Business Contracts Summarized

NOTE: I’m not a lawyer. This simply explains business contracts in plain English. This is not legal advice.

Since written history, people make agreements. Most religions and stories involve some type of tit-for-tat obligation, and it extends to how we carry out activities within society.

When a person acts, they are only performing any form of sacrifice from 3 possible non-exclusive motivations:

  1. Generosity, which is typically driven by love or moral duty.
  2. Habit, typically without thinking about it.
  3. Some form of belief or expectation about a return on that sacrifice, which is a “contract”.

Every time there’s some sort of exchange, that exchange is a contract (“quid pro quo”) based on our belief that a person can perform an action, or that someone can act with “implied authority” on behalf of someone else.

Absolutely any promise (“covenant”) can veer into becoming an implicit contract. If a person feels responsible for anything, and it’s connected to something the other person gave, it’s technically an implied contract.

Generally, we gain our reputation in society at large by fulfilling contracts, so understanding how they work and what to do with them is very important to avoid exploitation. A government can never grant the contracts we make beyond their influence, but they can enforce them.

A contract should be mutually beneficial. If it isn’t, it’s typically either slavery or a mental disorder. If it’s accepted by a large group of people, it’s large-scale dysfunction.

The legal jargon and densely-worded language in written contracts comes heavily out of making absolutely sure every situation and specific odd situation is covered, as well as avoiding ambiguity in front of a judge.

The philosophy of the contract can be a bit dense, and is typically only discussed by law geeks:

  • Jean-Jacques Rousseau’s social contract implied that each person had their own innate and inalienable rights, which couldn’t be taken legitimately by a governing authority.
  • The “complete contract” implies that there’s a theoretical complete contract that outlines all rights and duties for every possible future state of the world, but it would be prohibitively expensive to write, so attorneys settle on being as thorough as possible with unspoken “default rules” that can be amended and “mandatory rules” that can’t.
  • Classical and neo-classical contract theory treats each contract as its own independent transaction, without any context to the world around it.
  • Relational contract theory interprets each contract as a set of relationships, not as discrete transactions.
  • The psychological contract is implied to exist as a framework of trust within employment/employee relationships.
  • For goods and services, there’s a presumption a buyer who chooses to purchase from a seller has certain implicit assurances that create an “implied warranty”, though “as is” can disclaim it.

There are many clauses and conditions which could make a contract more complex, and creative lawyers think of more permutations all the time. Most non-lawyers don’t need anything that complicated, and simple contracts are a very effective way to enforce what we say we will do.

The durability of a contract comes from how much both sides view it as fair. If one side feels they’re being exploited, they’ll likely terminate the contract, and both sides will generally be unhappier for the experience.

Methods

One very important distinction of a contract is that it doesn’t exist as a document. Any legal document to indicate a contract is a “negotiable instrument” that simply states what’s happening, and the actual things, actions, and ideas are the contract itself. All of this is framed under the “legal instruments” of a nation’s laws.

When most people think of contracts, they’re usually thinking of “standard” contracts, where one party has set all the terms and conditions, and the other party has agreed and signed it with very little negotiation or review. Standard contracts can represent many domains of a typical person’s life:

  • Employment agreements (especially for managers hiring employees)
  • Insurance agreements
  • Loan agreements
  • Service agreements (e.g., plumber, accountant)
  • Release of information (e.g., medical information)
  • Terms of service (e.g., social media)
  • “Shrinkwrap contracts” are attached to the product itself, with usage of the product indicating acceptance of the contract.

The formal structure of standard contracts is to basically provide a dense wall of standard language (which can surpass dozens of pages), with a cover page that clarifies the definitions which apply to the receiving parties.

A few specific types of contracts can only be written because of a region’s “statute of frauds”:

  • Something sold with a value greater than ~$500.
  • Selling or transferring an interest in land or real estate.
  • The terms of the contract outlast the lifetime of one of the parties (e.g., copyright).
  • Marriage or divorce agreements that promise an exchange of consideration.
  • The terms of the contract will take a long time (i.e., at least a year and a day).
  • The contract involves someone promising to pay someone else’s debt.

Contracts can also, however, be spoken agreements as well. If it has all the required elements and a court recognizes it, it’s a “quasi-contract”.

  • People can’t use the law to change what they promised (“estoppel”).
  • The challenge with oral contracts comes from challenges in enforcing them. Two people in a civil case disagreeing over what they agreed on will lean onto other reference points (e.g., the fairness of the contract, the reputation of the parties, the soundness of the parties’ minds).
  • Recording a conversation is not always sufficient, either. Unless the other person consents to the recording, it may not be admissible evidence in a court.
  • Further, if there are any signed written agreements, they supersede verbal promises (“parol evidence rule”).

