Guide to Understanding Contracts and Agreements

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How Contracts and Agreements Work in the United States

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What is a contract?

You have probably agreed to thousands of contracts, perhaps without even realizing it. Any time you visit a website, you are agreeing to their terms of service. And every purchase of a product is also effectively a contract.

A contract is simply an agreement between 2 or more parties that is enforceable in a court of law. This is not necessarily a formal document that says “Contract” or “Agreement” or even a document at all. You can have a “verbal agreement” (technically called an “oral agreement”) simply by speaking with someone and agreeing to something, which may also be considered a contract. However, contracts that are not at least written down in some form are much less likely to be enforced by a court. Even emails can be pretty good evidence of a contract; although the most enforceable contracts are a formal document signed by all parties.

These situations really depend on the specific circumstances, so definitely talk to a lawyer for help on this.

How do I interpret a contract?

See our Glossary of Contract Terms.

Are all contracts enforceable in court?

No. To be legally enforceable, an agreement must be an exchange of some sort, where each of the parties “gives up” something. For example, when you agree to buy supplies from someone, you are giving up some money, and the seller is giving up their supplies. This is known as consideration.

If only one of the parties agrees to do something, this is generally not enforceable. For example, if you promise you will buy a certain amount of supplies from a supplier, but the supplier says nothing, or does not clearly agree to sell you these supplies, you probably do not have a binding contract.

In addition, both parties must clearly have a “meeting of the minds” in that they both were generally on the same page about the deal.

Also, provisions or clauses in a contract can be unenforceable for other reasons, such as that they violate certain laws. For example, in some states, “non compete” agreements are generally illegal. So if a contract includes a non compete provision, that provision is unenforceable in these states.

If I didn’t sign anything, there’s no agreement, right?

No, that’s not necessarily true. Contracts do not necessarily need to be signed, and as discussed above, don’t even necessarily need to be in writing. It is easier to enforce in court if it is in writing and signed, but even if it’s solely a verbal agreement, you may still have a contract that you are legally required to follow.

Also if the parties have started “performing” on a deal, there may be an implied contract. For example, if a client asked a freelancer to do some work, and the freelancer began doing the work, there is likely an implied contract.

Check with a lawyer regarding your situation.

Are digital or online signatures valid?

In general, digital signatures can be as valid as physically signing on a piece of paper. Indeed, signing an agreement online through an app, such a DocHub,{[(|fnote_stt|)]}{[(|fnote_stt|)]}NOTE: Law Soup Media may receive compensation from this vendor if you use any of their services. We have used every product we recommend, and we stand by them. Thank you for your support!{[(|fnote_end|)]} that logs and timestamps the signature can be even better than a paper signature.

The purpose of a signature is to provide evidence that the signer actually agreed to the contract. And the stronger the evidence, the easier it is to prove this. Thus, more information about the context of the signing, including the time of signing, the IP address, etc., would provide stronger evidence.

What is a “handshake deal”?

A handshake deal usually just means an “oral agreement” (aka “verbal agreement”), which may or may not be enforceable. Shaking hands does not necessarily make the agreement any more or less enforceable, but it could potentially help to show that both sides had a “meeting of the minds.”

I signed a contract but now I changed my mind. What are my options?

See our Guide to Getting Out of a Contract.

Can I (or the other party) get out of a contract due to an unforeseen event?

See our Guide to Getting Out of a Contract.

How do I enforce a contract?

See our Guide to Enforcing a Contract.

Can a contract be enforced against a minor (person who is under 18)?

While a person who is under 18 years old can enter into contracts, they can simply cancel, void, or disaffirm any contract they sign, at their discretion. So it is often difficult to enforce contracts against minors.

What are common types of contract clauses?

Here are some frequently used contract provisions (often called “boilerplate”):

  • Limitation of liability
  • Indemnification
  • Merger clause (aka “integration clause” or “Entire Agreement”)
  • Assignment
  • Severability
  • Survival
  • Arbitration

These terms are explained below. Also see our Glossary of Contract Terms.

What is a “limitation of liability” clause?

A “Limited liability clause” in a contract generally stipulates that the amount of money to be recovered in a lawsuit is limited to a certain amount (often the amount of fees paid).

What is indemnification or indemnity?

A common clause in a contract is an “indemnification clause.” It’s best to use an example to explain the concept. Let’s say you are contracting with Maria to run an event for your company. If the contract states that Maria will “indemnify” you, this means that if you get sued by one of the attendees because of something Maria did, Maria will compensate you for any loss from that lawsuit.

What is a “merger” (or “integration” or “Entire Agreement”) clause?

A merger clause means that the document supersedes or replaces any and all prior agreements, whether written or oral/verbal.

What is an “assignment” or “no assignment” clause?

An assignment clause stipulates whether or not a party to the agreement can “assign” or transfer their contractual benefits or obligations to any other person.

What is a “severability” clause?

A severability clause states that if a court later determines that any particular provisions in the contract are unenforceable for whatever reason, the rest of the document is “severed” from those such that the enforceable parts remain in force.

What is a “survival” clause?

A survivor clause provides that certain specified provisions of the contract will “survive” after the contract terminates. For example, if there is a confidentiality provision in the contract, the parties to the contract may want to ensure that sensitive information is kept confidential, even after the contract and relationship is terminated.

What is an arbitration clause?

An arbitration clause or arbitration agreement generally means that if either party wants to sue the other over the contract, they must do so in arbitration rather than court. See more at our Guide to Arbitration and other Alternative Dispute Resolution.

Resources

How can I get a contract drafted?

For affordable legal documents and services, including consultations with lawyers, we personally recommend LegalShield.{[(|fnote_stt|)]}NOTE: Law Soup Media may receive compensation from this vendor if you use any of their services. We have used every product we recommend, and we stand by them. Thank you for your support!{[(|fnote_end|)]}
LegalShield has subscription legal plans to cover your business’s legal needs.

How much does it cost to get a contract drafted?

Getting a contract drafted can cost as little as $250 with a paid plan from LegalShield. Hiring a private lawyer usually would cost $500 – $1000+, depending on what type of contract it is, and how many pages. See more about legal costs.

How much does it cost to get a contract reviewed?

It generally depends on how many pages, but it is included with LegalShield’s business plans. A private lawyer would probably charge $250 – $500+.

Related Pages

Guide to Getting Legal Help

Guide to the Law for Entrepreneurs and Business Owners

Guide to Small Business Resources

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