Contract Terms: Essential Elements For A Solid Legal Agreement

Content

• What are contract terms?
• What are some typical contract terms?
• What are the different types of contract terms?
• Conditions 
• Innominate term
• Warranties
• Explicit or Implied terms
• Managing terms on a contract management platform
• Conclusion

What are contract terms?

Contract terms are provisions defining the rights, responsibilities, and obligations of parties in a contractual agreement. Even though not all terms are explicit or have equal legal force, breaching them can have damaging effects. Therefore, companies must create clear and simple contract terms to foster long-term business relationships.  

Furthermore, ambiguous and poorly written terms can lead to misunderstandings and disputes between the parties down the line. Since contract terms differ in weight and significance, some receive more attention than others. For instance, organizations are much more likely to negotiate termination or confidentiality than assignment terms. Either way, the legal team must take special care to ensure the language and content truly represent the parties’ best interests. 

What are some typical contract terms?

Contract terms are an integral part of commercial transactions. You need terms that expressly outline the rights and obligations when you enter a business relationship with clients, suppliers, or partners. There are a few standard terms that you will see in almost every contractual agreement. On the other hand, few are made specifically for particular transactions and the parties involved. 

• Confidentiality

The confidentiality term outlines the obligations of both parties to protect sensitive information shared during the contract's execution. It is a standard practice for businesses to ensure confidential data doesn’t get into the wrong hands.

• Indemnification and Liability

These contractual terms define each party's responsibility for damages, losses, or legal claims due to a particular event or circumstance. Liability limits the risk and expense the party is responsible for. Businesses utilize release of liability or indemnity clauses to protect themselves from lasting consequences.

• Dispute Resolution

Before starting a business relationship, it is typical for the parties to decide how to handle disagreements or disputes. Contract dispute resolution terms clearly outline the process for resolving issues. It also dictates whether mediation, arbitration, or litigation will be the solution.

• Intellectual Property

It’s a common contractual term to protect the integrity of any product, work, or invention from human creativity. Intellectual property terms specify ownership, licensing rights, and confidentiality provisions.

• Force Majeure

The force majeure clause excuses performance in unforeseen and uncontrollable events that prevent a party from fulfilling its obligations. Events can be an act of God (such as hurricanes, tornadoes, etc.) or human actions (such as wars or conflicts). 

• Payment Terms

For a business transaction, payment terms detail when and how payments will be made, including pricing, invoicing, and any late payment penalties.

• Governing Law and Jurisdiction

These contractual terms specify which laws govern the contract and which jurisdiction courts will have authority in case of disputes. 

These standard contract terms provide a legal framework for structuring and understanding the contractual relationship between parties. They can vary widely depending on the nature of the agreement, industry practices, and legal requirements.

What are the different types of contract terms?

Organizations must precisely define, understand, and adhere to contractual terms to establish compliance and performance. The first step is classifying contract term types according to their purpose and remedies. Here are the main three you need to know:

Conditions

Conditions are a type of contractual terms that the parties must fulfill to avoid breach of contracts. They play a significant role in defining the obligations and performance requirements. Conditions are a core part of legal agreements and are fundamental for productive business relationships. A term falls under the condition category if it goes to the heart of the contract. Failure to perform can lead to damages and termination.

Conditional terms are central to the purpose and performance of the contractual agreement. For instance, in a contract for the delivery of goods, a condition might be the timely and correct delivery per the specifications. In a construction contract, a condition might be the completion of a project within a specified timeframe and budget. They are legally enforceable, and a court will typically uphold them if they are clear, unambiguous, and essential to the contract.

Innominate term

An innominate term, also known as an intermediate-term or an innominate term of contract, is a type of contractual term that falls between conditions and warranties in terms of significance and consequences. Unlike conditions, which are essential and critical to the contract's performance, and warranties, which are less significant and typically secondary, innominate terms have their consequences determined on a case-by-case basis.