A contract can also be “implied-in-fact”, which means the facts expressed (typically through habit) are inferring the tacit understanding of both parties of that agreement. This probably defines most of our daily transactions, especially with friends and family.

  • Many high-context cultures provide gifts with unspoken implications. The motivation is often based on cultural presumptions, but has been used to extort future terms out of the other party. This is very frequent when someone doesn’t understand the customs of a region (e.g., foreigners, tourists).
  • A contract can be obligation by consent (“obligatio consensu”), where there’s no requirement for any formalities or parties’ presence.

A “letter of intent” can communicate willingness to enter into a contractual obligation, but without the elements of a legally binding contract. Its purpose is to create a morally binding assurance, even if it’s unenforceable.

At the farthest end, there can be a “gentleman’s agreement”, which is a very informal agreement that’s implied by implication, convention or through mutually-beneficial etiquette. Gentlemen’s agreements are non-binding, and require the honor or integrity of the parties to fulfill it.

Types

There are many types of contracts, proportional to how much we’re connected with others in society, and any given document may include multiple contracts assembled together.

Formalized arrangements are the foundation of most business, and they’re all connected through these contracts. For this reason, there are many domains of law that intersect and converge with contract law:

Generally, contracts are either payment (trading a good for another good or a service) or reciprocal (where both sides must perform).

Contract of sale – a party selling or transferring an interest, right, or property to another party (typically with a “deed”):

  • Agreement to sell business – selling a business.
  • Assignment of contract – transferring benefits and obligations from one party to another.
  • Bills of sale – documents that legally transfer ownership, as well as providing evidence that there was an agreement at the time of sale.
  • Bill of lading – a document that indicates receipt of cargo transferred for shipment, with a delivery order that fulfills that delivery.
  • Option contract – an agreement where the holder has the right, but not the obligation, to buy or sell something.
  • Leaseback – short for sale-and-leaseback, where a party sells an asset and then pays a lease back for long-term use, effectively transferring ownership while still using it.
  • Purchase order – a document indicating an agreement for someone to buy an item at an agreed-upon price, typically with delivery dates and payment terms included.
  • Real estate contract – two parties transferring ownership of real estate.
  • Rent-to-own agreement – aka lease-purchase contract, permitting a person to rent, with the conclusion of a term leading to ownership of the property.
  • Warranty – actions or conditions that would lead to paying damages, with a “limited warranty” only limiting one or a few parts of the contract.

Payment forms:

  • Cost-plus contract – the payment involves all of the service provider’s allowed expenses, plus additional payment to permit a profit, contrasts to fixed-price contract.
    • Cost-plus incentive fee – an initially negotiated fee that can be adjusted later by a formula.
    • Cost plus fixed fee contract – the purchaser pays a fixed amount over the documented costs of the work.
    • Cost plus a percentage of cost contract – the purchaser pays over 100% of the documented cost, with a certain expense for the contractors’ profit
  • Fixed-price contract – the payment amount doesn’t depend on resources used or time expended by the contractor, contrasts to cost-plus contract.
  • Lump sum contract – the payment comes at the end, after the job has been finished.
  • Part exchange – instead of one party paying money and the other supplying goods/services, both parties supply goods/services with one of them using money to make up any difference in value.
  • Performance based contracting (PBC) – payment is based on measurable metrics.
  • Unit cost contract – payment is based on units fulfilled rather than a single price.

Lease – a lessee provides temporary use of a lessor’s property, which can include many domains including security deposits and rules.

  • Commodate – a gratuitous loan that grants free ownership of something for a certain timeframe, which restores it back to the commodator after a certain time.
  • Concession agreement – a government, local authority, individual or entity granting rights, land or property for a particular purpose or in exchange for a percentage of revenue generated.
  • Indefeasible right of use – a non-revocable agreement between a customer and telecommunications company where the customer pays a portion of operating/maintenance costs, typically for a very long time (often 20-30 years).
  • Land contract – a seller provides financing for the buyer to finance land, and the buyer repays the resulting loan in installments, with the seller permitting use of the land until a final balloon payment that determines title transfer.
  • Enhanced use lease – permitting a private developer to lease underutilized property and giving license to improve or renovate.
  • Masoveria contract – a Catalan agreement of sharecropping, where a rural farm owner commissions a natural person to work the farm for a percentage of the results and the right to live on the estate.
  • Rental agreement – a comparatively shorter term than a lease, with the expectation of more short-term use.

Service contract – general contract defining the scope of performing a service.

