Contract Definition & Importance

What is a Contract & 6 Reasons They are Important

two people navigating the importance of a contract

Chapter 2

A written contract illustrates that all parties understand what they are supposed to do and when.

CHAPTER AUTHOR

Lindsey Ehlman is on the content team at ApproveMe. She’s an MVP legal junkie, professional paralegal with over 6+ years experience and currently pursuing her doctorate of law. In this guide, Lindsey will outline how companies and individuals can craft, negotiate and execute a win-win (and enforceable) contract.

Date Published:

Wondering what a contract is? A contract is a legally binding document between two or more parties that define the terms of a transaction. A contract is essential because it details the expectations of all parties involved. Moreover, if an expectation, promise, performance, duty, or obligation is not met, the law provides certain protections to cure a breach to the contract. 

A written contract illustrates that all parties understand what they are supposed to do and when. It spells out the specific duties and responsibilities of each party. It also specifies the payment details and other particulars relevant to the agreement.   

Contracts are important for many reasons. Overall, contracts expressly prove the agreement between the parties and provide remedies in the event a party breaches the contract. Since contracts serve so many purposes, they, in turn, have several reasons they are important.

two people navigating the importance of a contract

1. Record of Commitments 

A contract visualizes the contractual relationship between both parties. It shows that the parties affirmatively agreed to enter into a contract. Contracts are important because they hold each party accountable for their respective obligations and performance due under the agreement. Without a written contract, it is difficult to conjure up an accurate record of the commitments made between the parties.

A written contract proves the details of the mutual agreement. That is why it is essential to cover all of your bases when drafting a contract by making it as detailed as possible. Everything stated in the contract can serve as legal proof of the parties’ agreement.

2. Eliminates Misunderstandings

Before entering into a contract, each party should have a reasonable amount of time to review the terms listed. They can also reach out to an attorney for guidance before officially entering into the contract. However, once the contract is signed, both parties are representing they understood and agreed to all terms listed in the contract.

The contract lays everything out on the table so that both parties demonstrate a mutual understanding of each other’s responsibilities, obligations, and expectations. Among other things, contracts can manage expectations, provide a sense of security, and eliminate hassles. 

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3. Protection and Peace of Mind

Without a contract, the parties are left vulnerable. Conversations and “handshake” deals, also referred to as oral contracts, are rarely enforceable. A written agreement increases the odds of enforceability.

Implementing a contract provides peace of mind to the parties. Both parties should have a copy of the contract so they can refer back to it at any time. They can also rest assured that if any party is in breach of contract, that they may have a legal remedy to enforce the contract.  

Some contracts require an intellectual property and confidentiality provision. Such provisions are generally found in employment agreements and business transactions. The parties are legally bound to protect the disclosing party’s intellectual property, confidential and protected information. Moreover, if the receiving party breaches the confidentiality clause, they would be held liable for breaching the agreement, and either equitable or other monetary damages could be ordered.  

An enforceable contract can help you recover debt in the event you do not get paid for your services. That is why it is critical the cost and payment structure is clearly listed in the agreement. 

4. Prevent Litigation

While having a contract will not completely eliminate the change of litigation, it can certainly minimize the risk. Most contracts include a dispute resolution clause. This type of clause sets the ground rules in the event of a dispute. Most of the time, it provides that the parties first try to resolve the dispute in good faith before taking legal action.

If a party breaches the contract, a written agreement can be offered as an official record to show what the parties agreed to and help determine which party is truly at fault. A written contract can help evade expensive litigation because there is a record of the agreement between the parties.  

It is important that a contract is enforceable. Sometimes contracts can be challenged in court in reference to their enforceability. The contract as a whole can be challenged, and so can just one provision of the contract. If the contract includes a severability clause, it provides that if one of the provisions is deemed invalid, the rest of the provisions still stand, meaning the parties are still bound by the rest of the contract except for the section deemed unenforceable. 

5. Remedies

The existence of a written contract can play a vital role in the event of a breach. A few examples of a breach include:

  • Failure to perform 
  • Failure to perform on time or delay in performance 
  • Failure to perform in conformance with the terms of the contract
  • Partial performance of the contract
  • Defective performance or below industry standards

The law offers several forms of relief to the non-breaching party. There are quite a few forms of relief. Here are a few examples:

  • Monetary Damages
  • Equitable Remedies (specific performance, injunction, and restitution) 
  • Recission 
  • Liquidated Damages 
  • Nominal Damages
  • Punitive Damages (rare)

6. The Advantages of Contracts

Contracts usually come across as confusing and boring. However, a contract can help you understand the law by making it more accessible. Contacting an experienced attorney can also help you navigate all of the pertinent terms of a contract.

No matter how complex or tedious a contract may seem, they are absolutely critical to protect the parties in the event of a breach. Should an issue arise, you will be glad you had a written contract in place. 

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