Contracts and Agreements Legal Terms and Definitions Glossary

Here is a business contracts terms and definitions glossary a useful guide for anywhere else in the world. When you are involved in business contract negotiations – especially for your own business – you can achieve far better negotiated results if you have a good understanding of what contracts and their terminology actually mean.

Acceptance

The unconditional agreement to an offer. This creates the contract. Before acceptance, any offer can be withdrawn, but once accepted the contract is binding on both sides. Any conditions have the effect of a counter offer that must be accepted by the other party.

Agent

Somebody appointed to act on behalf of another person (known as the principal). The amount of authority to deal that the agent has is subject to agreement between the principal and the agent. However, unless told otherwise, third parties can assume the agent has full powers to deal.

Arbitrator

Using an independent third party to settle disputes without going to court. The third party acting as arbitrator must be agreed by both sides. Contracts often include arbitration clauses nominating an arbitrator in advance.

Bankruptcy

The formal recognition that a person cannot pay their debts as they are due. Note this only applies to individuals, companies and partnerships that become insolvent are wound up.

Bona fide

in good faith. Usually implies an amount of trust that the parties are acting without any hidden motives. The opposite is mala fides – in bad faith.

Breach of contract

failure by one party to a contract to uphold their part of the deal. A breach of contract will make the whole contract void and can lead to damages being awarded against the party which is in breach.

Change order

Is work that is added to or deleted from the original scope of work of a contract, however, depending on the magnitude of the change, it may or may not alter the original contract amount and/or completion date. A change order may force a new project to handle significant changes to the current project.

Choice of Law

often, the parties to a contract will specify which rules of law should be used to resolve any dispute between them. Particularly in international transactions, the choice of law can be a significant point of negotiation among lawyers. Choice of law (what legal principles will be used to resolve the dispute) should be distinguished from choice of forum (where the dispute should be resolved) and choice of dispute resolution method.

Collective agreement

Term used for agreements made between employees and employers, usually involving trade unions. They often cover more than one organization. Although these can be seen as contracts, they are governed by employment law, not contract law.

Comfort letters

Documents issued to back up an agreement but which do not have any contractual standing. They are often issued by a parent or associate company stating that the group will back up the position of a small company to improve its trading position. They always state that they are not intended to be legally binding.

Company seal

an embossing press used to indicate the official signature of a company when accompanied by the signatures of two officers of the company.

Conditions

major terms in a contract. Conditions are the basis of any contract and if one of them fails or is broken, the contract is breached. These are in contrast to warranties, the other type of contract term, which are less important and will not usually lead to the breach of the contract – but rather an adjustment in price or a payment of damages.

Confidentiality agreement

an agreement made to protect confidential information if it has to be disclosed to another party. This often happens during negotiations for a larger contract, when the parties may need to divulge information about their operations to each other. In this situation, the confidentiality agreement forms a binding contract not to pass on that information whether or not the actual contract is ever signed. Also known as a non-disclosure agreement.

Consideration

in a contract each side must give some consideration to the other. Often referred to as the quid pro quo – see the Latin terms below. Usually this is the price paid by one side and the goods supplied by the other. But it can be anything of value to the other party, and can be negative – eg someone promising not to exercise a right of access over somebody else’s land in return for a payment would be a valid contract, even if there was no intention of ever using the right anyway.

Consumer

a person who buys goods or services but not as part of their business. A company can be a consumer for contracts not related to its business – especially for goods or services it buys for its employees. Charities are also treated as consumers.

Contract

any legally binding agreement voluntarily entered into by two or more parties that places an obligation on each party to do or not do something for one or more of the other parties and that gives each party the right to demand the performance of whatever is promised to them by the other parties. To be valid, all parties must be legally competent to enter a contract, neither the objective nor any of the obligations or promised performances may be illegal, mutuality of the agreement and of its obligations must exist, and there must be consideration.

Damages

money paid as the normal remedy in the law as compensation for an individual or company’s loss. If another type of remedy is wanted (such as an injunction – see general contract terms below) but cannot be or is not given by the court, then damages will be awarded instead.

De facto

in fact. The opposite of de jure (in law). Having a practical effect different from the legally accepted or expected situation. For example, a person who deliberately or negligently gives the impression to another party of being a company director, can be treated as a de facto director. So, any agreement or statements will bind the company they make as if a properly appointed director made them.

Disclaimer

a written document denying legal responsibility, or a limitation of rights that might otherwise be claimed.