  • Aleatory contract – an agreement where a party does not have to perform until a specific, triggering event occurs.
  • Break/fix – aka break’n fix, an IT service provider provides services as needed and bills the customer for work done.
    • Managed services – a service plan where the customer pays a routine fixed amount for covered services, with additional amounts for more significant uncovered repairs.
  • Consulting agreement – the clarified service of a consultant.
  • Construction contract – a property owner agrees for a contractor to work on a building.
  • Contract of carriage – an agreement between a cargo/passenger carrier and the consignor (if the sender pays), consignee (if the receiver pays), or passenger. The receiver is typically the same as the consignee.
  • Extended warranty – a prolonged warranty offered to customers on new items beyond the standard warranty.
  • Filmmaking guarantee – aka “pay-or-play contract”, a participant in a film is still guaranteed to be paid even if they’re released from that contract (e.g., signing talent who later may not be needed).
  • Output contract – a producer agrees to sell their entire production to the buyer, and the buyer agrees to purchase that entire output, the converse of a requirements contract.
  • Power of attorney – allows the “attorney-in-fact” to make legal, medical, and financial decisions on behalf of someone else.
  • Publishing contract – the relationship between a publisher and author(s) to publish their original content, also often refers to promoting the work beyond distribution (e.g., music publishing contract).
    • Recording contract – the agreement between a record label and recording artist.
  • Requirements contract – one party agrees to supply as much of a good or service as required by the other party, with the other party agreeing to only obtain its good or service from them, the converse of an output contract.
  • Service-level agreement (SLA) – one party provides a service to another party who is a customer, with specific conditions indicated if the service is not fulfilled according to specifications.

Loan agreement – a creditor lends money to a borrower, with a specified asset or promise as the “security”.

  • Account stated – a statement between a creditor and debtor that a particular amount is owed.
  • Antichresis – a debtor pledges real property to a creditor to use and occupy it in lieu of interest on the loan.
  • Chattel mortgage – borrowing money to purchase “personalty”.
  • Indenture – exchanging labor or apprenticeship for something else, but can also apply to certain land transactions.
  • Letter of credit – a payment mechanism where a credit-worthy bank gives an economic guarantee for an exporter of goods.
  • Real estate mortgage – borrowing money to purchase “realty”.
  • Pactum de quota litis – an agreement where the creditor of a difficult-to-recover payment promises a portion to another party to recover it.
  • Personal contract purchase (PCP) – a loan agreement where the borrower makes a comparatively lower monthly amount than a conventional loan during the contract period (~24-48 months), then required to make one large balloon payment at the end.
  • Promissory note – a formalized document that memorializes a loan and repayment requirements.

Investor-specific agreements:

  • Big boy letter – pre-sale agreement involving a private sale of securities between two “accredited investors”.
  • Derivative – a contract that derives its value to investors from an underlying entity.
    • Futures contract – purchasing something at a predetermined price for delivery at a specific time in the future.
  • Life annuity – a series of formula-defined payments at fixed intervals to an annuitant while they’re still alive, typically part of an insurance product but can apply to most retirement-based matters.
    • Indexed annuity – a tax-deferred annuity where the credited interest is linked to an equity index (e.g., S&P 500).
  • Private investment in public equity (PIPE) – selling publicly-traded common shares or preferred stock to private investors.
  • Stock option – an option contract specialized for stock ownership:
    • Call option – a holder can purchase a specific quantity of an asset at a specific strike price sometime before a specified date.
    • Put option – a holder can sell a specific quantity of an asset at a specific strike price sometime before a specified date.
  • Stock purchase agreement – selling certain stocks to a specified party.
  • Swap – two “counterparties” agree to exchange financial instruments, cashflows, or payments for a period of time.

Sharing benefits:

  • Cohabitation agreement – two people, irrespective of sexuality, who have agreed to live together (a bit like marriage, but only in some domains).
  • Interconnect agreement – telecommunications companies agreeing to connect their networks and exchange network traffic.
  • Joint venture agreement – the goals, obligations, and financial contributions of parties in a joint business venture.
  • Material transfer agreement – governs the transfer of tangible research materials between 2 entities for the purpose of the recipient using it for their own research.
  • Memorandum of understanding – a bilateral (2 parties) or multilateral (3+ parties) agreement that expresses a convergence of will between the parties.
  • Partnership agreement – the relationship between business partners, including their contributions and obligations to a business entity.
  • Production sharing agreement – an agreement of the ratio between multiple entities of ownership of an extracted resource.
  • Tax receivable agreements – a company’s promise to share economic benefits from certain tax savings with other parties, can often be tax-deductible.

