines the terms of the agreement by detailing exactly what each party is responsible for. It outlines the expectations of each party. The description of the responsibilities should be clear so that each party can easily identify their role in the agreement.
The Anatomy of a Contract: Business in the Front, Legalese in the Back
Contracts generally start off very specific on the frontend. It contains the meat of the contract. The contract identifies the parties, detail each party’s responsibilities, outline the terms of payment, and sort through other relevant details. However, the backend of a contract is pretty generic and contains standard “contract language.” Standard contract language is full of wordy legal vernacular and includes sections that spell out how to terminate the contract, confidentiality provisions, indemnification, dispute resolution, and much more.
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The Bare Bones of a Contract
Generally, contracts follow a basic structure. Here is the general flow of a standard contract:
- Title – It is essential to name the contract. The title needs to accurately depict the substance of the contract (Employment Contract, Construction Contract, Freelancer Agreement, and more!).
- Parties – All parties responsible under the terms of the agreement should be properly identified. Depending on the contract, the parties could be individuals, entities, or both.
- Background Information– This explains the purpose of the contract.
- Scope of Services – Spells out each of the party’s responsibilities and expectations and should be one of the most detailed sections of the contract. Under the scope of services, you may find a schedule baseline and due dates. You may also find compensation details and terms of payment. The information in this section can later determine whether a party is in breach of the contract by failure to perform or deliver.
- Consideration – This is a biggie! Remember, without consideration; there is no enforceable contract. Each party to the contract needs to have some kind of obligation, legal detriment, or exchange. Essentially the parties cannot be bound to each other for nothing. The parties must demonstrate that they had a “meeting of the minds” when agreeing to the terms of the contract.
- General Provisions – These provisions are usually packed with legal jargon and referred to as “boilerplate” terms. While they may seem tedious, they are pretty important. They are included to protect the parties in the event the parties do not perform the obligations listed in the contract. They spell out dispute resolution procedures, termination policies, governing law, consequences of a breach of contract, and much more.
- Signatures – Without a signature, the contract is unenforceable. Technology has allowed us to make the signature process overwhelmingly convenient with the use of ApproveMe’s WP E-signature solution. Electronic signatures are legally binding, and ApproveMe has worked hard to provide you with an arsenal of tools.
- Exhibits & Schedules – Exhibits usually include a more detailed statement of work. The scope of work should be unambiguous and clear-cut. Spare no details! Payment schedules are also a common exhibit to a contract.
General Provisions in a Contract
The generic provisions are found in the back of the contract. Two-thirds of the contract is customized and tailored based on the details of the agreement between the parties. However, 1/3 of the agreement is at the end composed of standard legal language. Again, depending on the agreement and scope of work, some of the below general provisions may not be necessary. As with anything in law …. “it depends.” General contract provisions include:
- Terms of the Original Offer and Termination
- Dispute Resolution Procedure
- Confidentiality and Property Rights
- Intellectual Property Rights and Ownership
- Indemnification and Release
- Exclusivity / Non-Compete
- Governing Law
- Legal Fees
- Assurances and Modification Procedures
- Force Majeure
- Limited Liability
- Warranties and Representations
- Entire Agreement
- And More!
The Importance of a Viable Contract
Contracts are an integral component of any business relationship. They are just as crucial in one-time projects as in long term affiliations. Written contracts are a professional routine business practice that could save you from the headache and expense of litigation. Ensuring your contract is not voidable is crucial. So focus on the anatomy of your contracts and ensure you cross your T’s and dot all your lowercase J’s, legally speaking. A legal contract can make a huge difference in your course of business, so what are you waiting for? Use this guide to contracts, or get your own legal advice, and get secure contracts in place today! So you avoid headaches tomorrow.
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