Employment contract

a contract between an employer and an employee. This differs from other contracts in that it is governed by employment legislation – which takes precedence over normal contract law.

Exchange

the exchange of agreed, signed contracts. The transaction between the seller and the buyer is then legally binding, and completion (including the final transfer of money) usually takes place two to four weeks later.

Exclusion clauses

clauses in a contract that are intended to exclude one party from liability if a stated circumstance happens. They are types of exemption clauses. The courts tend to interpret them strictly and, where possible, in favour of the party that did not write them. In customer dealings, exclusion clauses are governed by regulations that render most of them ineffective but note that these regulations do not cover you in business dealings.

Exemption clauses

clauses in a contract that try to restrict the liability of the party that writes them. These are split into exclusion clauses that try to exclude liability completely for specified outcomes, and limitation clauses that try to set a maximum on the amount of damages the party may have to pay if there is a failure of some part of the contract. Exemption clauses are regulated very strictly in consumer dealings but these don’t apply for those who deal in the course of their business.

Express terms

the terms actually stated in the contract. These can be the written terms, or verbal ones agreed before or at the time the contract is made.

Force Majeure

an “act of God” which prevents one party from performing the obligations owing under a contract. Commonly such things as war, riots, earthquakes, floods, strikes and the like are included. The common law generally takes a stricter approach to force majeure than civil law legal systems.

Franchising

commercial agreements that allow one business to deal in a product or service controlled by another. For example, most car manufacturers give franchises to sell their cars to local garages, who then operate using the manufacturer’s brand.

Going concern

accounting idea that a business should be valued on the basis that it will be continuing to trade and able to use its assets for their intended purpose. The alternative is a break-up basis, which sets values according to what the assets could be sold for immediately – often much less than their value if they were kept in use.

Guarantee

a secondary agreement by which one person promises to honour the debt of another if that debtor fails to pay. Banks and other creditors often call on directors of small companies to give their personal guarantees for company debts. A guarantee must be in writing. The guarantor can only be sued if the actual debtor can’t pay, in contrast to indemnity.

Implied terms

are terms and clauses that are implied in a contract by law or custom and practice without actually being mentioned by any party. Terms implied by custom and practice can always be overridden by express terms, but some terms implied by law cannot be overridden, particularly those relating to consumers (see exemption clauses).

Incorporate

inclusion in, or adoption of, some term or condition as part of the contract. It differs from its company law definition where it refers to the legal act of creating a company.

Indemnity

a promise by a third party to pay a debt owed, or repay a loss caused, by another party. Unlike a guarantee, the person owed can get the money direct from the indemnifier without having to chase the debtor first. Insurance contracts are contracts of indemnity: the insurance company pays first, and then tries to recover the loss from whoever caused it.

Independent Contractor

This term is usually used to contrast with “agent” or “employee.” The basic idea is that an independent contractor is free to do only that work that it contracts to do, in the way it contracts to do it. In contrast, an agent or an employee is subject to the discretion or control of the party for whom they are working. The chief importance of the concept is in the context of vicarious liability – – a person is generally not responsible for the misdeeds of its independent contractor, while it may be liable for the misdeeds of its agents or employees.

Injunction

a remedy sometimes awarded by the court that stops some action being taken. It can be used to stop another party doing something against the terms of the contract. Injunctions are at the court’s discretion and a judge may refuse to give one and award damages instead – see the finance contract terms below.

Intellectual Property – right given by law to a person in connection with intellectual, industrial or artistic work. Intellectual Property includes, among other things, patents (inventions), designs (graphics), trademarks (names or marks used to identify goods) and copyrights (rights of authorship). Due to the information revolution, the nature and extent of information which is protected as intellectual property is a rapidly changing field.

Joint and several liability

where parties act together in a contract as partners they have joint and several liability. In addition to all the partners being responsible together, each partner is also liable individually for the entire contract – so a creditor could recover a whole debt from any one of them individually, leaving that person to recover their shares from the rest of the partners.

Joint venture

a very broad term used in many different contexts. In its general sense, it means more than one person getting together for the purpose of making a profit in a speculative enterprise. In this regard, it is very similar to a Partnership, but it tends to be used for limited undertakings. Often, particularly in reference to central and eastern Europe, American lawyers use the term to refer to profitable activities done in cooperation with foreign governments or foreign nationals.

Jurisdiction

a jurisdiction clause sets out the country or state whose laws will govern the contract and where any legal action must take place.

