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A contract is a voluntary agreement between two or more parties, sometimes verbal but mostly written, and enforceable by law.

A contract agreement can:

  • Cover any subject or activity in terms of what is required to be done or not be done by each party so long as it's legal
  • Deal with single or multiple transactions
  • Be limited or not in terms of duration or geography

The contracted parties can be individuals or organisations in any combination, with party-party ratios of one-to-one, one-to-many, many-to-one or many-to-many.

Where a party is an organisation, it may act for or on behalf of its subsidiaries and affiliated organisations where it has an agreed minimum level of ownership, to allow their participation in the agreement without necessarily being explicitly named.

A written contract may not necessarily have to be physically signed if there is local regulatory acceptance of electronic document signing technologies and the parties are willing and able to provide electronic signatures.

Further, a written contract may not have to be signed at all when it is only ever presented online as 'Terms of Use' or something similar to somebody trying to access a website, obtain service upgrades or downloads and the like.

In these cases, the 'Terms of Use' contract is considered as executed on the clicking of an on-screen button labelled 'I Agree' or something similar.

When is a contract valid?

A contract (with only two parties for simplification of the following) can only be considered as valid and enforceable if:

  • One of the parties offered to do or not do some specific legally allowed action for a period of time
  • The other party promised something of value as consideration for the action or non-action, such as money, actual or potential action or non-action
  • The offer and the consideration were each accepted unequivocally by the relevant party
  • The parties willingly agreed to the terms of the contract in the absence of any deceptive or unconscionable conduct, undue influence or duress
  • At the deemed or actual time of execution of the contract, none of the parties involved were minors, mentally incompetent or affected by alcohol or drugs.

What are some standard contract elements?

There are situations where a standardised format can be used for certain contract types, where the terms and conditions remain unchanged but specific details need to be added for each such contract issued.

As an example, a leasing agreement with a fixed set of terms and conditions may only need to record the lessee's details, the items to be leased, the amount to be financed, the term of the lease, the interest rate and the monthly repayments.

There can't a specific format that every contract must follow. There's just too much variability in requirements, approaches, regulatory systems and the like.

Over hundreds of years of contract refinement, certain elements have become standard for the vast majority of contracts.

This doesn't mean that contracts are limited to using just these standard elements. Not all of these elements may be relevant for any particular contract, and those that are may be dispersed across multiple documents rather than found in one place.

The standard elements that a contract can include are:

  • Contract name, plus an identifying number if one is established by the provider of the contract, and the effective or commencement date
  • Details of the parties to the contract, and how they will be referred to in the rest of the contract
  • Duration of the contract when a fixed term is applicable, otherwise indicated by words like 'evergreen' or 'perpetual'. May be accompanied by a statement indicating the contract remains in force, possibly with automatic renewal at the end of each term, unless and until terminated
  • Purpose of the contract, describing what it's for
  • Definitions of key terms used within the contract
  • Description of the nature of whatever will be provided under the contract, whether physically, electronically, financially, behaviourally or in any other form
  • Pricing and payment details and dates. May state if invoices can be disputed, if interest will be applied to late payments of undisputed amounts, who is responsible for taxes and other associated government charges
  • Warranties for goods and services purchased, showing scope, limitations, base duration, any extension options, and any conditions where warranty would be voided
  • Assignment details, showing the rights each party has to assign their obligations to a third party, and any pre-conditions
  • Indemnity provisions for each party, including notification requirements
  • Liability caps for each party, including consequential loss exclusions
  • Contract dispute resolution process, intended to remove the need for litigation
  • Termination conditions, specifying each party's rights to terminate the contract due to the default of the other party(s) through action or inaction. May also specify cancellation penalties and consequences of termination to prevent breach of contract
  • Intellectual property rights, covering a party's rights in its pre-existing IPR and any modifications to it, and any new IPR created during the contract term
  • Confidentiality requirements appropriate to the nature of whatever will be provided under the contract. This may include the existence of the contract itself as well as its terms and conditions
  • Force majeure, detailing how to deal with situations where contracted obligations cannot be performed due to circumstances beyond the control of the obliged parties
  • Entire agreement, stating that the contract is the only agreement between the parties for whatever will be provided, replacing any existing agreements, and modifiable only with written amendments signed by all parties
  • Compliance with law, stating which parties need to comply with what export, privacy, anti-bribery or other laws and regulations. Must also specify the laws of which region / country / state will be used to interpret the agreement
  • Signatures section, showing each party's name followed by a place for the signature, then the printed name, title and signing date of its representative holding sufficient authorisation for the contract.

For advice on how best to manage contracts, you can read our related blogs.

We've also prepared a free 38 page ebook called "The Complete Guide to Contract Management", which you can download today. Packed full of helpful advice and checklists, it gives a clear roadmap for managing contracts through their lifecycle.

Rod Linsley
Rod Linsley

Rod is a seasoned Contracts Management and Procurement professional with a senior IT Management background, specialising in ICT contracts


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