Suppose you are renting an apartment. You would want everything put down on paper, such as how much you'll be paying, on what date of the month or year, and what all this will cover, like maintenance or utilities. Why? Well, it would avoid confusion since it's on paper and makes sure you and your landlord know what you're expecting.

Contracts like this are everywhere in daily life. They are agreements that make sure everyone involved understands their responsibilities. In this article, we will look at what contracts are, the different types you may come across, and why they are so important for individuals and businesses alike.

What is a contract?

A contract is a legally binding agreement between two or more parties that creates mutual obligations. Such an agreement is a cornerstone of private law, ensuring that the contracting officer and other parties understand their roles, rights, and responsibilities. 

In the US, contract law derives from common law, supplemented by statutes like the Uniform Commercial Code (UCC), which governs secured transactions and commercial contracts.

Types of contracts

Contracts can be in many different forms, based on the various ways of establishing and interacting with them. Each has its own strengths and is typically used for specific use cases:

#1 Written contracts

Written contracts spell out the terms and are devoid of ambiguity. They are enforceable in the court of law and preferred in cases involving complex agreements like vendor agreements, employment contracts, or service-level agreements.

Also read: How to Write Business Contract Agreements: Tips + Free Template

#2 Verbal contracts

These are agreements made by words of the mouth, with no written record. While verbal contracts can be legally binding, their terms are difficult to prove in case of a dispute. They are often harder to prove but enforceable under common law in specific circumstances.

#3 Implied contracts

These are from the conduct of parties or the circumstances and not from direct communication. A simple example, once you order in a restaurant, it would be assumed that you are to pay for the meal as long as no one says something about the fact. Implied contracts are so common in day-to-day transactions and scenarios where expectations are apparent.

Why are written contracts preferred?

While verbal and implied contracts have their place, written contracts are the most secure option. They provide clarity, reduce misunderstandings, and are enforceable in court, making them ideal for professional and high-stakes agreements. By laying out every detail, they minimize risks and ensure all parties have a clear understanding of their obligations.

Essential elements of a contract

Contracts are powerful means of setting expectations and creating accountability, but what exactly makes them an enforceable contract? Let's break down what constitutes the building blocks that turn an agreement into a legally binding commitment.

• Offer: One party makes a proposal to another, specifying the terms of what they are committing to do or provide

Example: A supplier offers to deliver 1,000 units of something at a given price

• Acceptance: This is where the other party accepts the proposed terms without amendments

Example: The buyer confirms that he will buy the 1,000 units at the agreed-upon price.

• Consideration: The parties exchange something of value, which may be money, goods, services, or a promise

Example: The buyer pays for the merchandise, and the vendor delivers the goods

• Legal capacity: The parties should have the legal capacity to contract, meaning of sound mind, not minors, and not under duress

Example: An agreement signed by a minor may not be legally enforceable contract

• Legality: The purpose of the contract needs to be legal. Agreements to commit some sort of illegal activity are not enforceable

Example: The contract to sell counterfeit goods is void

• Mutual assent: Both parties must fully understand and agree to the terms without misunderstanding or misrepresentation

Example: A party is misled into signing; mutual assent has not occurred, and a contract may not be held valid

Types of business contracts

Understanding business contract types helps in-house legal teams navigate and draft agreements that align with organizational goals and compliance requirements.

Also read: What Are Commercial Contracts (Clauses, Examples, and Benefits)?

Based on the nature of the agreement

• Bilateral contracts: It is an agreement where the two parties involve mutual promise. The second party accepts it with the agreement of meeting certain obligations required by the first party

Example: A seller agrees to deliver goods, and a buyer agrees to pay for goods.

Source: https://www.uslegalforms.com/

• Unilateral contracts: These are those where one party gives a promise which is only fulfilled if the other party performs some action

Example: A reward by a company for information that may lead to the recovery of stolen goods.

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Source: www.vertex42.com

• Express contracts: The terms used are clearly mentioned, either orally or in writing, and cannot be misunderstood

Example: A written agreement to lease describing rent, term, and other conditions.

