What are Contracts and Agreements? A Simple Guide for the Average Joe

We've all signed a contract or agreement at some point - whether it's for a cell phone plan, a lease on an apartment, or a job offer. But what exactly are these legal documents and why do we need them? In this article, we'll break down contracts and agreements in simple terms so you can understand what you're getting yourself into the next time you put pen to paper.

The Basics: What is a Contract?

A contract is a voluntary agreement between two or more parties that is enforceable by law. The main elements of a valid contract are:

- Offer and acceptance: One party makes an offer and the other party accepts it. This constitutes a meeting of the minds.

- Consideration: Something of value is exchanged between the parties. This can be money, property, services, etc. 

- Intent to create legal relations: The parties intend for the agreement to be legally binding.

- Contractual capacity: The parties must have the legal ability to enter into a contract. Minors and mentally incompetent persons do not have full contractual capacity.

Some key examples of contracts include:

- Employment contracts

- Loan agreements 

- Rental or lease agreements

- Sales contracts

- Settlement agreements

- Prenuptial agreements

Simply put, a contract imposes obligations that are enforceable in court. If one party doesn't fulfill their end of the bargain, they can be sued for breach of contract.

( Also read our informative article on Evolution of Banking and Finance In Saudi Arabia )

What is an Agreement? How is it Different From a Contract?

An agreement and a contract sound quite similar, but there are some important distinctions:

- Enforceability: The main difference is that agreements are not necessarily enforceable by law. Contracts are always enforceable.

- Formality: Contracts are formal documents, while agreements can be verbal or casual written arrangements.

- Intent: Parties may not intend for an agreement to be binding. With a contract, there is always intent to create a legal obligation.

Some examples of common agreements include:

- Verbal agreements

- Letters of intent 

- Memorandums of understanding

- "Gentleman's agreements" or "handshake deals"

So in summary, all contracts are agreements but not all agreements qualify as enforceable contracts. Agreements may look like contracts but lack the full legal formalities and intent.

Why Do I Need a Contract?

Contracts are important because they create legal obligations and provide remedies if those obligations aren't met. Here are some key reasons you need a written contract:

- Sets clear expectations: The contract lays out the terms, conditions, scope, timeline, pricing, and other expectations so both parties understand their responsibilities. This prevents misunderstandings.

- Provides legal recourse: You can sue for breach of contract if the other party doesn't deliver. This gives you leverage to enforce the deal.

- Reduces risk: Contracts limit liability and outline dispute resolution procedures. This reduces financial/legal risks.

- Formalizes the deal: Contracts make an agreement legally binding and show the arrangement is serious. 

- Creates a record: You have documentation to refer to if any conflicts arise.

Contracts provide valuable predictability in business relationships. The effort to formalize an agreement upfront can prevent much bigger headaches down the road.

What Makes a Contract Valid and Enforceable?

In order for a contract to be valid in the eyes of the law, certain elements must be present:

Offer and Acceptance

There must be a clear offer and unconditional acceptance of the main terms. The offer shows one party is willing to enter into a contract. Acceptance demonstrates that the other party agrees to the proposed terms. Communication and consensus are required.

Consideration

Each party must exchange something of value. It doesn't have to be money - it could be goods, services, a promise, an action, etc. There must be a mutual exchange for the contract to be valid. 

Capacity 

The parties must have the legal capacity to sign the contract. Those who are mentally incapacitated or minors (under 18) don't have full legal capacity. Exceptions exist if the minor contract involves only reasonable necessities.

Legality

The underlying purpose of the contract must be legal. Contracts for illegal activities are void.

Intent 

There must be a clear, mutual intent between the parties that the agreement should have legal effect.

Genuine Assent

The parties must voluntarily agree to the contract. Assent that is given mistakenly or under duress is not genuine.

Proper Form

For some types of contracts, the law requires that they be in writing to be enforceable. Examples include real estate contracts, prenuptial agreements, and sales of goods above a certain value. 

So in summary, these key elements must be present for a contract to be valid: offer, acceptance, consideration, capacity, legality, intent, genuineness, and proper form. Consult an attorney if you have questions!

What to Watch Out For Shady Contract Terms 

While most contract terms are fairly standard, some companies try to sneak in questionable or overreaching clauses. Here are some red flags to watch out for:

- Forced arbitration: These clauses require disputes to be handled in private arbitration instead of court. They heavily favor the company.

- Unilateral amendment: This states the company can change any terms without notice. Avoid giving unilateral control.

- Perpetuity clauses: The contract renews automatically forever unless you jump through hoops to cancel. Set firm renewal terms you both agree on. 

- Indemnification: This makes you liable for legal costs or judgments even if you did nothing wrong. Add a carve-out for your negligence.

- Automatic renewals: These renew without your consent unless you remember to cancel. Make renewals optional. 

- Limitation of liability: There are reasonable limits, but some try to exclude all liability. Push back on extreme limitations.

- Jurisdiction: Out-of-state jurisdiction makes disputes more of a pain to deal with. Designate a jurisdiction close to you.

- Intellectual property: Some contracts grab IP rights to work products that should belong to you. Clarify ownership.

While you can't eliminate all legal language from contracts, watch for terms that unreasonably favor one party over the other.