Relationships that vest “delegable” responsibilities and grant authorities or rights (“charter”):

  • Agency agreement – establishes the scope of work an agency can perform, as well as payment and duration.
    • Listing contract/agreement – the relationship between a property owner and a real estate broker acting as their real estate agent.
  • Aleatory contract – an uncertain event determines the parties’ rights and obligations (e.g., gambling, insurance), contrast to indemnity agreement.
  • Community benefits agreement – community groups arrange for a real estate developer to provide specific amenities or mitigations to a community or neighborhood in exchange for the community supporting it (or at least not opposing it).
  • Distributor agreement – the relationship between a distributor and supplier.
  • Employment agreement – the relationship between an employee and employer.
  • End-user license agreement – a software license between the software supplier and end user.
  • Franchise agreement – a relationship where a franchisor licenses some or all of their knowledge, procedures, intellectual property, use of their business model, brand, and rights to sell branded products and services to a franchisee.
  • Guaranteed rental – an arrangement where a party wants to rent out a property for a large block of time to rent it themselves on a retail basis (e.g., for days or weeks).
  • Indemnity agreement – a party will provide compensation for a clearly identified situation of another party (e.g., insurance), contrast to aleatory contract.
  • Independent contractor agreement – the relationship between a freelance contractor and client.
  • Licensing agreement – the relationship between a licensor and licensee.
  • Management contract – operational control of an business is “vested” for a separate entity to manage it for a fee.
  • Open-book contract – the buyer and seller of services agree which costs are “remunerable” and the margin the supplier can add to those costs.
  • Pet care agreement – clarifies what to do in the case of a pet dying, including what they need.
  • Retainer agreement – a distinctive work-for-hire contract halfway between independent contractor and employee that involves advance payment for professional work to be defined later (e.g., establish an attorney/client relationship).
  • Risk sharing agreement – the relationship between an insurer and an insured.
  • Sales representative agreement – the relationship between a salesperson and vendor, with the calculation for how they receive commission.

Agreements involving a third party:

  • Estoppel certificate – a document signed by a tenant for a transaction between a landlord selling real estate to a third party.
  • Non-compete agreement – a specified period of time where an employee can’t work for their company’s competitor, can be for a period of time after terminating employment or simply for the duration of being employed there.
  • Non-disparagement agreement – prohibitions for an employee to speak poorly about the entity they’re contracted with or another entity/idea altogether, typically for a window of time or in perpetuity.
  • Non-solicitation agreement – prohibitions for an employee to utilize a company’s clients, customers, and contact lists for personal gain upon leaving the company.
  • Nondisclosure/confidentiality agreement – legal protections regarding sharing confidential information with others beyond a business relationship (e.g., intellectual property, private information), can be reciprocal.
  • Novated lease – a motor vehicle lease where the contract obligations have been moved from one party to another (“novated”).
  • Parent company guarantee – a parent company promising to guarantee their subsidiary’s performance as a contractor.

Agreements to resolve trouble with a different agreement:

  • Collateral assurance – a bond external to a deed that’s over and beyond that deed.
  • Employment separation agreement – formally defines the termination of employment.
  • Penal bond – the obligee is responsible to perform, or they must deliver a penalty repayment to the obligor.
  • Precontract – a legal contract that precedes another, historically was used for a promise of marriage to legally nullify later marriages.
  • Prenuptial/postnuptial agreement – clarifies a married couple’s affairs and assets in the event of a separation or divorce.
  • Release – typically a liability release, where a customer releases some aspect of obligation from the other party.
  • Settlement agreement – contract that ends a lawsuit if certain concessions are meant, which typically means paying cash to the plaintiff.
  • Security agreement – property is established as “collateral” in case a debt isn’t repaid.
  • Side letter – a second separate agreement that resolves issues that aren’t in a primary agreement.

Requirements

There are six major elements required to make a contract (“essentiala negotii”). If they’re missing any of those elements, that contract is an “illusory promise”.

A formal contract is when the parties have signed it under a seal (e.g., wax seal). Historically it was more common, but 99.99% of contracts today are informal.

Not all contracts are “binding”. Binding contracts must have all six elements to be sufficiently enforceable in a court.

A. Offer and Acceptance

This section is technically 3 parts, known as the “meeting of the minds”:

  1. One party makes an “solicitation” with “provisions” that provide “conditions” and “warranties” with a “contract price”.
  2. The other party uses their “power of acceptance” to “consent”.
  3. Both parties must benefit in some way from the relationship.

This may not always apply:

  • An “invitation to bargain” means the person wants to discuss terms, but is open to it, so acceptance may come much later after a proposal and negotiation.
  • A “firm offer” can remain open for a certain period of time or event and is incapable of being revoked during that time (up to 3 months if not indicated otherwise, though it’s not an acceptance until the other party consents).

