Key Takeaways

  • An agreement between two parties can be oral or written, but a contract is legally enforceable only if it meets specific requirements like offer, acceptance, consideration, and mutual intent.
  • Identifying parties clearly—whether individuals, companies, or groups—is critical to avoiding ambiguity and ensuring enforceability.
  • Properly defining parties in the introduction clause and maintaining consistent terminology throughout the document strengthens clarity.
  • When groups are involved, list representatives and establish joint or several liability to avoid future disputes.
  • Avoid pitfalls like failing to specify entity types, leaving out identifiers for individuals, or not including formation jurisdiction and tax ID for companies.
  • Clear drafting helps ensure the agreement’s enforceability and reduces the likelihood of misunderstandings.

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.

Agreement vs. Contract: Key Legal Distinctions

While the terms “agreement” and “contract” are often used interchangeably, there is an important legal distinction. An agreement is any mutual understanding between two or more parties regarding their rights and obligations. It can be oral or written and may or may not be legally enforceable. In contrast, a contract is a specific type of agreement that meets all the elements required for legal enforceability, including:

  • Offer – One party proposes specific terms.
  • Acceptance – The other party agrees to those terms without significant modification.
  • Consideration – Each party exchanges something of value.
  • Mutual Intent – Both parties intend the agreement to be legally binding.
  • Capacity – All parties have the legal ability to contract.
  • Legality – The contract’s subject matter is lawful.

Understanding this distinction is critical when you define an agreement between two parties—if enforceability is desired, it must satisfy all contract requirements.

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.

Companies, including LLCs, LLPs, corporations, partnerships, and sole proprietorships who are parties to a contract must be identified as follows:

  • 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.

Best Practices for Drafting Party Identification Clauses

When drafting the identification clause:

  1. Use Full Legal Names – Avoid nicknames or abbreviations unless the entity is widely known by them.
  2. Include Entity Details – For organizations, state the type of entity (e.g., “ABC, LLC, a Delaware limited liability company”) and its principal place of business.
  3. Add Unique Identifiers – For individuals, consider adding an address or government-issued ID number.
  4. Specify Roles – State each party’s role in the agreement (e.g., “Seller” and “Buyer”) and use these terms consistently.
  5. Avoid Ambiguity – If there are multiple related entities, clarify exactly which entity is bound.

Clear party identification not only aids enforcement but also prevents third parties from wrongly claiming rights or obligations under the agreement.

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.

Clarity in Using Defined Terms

Defined terms in contracts should be unambiguous and consistently applied:

  • Capitalize defined terms to indicate they have specific meanings in the contract.
  • Avoid over-defining—only create a defined term if it appears multiple times.
  • Introduce defined terms early, typically in the recitals or first clause.
  • Steer clear of interchangeable usage, which can lead to interpretive disputes.

For example, if “Consultant” is defined in the introduction, it should not later be referred to as “Advisor” unless both are separately defined. Precision in defining parties minimizes the risk of loopholes or conflicting interpretations.

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.

Handling Joint and Several Liability

When multiple parties form one “side” of an agreement—such as a consortium or partnership—it’s important to clarify liability. Options include:

  • Joint Liability – All parties are collectively responsible for fulfilling the agreement; failure by one can result in all being held liable.
  • Several Liability – Each party is only responsible for its own obligations.
  • Joint and Several Liability – A combination where each party is individually responsible but can also be held liable for the entire obligation if necessary.

The choice affects enforcement, risk allocation, and strategy if disputes arise. Clearly stating the liability structure when you define an agreement between two parties—or more—is essential for protecting all sides.

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.

Frequently Asked Questions

  1. What is the difference between an agreement and a contract?
    An agreement is any mutual understanding between parties, while a contract is a legally enforceable agreement that meets specific legal requirements.
  2. Can an agreement between two parties be verbal?
    Yes, but it may be harder to enforce. Written agreements are preferred for clarity and proof.
  3. Why is identifying parties in a contract so important?
    Clear identification ensures enforceability, prevents confusion, and avoids disputes over obligations.
  4. What details should be included when naming a company in a contract?
    Include the full legal name, entity type, jurisdiction of formation, and principal address.
  5. What is joint and several liability?
    It means each party can be held responsible for the entire obligation, even if only one party fails to perform.

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