5 Tips for Negotiating a Fair Contract

You don't have to accept all terms as written. To tilt the contract more to your advantage, keep these tips in mind:

Know Your Walking Away Point 

Before negotiations, decide what provisions are unacceptable dealbreakers for you. Know when to walk away if needed.

Ask Questions

Don't assume you understand everything. Ask for clarifications on legalese so you fully grasp each clause. 

Compare Competitors 

See if you can get better terms from competitors bidding for your business/services. Use that as leverage during negotiations.

Request Concessions

Don't start by compromising. Politely ask for the removal of clauses favorable to the other party as a place to start.

Make Your Case 

Explain reasonably why you want changes that are fair and mutually beneficial. Offer concessions on less important points as a bargaining tactic if needed.

With preparation and strategic negotiating, you can get more preferable contract terms and avoid bad surprises down the road. Don't be afraid to speak up!

Common Contracts: Examples and Key Provisions

Here is an overview of some common contracts and key provisions they contain:

Employment Contracts

These agreements cover the expectations, rights, and obligations of employers and employees. Key provisions include:

- Compensation (salary, benefits, equity, commissions)

- Responsibilities and Duties 

- Hours and schedule

- Length of employment (or if "at will")

- Paid time off

- Ownership of intellectual property 

- Grounds for termination 

Rental or Lease Agreements

These contracts allow a tenant to live in or use a property owned by a landlord. Typical provisions cover:

- Length of lease 

- Monthly rent amount

- Security deposit requirements

- Maintenance responsibilities 

- Grounds for eviction

- Restrictions on guests/pets

Sales Contracts 

Sales contracts outline the terms of a transaction where ownership of an item transfers from one party to another. Key details include:

- Description of the item being sold (and any defects disclosed)

- Purchase price 

- Method and due date of payment  

- Warranties about item condition

- Delivery date and transportation

- Seller's right to cancel if payment is not received

Settlement Agreements

These contracts resolve legal disputes before or during litigation. Settlements often include:  

- Payment (often a lump sum) exchanged for waiving the right to sue 

- Confidentiality clause 

- Statement that neither party admits wrongdoing

- Release of liability for all claims arising out of the dispute

Prenuptial Agreements

Prenups protect assets in case of divorce. Key sections include:

- Full disclosure of all assets, debts, and income

-  Rights waived to assets/property owned before marriage  

- Division of assets acquired during marriage**

- Spousal support

Understanding typical contract sections prepares you to better negotiate terms tailored to your situation. Now let's look at how to interpret contracts.

Interpreting Contracts Like a Pro

Legalese can be confusing, but a few simple rules help reveal what contract terms actually mean:

Read Carefully

Don't skim or make assumptions. Read every word closely to grasp all the details. Use a dictionary if needed for legal terminology.

Master the "Hierarchy of Terms" 

If there are conflicting provisions, here is the order of precedence:

1. Typed terms prevail over handwritten terms

2. Handwritten terms prevail over pre-printed terms 

3. Specific provisions take priority over general provisions

Consider Context 

Interpret terms in the context of the entire document. Review headings, section sequences, and defined terms.

Watch for Cross-References

Understand how sections interrelate by looking for cross-references to other sections.

Focus on Operative Terms

Operative terms like "shall" and "must" indicate mandatory provisions. "May" and "should" signal optional terms.

Identify the Parties 

Pay attention to which parties are bound to each obligation (e.g. seller vs. buyer)

With practice reading contracts, you can break down dense sections into easy-to-apply practices. Now let's tackle five common questions people have around contracts.

5 FAQs About Contracts

1. Do verbal agreements count as contracts?

In some cases, yes. Verbal agreements can potentially be enforced as oral contracts. However, it is very difficult to prove the agreed-upon terms without documentation. Whenever possible, contracts should be in writing.

2. Can you break a contract? 

Breaking most contracts has legal consequences. However, there are certain situations where a contract can rightfully be broken without penalty, such as if there is:

- Fraud or misrepresentation

- Illegal purpose 

- Physical/legal incapacity 

- Breach by the other party 

- Impossible performance

Unless limited permissible circumstances exist, one should honor a signed contract or attempt to renegotiate mutually acceptable new terms.

3. Is a signed contract final?

Generally, yes. A valid contract that is voluntarily signed is binding. However, some specific types of contracts allow for short cancellation periods after signing such as:

- Real estate purchase contracts 

- Timeshare purchase contracts

- Car purchase contracts 

You must act quickly within the cancellation window specified in the contract.       

4. Can you negotiate changes to a contract?

Yes, contracts can be renegotiated if both parties agree. When amending a signed contract, the best practice is to document changes in writing rather than verbal agreements to avoid uncertainty. An amendment or addendum should be signed by both parties.

5. What happens if a contract is breached?

There are a few potential remedies when a party does not fulfill their contractual duties: 

- Monetary damages: Compensation for losses suffered due to the breach

- Cancellation: The non-breaching party can end the contract

- Specific performance: The breaching party is ordered to complete duties

- Limitation of terms: Courts may limit unreasonable clauses  

The best action depends on context. An attorney can advise on suitable remedies for a particular breach.

Understanding contracts gives you confidence during negotiations and clearer expectations afterward. While the legal jargon can be tedious, take the time to protect your rights and make business dealings less stressful.