• Implied contracts: These are inferred from the behavior or circumstances of parties, rather than from express terms

Example: If a customer orders food from a restaurant, it is implied that he or she will pay for the meal.

Standard business contracts

• Employment contracts: An agreement containing the conditions of the employer-employee relationship, including responsibilities, compensation, and benefits, along with any termination clauses. They help both parties to understand their respective rights and duties

Source: easylegaldocs.com

Also read: How to Review Employment Contracts: A Comprehensive Guide

Also read: Rolling Out An Employment Agreement - Key Clauses

• Non-disclosure agreements: These will protect sensitive information disclosed or shared by one or both parties without consent. They are common in partnerships, mergers, or when dealing with proprietary data

Source: easylegaldocs.com

Also read: The Ultimate Guide to NDAs: NDA Meaning, Template, Requirements, Limitations & Best Practices

• Service agreements: These are contracts that outline the terms of engagement of services, including but not limited to scope, payment, timelines, and liability. They help manage expectations between service providers and clients

Source: signaturely.com

Also read: Checklist to a Good Master Service Agreement [+Sample MSA Template]

• Sales contract: These govern the sales of goods and services by setting out prices, delivery terms, and warranties. These are an integral part of any business transaction because they provide clear guidelines on various business transactions that will help avert disputes

Source: signaturely.com

Also read: 7 Types of Sales Contracts + Best Practices for Executing Them

Also read: 10 Types of Commercial Contracts Your Team Must Know

Importance of contracts

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Source: geeksforgeeks.org

Contracts are not just legal documents but actually strategic tools that underpin smooth operations, securing the interests of a company. Contracts are the core of the management of relationships, mitigation of risks, and compliance for in-house legal teams. Here’s why they’re indispensable:

#1 Contracts provide clarity in business operations

“Avoid unnecessary complexity and shoot for short sentences. Always ask yourself if what you wrote down is clear – could a judge or jury understand the section if there was ever litigation?  If not, rework it.  For example, think about this statement, ‘This Agreement will terminate on August 31, 2021.’  Does this mean that it terminates when the day starts? When the day ends? And when does the day end? At the end of the business day, at midnight, and in what time zone? The better sentence is ‘This Agreement will terminate on August 31, 2021, at 11:59 p.m. Central Time.’ Be precise and concise!”

~ Sterling Miller, CEO, Hilgers Graben‍
Ten Things: Making Contracts Easier to Sign

The terms or conditions in the contracts are well stated, from the roles, responsibilities, and expectations of either of the contracting parties. This cuts down ambiguities and misunderstandings to a minimum, leaving everyone on the same page. Clear contracts limit the risk of disputes and make enforcement smooth in case something goes wrong.

#2 Contracts offer legal protection during disputes

A contract is your organization's sword and shield for when the rules are breached. They indicate remedies such as damages or the right to terminate, with usually a solid base for enforcement in judicial disputes. A well-drafted contract provides all the tools that an in-house counsel may need in order to enforce the interests of a company without entangling itself in very expensive litigation.

Also read: Ensuring That Your Electronic Contracts are Legally Binding

#3 Contracts help build trust between parties

Explicitly stating mutual obligations, contracts are a source of trust between different parties. They exhibit both sides standing on the commitment to be honorable, which is very essential in building long-term business relationships. At this point, legal teams are very important in ensuring that contracts are not only fair and transparent but also enforceable.

#4 Contracts support proactive risk management

Contracts help identify and mitigate risks before they become problems. They include contingencies such as force majeure, limitation of liability, and dispute resolution mechanisms. Proactive risk management through contracts is very important for in-house legal teams in safeguarding the organization against unforeseen challenges.

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Source: Olga V. Mack via LinkedIn

Also read: Effective Contract Risk Management: Top Tips & Strategies

Contract formation and termination

Contracts have a life cycle that begins with the creation and ends with the termination of the contract. In-house legal teams should therefore be aware of each stage to ensure the contracts are valid, protect the interest of the organization, and respond to changing business needs.