The acceptance of the contract is typically at the moment the other party communicates their acceptance, though there are exceptions:

  • A “Ulysses contract” binds a contract in the future when a person may not be capable of making a decision.
  • The “posting rule” considers the time delay for sending messages and goods:
    1. The offering party sends the offer by mail, and the effective date is when they send it (e.g., January 12).
    2. The offer isn’t valid until the receiving party gets it (e.g., January 17).
    3. For the offering party to revoke it, they must do it before the receiving party receives it.
  • If there are any legal notices or changes, the address is indicated as the domicilium citandi et executandi, which the party is responsible to indicate when they move.

This agreement connects to the right of property or the power to enforce a promise or warranty, which means it can also connect to a close, mutual, or successive relationship (e.g., family’s trustee, parent company).

Historically, before 1800 the meeting of the minds was not as important as whether an exchange was sufficiently fair. Then, a trend throughout the 19th century shifted society from a focus on property to a focus on contract and their intentions/promises. That trend has somewhat died after 1900 with the growth of consumer protection, rent and employment legislation to drive contract law back into a smaller domain, though it’s a very odd and inorganic existence to this day that defies common sense.

B. Lawful Purpose

The entire arrangement must be lawful. If it isn’t, the contract can’t be enforced by a governing authority. This includes not adversely affecting a third party (“res inter alios acta, aliis nec nocet nec prodest”), and “kickbacks”.

If the contract is illegal, it still can be enforced by illegal entities (e.g., the mafia), but it will probably not be enforced fairly.

Sometimes, even lawful contracts are simply unethical (e.g., “nokku kooli”).

C. Lawful Consideration

“Consideration” is simply something given that’s deemed to be of value. This is often money, but it can be pretty much anything.

  • While a present thing is certainly consideration, the promise of something in the future can also be consideration.
  • Both parties may have a “reciprocal obligation” to perform in the future, but one party can make an “accommodation” within a contract that has no reciprocation.

If a written or oral contract isn’t formally acknowledged (e.g., an actuary), it’s a “simple contract” and can only be bound with physical consideration like a “security” (e.g., a loan’s down payment) or a “peppercorn”.

Without consideration, a promise isn’t legally enforceable (“nudum pactum”).

D. Terms are Certain and Complete

This can’t be a vague expression with an approximate promise. It should be very clear what the conditions of the agreement are:

  • Who the parties to the contract are
  • Each party’s obligations
  • The expected price everyone is paying
  • The obligations everyone is required to perform
  • The subject matter of the contract and any periods of time

It’s worth noting these terms do not have to be complex:

  • John Smith and Adam Jones agree…
  • …that Adam will mow John’s yard…
  • …for $10…
  • …and the yard will be completely mowed…
  • …and this doesn’t imply any future mowing by Adam.

However, to clarify the language, most written contracts have definitions explicitly clarified at the beginning of it.

  • These definitions are constantly referenced throughout the document, typically in capital letters or quotes.

E. Parties’ Free Consent

The parties should and consent freely, which means an absence of a few things:

  • There can’t be any “undue influence”, which is when one party pressures another into signing a contract.
  • There can’t be any coercion or duress, which includes using tactics like threats (“per minas”), physical violence, or psychological pressure. This can also include an unequal power dynamic (“arm’s length principle”).
  • Neither party can misrepresent facts. If one of them was lying (“fraud”) or exaggerating (“puffery”), that could nullify the contract.
  • Both parties must be aware of the contract, meaning there can’t be an “officious intermeddler”.

By implication, most contracts are performed in “good faith”, where there’s mutual trust that the other party will try to create advantageous results for the other. Without that trust, there’s no contract.

Unfortunately, clarifying whether someone was consenting freely without undue influence or misrepresented facts can be very difficult later, which is another major duty for lawyers to wrestle with it.

F. Mental Capacity

First, the parties must be old enough (i.e., “age of consent” or “age of majority”). This age varies by region, but means someone is old enough to make their own decisions.

Second, the parties must be of “sound mind”, which means they’re not mentally incapacitated:

  • Cognitive impairments (e.g., senility, dementia, legal insanity)
  • Affected by a mind-altering substance (e.g., alcohol, drugs)
  • Sleep-deprived

Clarifications

Each party must have their duties clearly defined:

  • If a party was already performing a duty, that duty generally can’t be part of a contract (“pre-existing duty rule”).
  • Most parties may have retention obligations, where they must archive and maintain specific information (e.g., chat history).
  • Many contracts provide a “drop dead date” that indicates the final day a responsibility must be fulfilled before specified consequences occur.
  • A “morals clause” may indicate certain behaviors a party is not permitted to do (e.g., actors, educators, athletes).
  • An “acceptable use policy” outlines the acceptable ways to use of the good or service.
  • Sometimes, on a prolonged agreement, one of the parties may grant an “allowance” to assist in purchasing needed supplies or labor.

