Contract Terminology: Everything You Need to Know
Contract terminology can seem daunting, but it is crucial that anyone who does business of any kind understands the most basic terms. Knowing what is in a contract can prevent you from losing money and credibility in the long run.3 min read
Contract terminology can seem daunting, but it is crucial that anyone who does business of any kind understands the most basic terms. Knowing what is in a contract can prevent you from losing money and credibility in the long run.
What is a Contract?
A contract is a document that describes a legal agreement among two or more parties. It stipulates all the conditions and terms that all parties agree to do for the exchange of money or other forms of compensation.
Within business, a contract for selling goods and services is very common. Knowing the terminology involved in contracts can be useful to business owners as they navigate terms and conditions that are mutually beneficial.
Classifying the Contract
A contract comes in the form of a deed or a simple contract. A deed is an old form of contract that states that the agreement has to be made in writing and signed by all parties. It has to be witnessed by a neutral third party and delivered. A deed would be a mortgage or marriage license.
Almost all other contracts are considered simple contracts. They can be in written form, implied, or oral in nature. Contracts can be bilateral or unilateral. Simple contracts are typically bilateral. This means that both parties to the contract made an agreement for an exchange, like when you purchase something at a store with money.
A unilateral contract means that just one party promises to do something in the relationship. For instance, if you lost your dog and you advertise a reward for its return, this is a unilateral contract.
An Invitation to Treat
An invitation to treat in a business sense is a precursor to a contract. This means that a business is ready to take payments or offers from clients and customers. This would include placing products in a store window or otherwise advertising services. It is referred to as an invitation to treat because customers can reject or accept your offer.
Acceptance of Offers
If a customer chooses to accept your offer, he or she has to communicate the acceptance in some fashion. An order placed online is an example of offer acceptance. The communication between the parties is considered proof of acceptance.
An online shop will send you a receipt via email to confirm your transaction. By law, the acceptance has to be unconditional. The customer may not say that the offer can only be accepted if certain situations occur prior.
Intention to Be Legally Bound
There are some specific criteria that have to be met for a contract to be legally binding. Social or domestic agreements are not presumed to be binding unless there is evidence that those involved have said so. Asking your child to mow the lawn for $20 is not considered a legal contract.
A commercial agreement is considered a legally binding contract, even if it is not put in writing. Although it is a good practice, you do not have to provide a receipt to the customer to contract for a sale.
Capacity is an important term with regard to contracts. By law, a contract is not legal if both parties have not met capacity. Capacity refers to:
· the legal age
· whether or not they are of sound mind to enter a contract
· whether the subject of the contract is legal (no legal contract may deal in illegal drugs, for example.)
In general, there is nothing the law requires regarding the terms and conditions being put into writing in order to make something an enforceable contract.
It is still a good idea, however, to ensure that your business maintains very good records. This includes providing receipts, carefully outlining conditions of your contracts, and making sure you have all of your communication on hand. You never know when you could face a lawsuit should a party breach a contract. If you are the victim, the law requires you to have the burden of proof, and good records will suffice. This will protect your financial interests during a lawsuit.
If you need help understanding business contract terminology and all it entails, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.