Creation of a contract

#1 Negotiation

The process of contract creation starts with negotiation, which involves the discussion of the parties over their respective expectations and obligations. This is the stage when the identification of key terms takes place, including but not limited to the fixed price, timelines, deliverables, and dispute resolution mechanisms.

"Negotiation is 90% preparation, 10% talking."

~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: Business Skills All In-House Lawyers Must Know

Good negotiation clears up misunderstandings that could lead to disputes later. Quite often, legal teams get involved in this stage to ensure that the laws are not violated and the risks are at their minimal level.

Also read: Mastering the Art of Contract Negotiation: Strategies for Success

#2 Drafting

After the agreement of terms, the documentation process begins. This stage, known as contract drafting, is crucial. During this phase, lawyers carefully refine the entire contract to ensure it is clear, accurate, and complete. Key aspects addressed in the drafting process include:

• The language used in the contract
• Accuracy and precision of all terms
• Completeness of the agreed terms and conditions
• Confidentiality provisions to protect sensitive information
• Termination clauses outlining how and when the contract can end
• Specification of governing law or the court for dispute resolution

#3 Execution:

Execution occurs when both parties sign the contract, showing that they are willing to be bound by the contract implied terms. Depending on the form of agreement, execution may be witnessed, notarized, or even electronically signed in accordance with relevant law. At this stage, the contract would be considered legally executed, and the parties take on liabilities from the contents of the agreement.

Also read: Contract Execution Process: The Ultimate Guide

Termination of the contract

#1 Completion

The contract would, of course, be deemed to have been discharged when all the obligations have been fulfilled as agreed. This is the most straightforward and desirable outcome.

For example, under a service agreement, the provider delivers the service, the client pays, and the full contract term is over without problems. Often, in-house lawyers and legal teams assist with smooth closures by confirming that all deliverables are met and issue necessary releases.

#2 Mutual agreement

Sometimes, too, contracts are perfected by early termination through mutual consent. This may be the case if the business priorities shift and the agreement is no longer required. In this regard, both parties agree to release one another from their respective obligations. This would most likely be written in some sort of addendum or termination agreement.

#3 Breach

Whenever one of the parties fails to fulfill the contractual agreement, the other party can terminate the contract. If, for instance, a supplier fails to deliver goods on time repeatedly, the buyer can invoke a termination clause. Termination for breach of a valid contract normally leads to remedies such as damages or fines; therefore, in-house counsel should assess the situation and take appropriate legal action.

#4 Legal grounds

Contracts may terminate due to external factors that make them unenforceable, such as fraud, illegality, or impossibility of performance. For example, a natural disaster or regulatory change might prevent obligations from being met. In such cases, in-house legal teams handle the challenges of termination to minimize risks and liabilities.

Also read: Contract Terminations: The Ultimate Guide + Free Template

Why businesses need a contract management system

Contracts are at the core of any business relationship-from onboarding a vendor to the closing of deals with clients. How would you expect this to work out manually?

A contract management system streamlines everything. Here’s why your business needs one:

#1 Centralized storage for quick and easy access

All contracts in one place, searchable and accessible—no more endless email threads.

Also read: Organize your contracts in a searchable repository

#2 Streamlined workflows to save time and effort

Draft, negotiate, and sign faster with pre-approved templates and real-time tracking.

Also read: Creating a Contract Using a Workflow with Multiple Questionnaires

#3 Automated compliance to stay legally secure

Stay ahead of changing laws, minimize risks, and avoid costly mistakes with built-in compliance features

Also read: Why Contract Management Is Important

#4 Proactive reminders to avoid missed deadlines

Automated reminders ensure you stay on top of renewals and key obligations.

#5 Data-driven insights to improve contract performance

Analyze trends, optimize costs, and improve contract performance with built-in analytics.

Also read: From Insight to Action: Building a Data-forward Legal Team

Ready to simplify your contract process?

Contract management need not be a headache. With SpotDraft, you can handle every stage of the contract lifecycle more effectively and efficiently, save time, mitigate risks, and find opportunities for growth.

Why wait? Take control over your contracts with SpotDraft and see the difference for yourself. Book a demo today and see how it works!