While standard form contracts are ubiquitous, they’re difficult to enforce for several reasons:

  1. Most of the people never read them, and typically consent through trusting the contract was well-written in good faith.
  2. Accessing the full terms may be difficult or impossible before they accept.
    • Often, multiple large organizations can have a “battle of the forms” over contract terms that contradict.
  3. Boilerplate terms don’t typically cover unlikely events, and the purchaser typically only thinks about the price and quality of the offering while disregarding those events.
    • Any poorly-worded contract will fall back on the organization that wrote it (“contra proferentem”).
  4. The person signing may be socially pressured to sign it:
    • The salesperson may imply the person is being unreasonable by wanting to read or question the terms.
    • If they’re in a queue, they may be pressured to quickly sign.
    • If there was any negotiation over price or particular details, the salesperson’s concessions may be interpreted as a gift, meaning social cooperation to sign.
    • The contract may exploit unequal power dynamics between parties.
  5. During the renewal of the term, the situation may have changed, but the speed of making the renewal may mean the contract’s terms are still in effect for an inaccurate agreement.

For many interactions, third parties may often need to be involved in a contract:

  • A party may have a “right of first refusal”, meaning they must first refuse a contract before that contract is offered to a third party.
  • “Novation” is either adding an obligation, replacing an obligation to perform with another obligation, or replacing a party of an agreement with another party.
  • “Subrogation” is when a third party (e.g., second creditor or insurance company) assumes another party’s legal right to collect a debt or damages.
  • “Assignment” is a process where an assignor transfers rights or benefits to an assignee.
  • “Delegation” is a process where a delegator transfers responsibilities to a delegate.
  • A “third-party beneficiary” gives another party not in the contract the right to sue.

Most contracts in most countries are based on all parts of the exchange being one transaction, though a few nations parse it further:

  • Canada uses Contract A (a process contract between all parties requesting a proposal) and Contract B (an acceptance when an owner formally accepts a bid)
  • Germany uses the “abstraction principle” to separate contracts into 3 uniquely individual contracts:
    1. The contract of sale itself: the seller is obligated to transfer ownership to the buyer and the buyer is obligated to pay for it.
    2. Another contract to benefit the buyer: transferring the seller’s consideration to the buyer’s ownership.
    3. A final contract to the benefit of the seller: transferring the buyer’s consideration to the seller’s ownership.

Complexities

An “integration clause”, at the end of the contract, can declare that contract is the complete and final agreement between the parties, which is often placed at or toward the end of the contract and make the entire contract an “integrated contract”. It’s a strong constraint where any pre-contractual discussions must be placed into that integration clause.

Constraining rights and freedoms:

  • A class action waiver prohibits a party from filing a “class action suit” against the other party.
  • An “exclusion clause” can seek to restrict the rights of the parties to the contract, though it may make the contract unenforceable.
  • An inclusion/equity rider can require an actor’s or filmmaker’s contract to discriminate toward a certain level of politically-left-favored diversity in casting and production staff.
  • A “negative pledge” prohibits a party in the contract to create any security interests over specific property.

Granting more rights and freedoms:

  • A “bonus clause” can reward a contract for doing more than the letter of the contract, typically to finish the job early. Alternately, there can also be a “penalty clause” for not fulfilling the letter of the contract.
  • A “pre-emption right” can give contractual rights to acquire newly existing property before anyone else can acquire it.
  • Buy now, pay later (BNPL) is short-term financing that permits consumers to make purchases and pay for them at a future date, typically in an installment plan (“hire purchase”) and without the need for conventional financing.

Clarifying more terms:

  • A “condition precedent” is a state of things or event required for something else to occur.
  • A “condition subsequent” is a state of things or event that causes something to end.
  • A “contingent contract” adds an agreement where certain conditions will result in specific outcomes (e.g., additional vacation time after working a certain number of months).
  • An “escalation clause” can allow a change in the agreed-upon price if a specific factor beyond the control of the parties changes the situation.
  • “Liquidated damages” define the exact damages in the event of specific breaches of contract (e.g., late performance).
  • The “risk of loss” determines which party is responsible after a sale but before the product’s delivery.

Involving third parties:

  • A “beneficial interest” is a third party’s right that arose from a contract where they’re not party (e.g., agreement to pay a third person), the basis of most trusts.
  • A “buyout clause” can require another entity wishing to purchase an employee’s services to pay a fee to the employer.
  • A “collateral warranty” creates a warranty for a third party that would otherwise not be able to seek damages in the event of an injury.
  • A piggy-back clause applies in shareholder selling rights, where a primary shareholder’s actions will affect other shareholders (e.g., primary shareholder’s sale price of selling shares is the selling price for all other shares).
  • An “escrow party” will hold onto assets until both sides can finalize the agreement.

