Common Contract Terms: Everything You Need to Know
Common contract terms are part of what makes a contract official. In order for a contract to be legally binding, it must have several required elements.3 min read
Common contract terms are part of what makes a contract official. In order for a contract to be legally binding, it must have several required elements, including:
- Parties who can legally enter a contract, meaning no minors or people who aren't mentally competent
- Lawful subject matter
- Mutuality of agreement
- Consideration of value
- Mutuality of obligation
In many cases, these things will need to be clearly put in writing.
Common Contract Terms
Acceleration Clause: This clause states that if one party breaches the contract, the other party can require full payment right away. Acceleration clauses are important in contracts like mortgage agreements that have spread-out payment plans. In the case of a contract with an installment plan that also has an acceleration clause, a party can demand the entire amount to be paid right away if the other party doesn't make a payment on time.
For example, a contract could state that a customer is buying a new computer for $1,000 and will pay it back in five installments of $200. If the customer pays the first payment but doesn't make the next payment in time, the acceleration clause then goes into effect and the customer would be required to pay the store the remaining $800 immediately. If the customer couldn't pay the remaining amount, they would lose the computer and the money they already paid.
A sample acceleration clause is, “In the event of default in the payment of any of the installments or interest when due, a party of this contract may declare the entire sum then unpaid immediately due and payable.”
Acceptance: Accepting an offer must be unconditional and done in the specific terms that were offered. If you change anything in the terms when you accept it, it is considered a counteroffer.
Arbitration: This type of clause establishes provisions that allow arbitrators to settle disputes surrounding the contract.
Attorney Fees Provision: This clause appears in many contracts and states that in the case of a contractual dispute, the losing party is required to pay the attorney fees for both sides. Some people may have an issue with this clause and want to change it so that it only applies to claims that are brought frivolously.
A sample attorney fees provision is, “In any proceeding by which one party looks to enforce its rights under this agreement, the prevailing party shall be awarded its attorney fees and expenses.”
Boilerplate: Most contract clauses use the same kind of template language for provisions as the last section of the contract. These include things like arbitration clauses, entire agreement clauses, and other miscellaneous provisions.
Breach: If one party doesn't follow a contract's agreed-upon terms, it is considered a breach. Written contracts have a four year statute of limitations for breach, and oral contracts have a two year statute of limitations.
Conditions: In a contract, conditions are important aspects that state what will happen if a specific event occurs. When those circumstances are met, the conditions outline how the contract and parties will react and what steps will be taken.
Consideration: In order for a contract to be valid, there must be something of value promised in exchange for a specific service. This could include the consideration of money given for a service provided.
Damages: If a contractual breach occurs, damages are what is awarded. They usually take the form of monetary compensation.
Guaranty: This agreement involves one party promising another party's loan obligation to a third party.
Indemnification: Also known as a hold harmless agreement, this clauses states that the parties are agreeing to hold another party harmless and not involve them in future legal claims. Indemnification states you can't take legal action against the other party. It is a way for both parties to protect themselves, especially from being held liable financially for someone else's actions. Indemnification clauses are typically written very precisely, so both parties should be sure they understand the scope of the clause before agreeing to the contract.
A sample indemnification clause could state, "Company A agrees to hold harmless Company B against loss by reason of the liability of Company B arising out of any claims for damages."
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