The seriousness of a breach of an innominate term and the resulting remedies depend on the specific circumstances of the breach.  Innominate terms are often used in contracts when the parties do not wish to categorically label a term as either a condition or a warranty. Usually, the parties recognize that the term's significance can vary depending on the specific circumstances.

An example of an innominate term might be a delivery schedule in a supply contract. If a minor delay in delivery with little impact on the overall contract's purpose may count as a breach of warranty. Thus, the buyer is only entitled to damages for the inconvenience. However, if a significant delay in delivery makes the contract's purpose impossible to achieve, then it falls under breach of condition and allows the buyer to terminate the contractual agreement.

Warranties

Warranties, in the context of contract law, are specific types of contractual terms or promises made by one party (the warrantor) to another (the beneficiary) regarding the quality, condition, performance, or characteristics of goods, services, or property being sold or provided. Warranties give the beneficiary reassurance that specific conditions of the contract will be met. 

Warranties play a crucial role in consumer protection and provide legal recourse for individuals and businesses when products or services fail to meet their promised standards or expectations. An example of a = warranty in a contract for the sale of a car might be the seller's written statement that the vehicle has a ‘bumper-to-bumper warranty for three years or 36,000 miles.’ In the event of a breach of warranty, the beneficiary typically has various legal remedies available, such as:

• Seeking repairs, replacements, or refunds.
• Recovering damages to compensate for any losses or harm caused by the breach.
• Rescinding (canceling) the contract if the breach is significant and fundamental.

Explicit vs. Implied terms

Explicit terms, also known as express terms, are explicitly stated by the parties in the contract. These terms are expressly communicated, either in writing or verbally, within the contract document. They serve as the foundation of the contract and are critical in defining the contractual relationship. 

Express terms are unambiguous and specific, leaving no room for interpretation or misunderstanding. These terms are legally enforceable, and the injured party typically has legal remedies for breach of contract. Explicit terms often include clauses related to price, payment terms, delivery dates, performance requirements, and any specific obligations or warranties.

Implied terms, on the other hand, are not explicitly stated by the parties but are nevertheless considered part of the contract. They are "implied" by law, industry custom, or the circumstances. Implied terms help fill in gaps in a contract and provide additional context and expectations. They are not the result of direct negotiation or agreement between the parties. In some cases, implied terms are based on industry customs and practices. For example, the implied term "merchantable quality" is common in the sale of goods. 

Managing terms on a contract management platform

Contract management systems like Dock 365 can go a long way in effectively managing the terms of a business contract. They provide a centralized platform and automated processes to track contractual rights, responsibilities, and obligations throughout the contract lifecycle. 

Contract Creation: Maintain a library of contract templates with pre-defined terms and clauses for various types of contractual terms to streamline contract creation. Businesses can customize templates to meet the specific needs of each contract, including adjusting terms, clauses, and obligations as necessary.

Search and Retrieval: Advanced OCR and AI functions allow users to quickly locate contracts based on various criteria, such as contract type, parties, dates, or specific terms. Enable full-text search to find contracts containing specific keywords or phrases within the contract portfolio.

Alerts and Reminders: Businesses can set up automated alerts and reminders for critical contract dates, such as renewal dates, milestones, and termination notice periods. It enables users to ensure compliance with contractual obligations and terms.

Obligation Tracking: Automated obligation tracking allows businesses to monitor and manage the contractual terms and commitments outlined in contracts. Thus, organizations can ensure compliance, minimize risks, and optimize contract performance. 

Conclusion

Contract terms are essential components of legal agreements that define the rights, obligations, and expectations of the parties involved. These terms play a critical role in ensuring that contracts are clear and enforceable. Also, they ensure both parties understand their roles and responsibilities. 

In the world of business and legal agreements, understanding and effectively managing contract terms are essential for maintaining commercial relationships. Clear, well-drafted, and well-managed contract terms contribute to minimizing misunderstandings and the fulfillment of contractual objectives.