Adding more terms:

  • An “accord” is a secondary contract with loans that give alternative consideration outside the original contract. This permits releasing responsibility (“satisfaction”) for both parties when the accord contract is fulfilled (e.g., give back the automobile instead of the remainder of the auto loan). In a sense, it’s a backup plan.
  • “Collateral contracts” are secondary contracts where the consideration is both parties guaranteeing they’ll maintain and uphold the original contract. They’re typically unilateral (with one party making it) but it can be bipartite or tripartite (2 or 3 parties). Typically, assuming nothing unethical, they exist because the primary agreement can’t be amended:
    • The primary agreement’s terms conflict with later-known facts.
    • The primary agreement was written incorrectly.
    • A third-party mediator must resolve the dispute between the original parties.
    • The parties don’t want to amend or overstep the primary contract’s terms.
  • Retained interest (aka payout penalty) is a future unpaid interest that some lenders add to the remaining principal of a loan to determine a payout amount in the event the loan is terminated before it’s completed its original term.
  • A “rider” can adapt the language to override specific provisions.
  • A “guillotine clause” can indicate that all aspects of involved contracts must be accepted, or all the contracts are terminated.

Termination/Amendment

An “amendment” is a formal or official change to the document, which may be necessary to prevent it from being “revoked” in most situations.

In many situations (e.g., mistake, misrepresentation, duress, undue influence) the transaction can be unwound as if it had never happened (“rescission”). Other times, it’s called “rectification” if a court fixes the mistake.

If a contract term can be ongoing indefinitely, most contracts include an “automatic renewal clause”, which “renews” the policy until it is formally terminated. If the contract “lapses”, it can also be “reinstated”.

An offer must be accepted absolutely without modification (“mirror image rule”), which means the recipient accepting the offer on different terms (e.g., “interlineation”) actually creates a counter-offer, which is binding based on the original offeror accepting that offer instead.

  • The “last shot rule” means a party implicitly consented to a counter-offer by not indicating objection to it.

The experience of severe hardship on an entity from an “external risk” can nullify or modify a contract.

A contract can be “repudiated” if a party can prove that their signature was not authentic, though typically “non-repudiation” is in effect with the exception of outright fraud.

Force majeure (French for “overwhelming force”) is a common clause that frees both parties from liability or obligation when an extraordinary event or circumstance beyond the parties’ control (e.g., war, natural disaster, riot, epidemic):

  • “Impossibility” – the circumstances have changed, and nobody presumed they would, so performing the contract is now literally impossible.
  • “Impracticability” – the circumstances have changed, and nobody presumed they would, so performing the contract is now too burdensome for one party.
  • “Frustration of purpose” – both parties knew the contract’s purpose could be used for a very different purpose than when it was made, and it is now being misused.

When a contract involves both parties having to pay (“cross claims”), they can perform a “set-off” by “netting”, which combines the payments for the sake of efficiency.

The “perfect tender rule” in the USA indicates that, in the case of goods not conforming to the terms of a contract, a buyer can choose to accept it anyway, reject it outright, or reject only the non-conforming parts of the delivered goods.

Many contracts end with “extinguishment”, which often destroys a right and voids the contract.

Conflicts

An “executory contract” hasn’t been fully performed or executed, and is usually where most disputes can arise.

Several possible reasons can form the basis of a bad contract.

  1. The contract itself can’t be illegal or unjust (“unconscionability”).
  2. There mustn’t be any “misrepresentation” or “mistake” between the facts and the contract’s terms during the negotiation:
    • The relative experience of the parties.
    • How much a party proves they rely on what they say.
    • Reassurances given by a party.
    • Customary norms of the trade itself.
    • The representation is actually making a secondary collateral contract.
  3. There can’t be any threats or unequal bargaining power (i.e., coercion or undue influence), and can’t be acting in bad faith (“clean hands doctrine”).
  4. A signing party can escape performance of an agreement when it’s fundamentally different than what they intended to sign (“non est factum”).

If a party doesn’t fulfill their duties to the effect that it denies the main benefit of a contract, it becomes a “breach of contract”.

  • While most breaches only terminate the contract partly, a “fundamental breach” can nullify an entire contract.
  • An anticipatory breach/repudiation involves one party clearly showing intent to not perform in the future according to the contract.
  • A breach of condition is a specific breach of a particular condition of a contract. Often, a “condition” may simply be a “warranty” or be an “innominate term”.
  • An efficient breach is a voluntary breach of contract and payment of damages by a party who concludes they’d incur greater economic loss by performing under the contract.
  • A deviation is when the carrier of a contract of carriage takes a completely different route than an agreed-upon path.
  • In a lease, the lessor can deliver notice to pay or quit (in a failed payment) or a notice to cure or quit (to fix a problem).
  • Debt evasion involves intentionally avoiding creditors’ attempts to collect or pursue their debt.
    • However, there are scams, so a consumer has a right to challenge a debt or receive written verification of that debt from a debt collector.

