Parties To A Contract: Everything You Need to Know
Parties to a contract enter into an agreement with one another that is legally binding. Each party must be competent for the contract to be valid. Agreement to the contract terms means that the parties understand them and accepts the specified obligations.3 min read
2. How to Identify the Parties
3. Defining Individual Parties
4. Contracts Between Groups as Parties
5. Pitfalls to Avoid in Contract Language
Parties to a contract enter into an agreement with one another that is legally binding. Each party must be competent for the contract to be valid. Agreement to the contract terms means that the parties understand them and accepts the specified obligations.
Defining the Term “Parties”
Many contracts include language stating that only the parties that sign the contract may enforce its terms. No other person besides the parties have any rights or remedies. Despite this statement, a court might rule that the term “parties” may include individuals besides the ones who signed. Therefore, contracts should specifically name the involved parties, or at least define the term as meaning only the ones who signed the document.
Specifically defining the term “parties” can be problematic. On the surface, it simplifies the process of drafting the contract since the signatories do not have to be constantly stated throughout the agreement. However, simply referring to the parties should be sufficient, because it is generally understood to mean the signatories. When defined terms are used, the reader might be distracted by the need to recall the definition.
How to Identify the Parties
Individuals are not the only kind of parties to a contract. Businesses can also be signatories, although a representative for the business must sign the document. All parties must be clearly identified.
- The company's full legal name.
- The registered address of the company office.
- The registration number of the company.
- The country in which it is incorporated or formed.
- For partnerships, the information about each partner.
- For LLCs, the information about each member.
- For larger partnerships and LLCs, information about one or two partners who will represent it.
- Sole proprietorships should provide the owner's full name and address, and possibly an identifier such as a license number or tax ID number.
Defining Individual Parties
Contracts generally define the parties by using a functional reference such as licensee, provider, lender, seller, etc. They may also use a shortened name of the company, if appropriate. You may also choose to use your own shortened business name and use the functional reference for the other. However, make sure you use the same terms throughout the document instead of alternating. Also, do not state that it can be one or the other; choose one and stick with it.
Make sure the term is defined in the beginning of the contract, in a clause added for introducing the parties. Do not use articles for this term, such as “an” or “the.” In other words, don't say “the seller,” just say “Seller.” This is done because you are simply replacing the party's name with the defined term.
It is also common for contracts to use paired terms to define the parties, in which the only difference is the final syllable, such as lessor/lessee, licensor/licensee, etc.
When defining individuals, contract language customarily uses their family names without including titles such as Mr. or Mrs. Professors and other professionals are defined with their title, which is abbreviated.
Company names should either be the full name or a defined term that is clearly equal to it. Avoid using abbreviations or acronyms unless the party is well-known by that acronym or if the business name uses the acronym in the course of everyday transactions.
Contracts Between Groups as Parties
It's not unusual for contracts to be drafted between groups, which constitute the parties. In such cases, each party should be clearly defined with a specific term, being sure to name each party who is part of the agreement or an appropriate representation. Making sure this is clearly stated prevents problems in the future, particularly in cases where there is joint liability.
Pitfalls to Avoid in Contract Language
There are several mistakes that are commonly made while drafting contracts regarding party definitions that result in reduced clarity:
- Failing to define the type of party, such as whether it is a partnership, LLC, corporation, etc.
- Failing to uniquely identify an individual within the contract, since there are probably several people with the same name. To correct this, use an identifier such as a drivers' license or passport number.
- Failing to identify the state in which a company is incorporated and its tax ID number.
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