A few clauses can indicate how a dispute arising under the contract will be determined:

  • “Choice of law” – Determined by the law of a particular jurisdiction.
    • “Lemon laws” protect purchasers from low-quality products marketed as high-quality (typically automotives).
  • “Forum selection” – Resolution will be within a specific forum, which classifies into 3 categories:
    1. Resolved with a dispute resolution process, which can include a hearing with a special referee or expert determination, mediation, or arbitration.
    2. Litigation in a mutually agreed-upon court, which must be indicated or it’ll create a conflict of law called “dépeçage”.
    3. A combination of the two, with a dispute resolution process, and clarifying which jurisdiction’s litigation if it fails.

Using an “arbitration” clause has pros and cons compared to a civil court case:

  • An arbitration process is often faster and less expensive than court litigation, though the “discovery” process may be limited or nonexistent.
  • Arbitration awards are generally harder to enforce than court decisions (i.e., seeking legal action to “confirm” the award), though they’re also easier to enforce across nations (New York Convention 1958).
  • The parties can choose their own tribunal, which may be very useful if the situation is highly technical.
  • Arbitration proceedings are generally non-public, and can be made confidential, though there are often presumptions of confidentiality among the parties that aren’t honored.
  • The parties can typically choose their arbitration language, while courts automatically apply formalized language according to that country’s courts.
  • Most legal systems give very limited avenues to appeal a decision compared to arbitration, but the arbitration language defines the constraints of an appeal.
  • If the arbitration is mandatory and binding, the parties waive their rights to access the courts with a judge and jury deciding the case.
  • A judge generally has no reason to lean one way or another, but repeat business for the arbitrator gives them incentive to rule against the interests of the employee or consumer.

Ideally, “mediation” resolves the issue while making all parties satisfied:

  • The very fact that parties are willing to mediate means they’re willing to “move” on their position.
  • Professional mediators are trained to work with difficult situations, and guide the parties through the process while assisting in finding creative solutions for the conflict.
  • Mediation is much more affordable than arbitration or civil suits, and can be resolved within a matter of hours with a competent attorney present.
  • The entire arrangement is strictly confidential where many mediators destroy their notes once it’s finished, to the point that many courts can’t enforce a mediator to testify in court about the mediation with the possible exceptions of child abuse or criminal acts.
  • All parties have tremendous control over a resolution.
  • Since everyone is working together, people tend to comply with mediation rulings.

Either way, the results of a conflict will arrive with a few possible results:

  • If you can avoid court entirely, you’ll be able to reach a “settlement” in lieu of the full scope of damages.
  • “Damages” are the simplest and most common form, with the payment coming from arbitrary calculations made by a judge. These “expectation damages” can range from concretely measurable (e.g., automotive repair) to emotional.
    • Damages are classified as “heads of loss”, with each head defining a different scope of damages.
    • Most of the time, a buyer breaching contract by not purchasing can leave the seller at a loss (because they had to sell it to another buyer for less), but a seller who sells at the same price can still collect damages as a lost volume seller.
  • “Specific performance” will be an order for a party to perform a specific act, which is typically only in the sale of land law because most other situations can involve paying out damages.
  • If a buyer of goods has experienced an anticipatory breach and has to pay more for an alternative source of those goods, then can file a suit to collect damages on the difference (“cover”).
  • In the case of a partial situation that frustrates performance (e.g., an intervening “act of God”), there can be an assessment (“quantum meruit” for services and “quantum valebant” for goods) to determine “unjust enrichment”.
  • If a defendant refuses to pay what they were deemed to owe, they may have their income “garnished” later by a court.

Application

Always, always use a contract.

  • Even if it’s a quick task or a project for a friend, a contract protects all parties.

Always send a proposal in writing that outlines the scope of the project:

  1. What you will do.
  2. Any clear deadlines about when you’ll do it.
  3. Any clear things you will not do.
  4. The rate you’ll charge for any tasks outside the scope of what you’re contracted to do.
  5. A formalized contract they’re required to sign.

If you expect continued business, send a master services agreement, along with a new scope of work for each new project.

Whatever price that’s been agreed-upon is non-negotiable.

  • Do research beforehand about how much others charge for the service you’re providing.
  • When proposing your rate for a service, either increase your rate for a service with the expectation they’ll push back, or make the rate reasonable and non-negotiable.