Letter of Credit

a financing device whereby a bank, at the request of a customer, agrees to pay a beneficiary upon satisfaction of certain conditions. Typically, the conditions are limited to presentation of specified documents. The bank makes the agreement as a service to its customer, and will seek reimbursement from its customer if it is required to make payment under the terms of the Letter of Credit. Letters of Credit are often divided into “Documentary Letters of Credit,” which are often used as a normal means of payment in international trade, and “Stand-By Letters of Credit” which are more in the nature of a bank guarantee.

Liability

a person or business deemed liable is subject to a legal obligation. A person/business who commits a wrong or breaks a contract or trust is said to be liable or responsible for it.

License

this term has many meanings, depending on the context. Its general sense is permission to use the property of the licensor. It is often used in the context of Intellectual Property to mean the agreement by which the owner of the Intellectual Property gives someone else permission to use it, typically for a royalty or a fee. License agreements are often used to transfer technology from one party to another. Absent the License, the licensee’s use of the Intellectual Property would be against the law. The term is also used in completely different contexts. For instance, a movie theatre ticket is often characterized legally as a “License.”

Limited liability

usually refers to limited companies where the owners’ liability to pay the debts of the company is limited to the value of their shares. It can also apply to contracts where a valid limitation clause has been included in the terms.

Liquidated Damages

when parties to a contract settle in advance the amount of damages which will be available should one party fail to perform. Liquidated damage clauses are generally subject to close scrutiny under U.S. and U.K. law. This is also sometimes called a Penalty clause.

Liquidation

the formal breaking up of a company or partnership by realising (selling or transferring to pay a debt) the assets of the business. This usually happens when the business is insolvent, but a solvent business can be liquidated if it no longer wishes to continue trading for whatever reason.

Misrepresentation

where one party to a contract makes a false statement of fact to the other which that other person relies on. Where there has been a misrepresentation then the party who received the false statement can get damages for their loss. The remedy of rescission (putting things back to how they were before the contract began) is sometimes available, but where it is not possible or too difficult the court can award damages instead.

Non-executive director

a director who does not work directly for a company but advises the other directors. Non-executive directors have the full powers and authority of any other director and can bind the company to any contract.

Offer

an offer to contract must be made with the intention to create, if accepted, a legal relationship. It must be capable of being accepted (not containing any impossible conditions), must also be complete (not requiring more information to define the offer) and not merely advertising.

Parent company

where one company owns more than 50 per cent of the voting rights of another company it is the parent of that company which in turn becomes its subsidiary. It can also occur where the parent has less than 50 per cent but can control the board of directors of the subsidiary: that is, it has the power to appoint and remove directors without referring to other shareholders.

Partnership

when two or more people or organizations join together to carry on a business.

Proxy

a person who acts on behalf of another for a specific purpose, or the form used to make such an appointment. In a company a shareholder can appoint a proxy to attend a meeting and vote on their behalf.

Quorum

the minimum number of people needed at a meeting for it to proceed and make any decisions.

Ratification

Giving authority to an act that has already been done. A company general meeting resolution can ratify an act previously done by the directors; or a principal can choose to ratify the act of an agent that was beyond the specified power of the agent.

Registered Office

the official address of the company as stated on the register at company’s house. Any documents delivered to this address is considered to be legally served on the company.

Remedy/Remedies

payments or actions ordered by the court as settlement of a dispute. The most common is damages (a payment of money). Others include specific performance (of an action required in the contract), injunction (see the general contract terms above) and rescission – putting things back to how they were before the contract was signed.

Repudiation

has two meanings in contract law. The first is where a party refuses to comply with a contract and this amounts to a breach of contract. The second is where a contract was made by a minor (person under the age of 18) who then repudiates it at or shortly after the age of 18. Then the repudiation voids the contract rather than causing a breach of contract.

Restrictive covenant

is often included in long-term contracts and contracts of employment to stop the parties working with competitors during the period of the agreement and for some time thereafter. However, unless carefully written the courts will see them as being a restraint of trade and not enforce them.

Risk of Loss

who bears the risk if the goods covered by a contract are damaged or destroyed. Risk of loss is particularly important when goods are being transported long distances between the seller and the buyer. If the seller bears risk of loss during carriage, and the goods are destroyed in transit, the seller has a responsibility to provide substitute goods. If the buyer bears risk of loss, the buyer generally must pay for the goods, even though they never arrive. Often parties cover 10 the risk of loss with insurance, so the ultimate loss may rest with an insurance company. In practice, areas of risk are dealt with by INCOTERMS and insurance (or re-insurance).

Service contract

directors and officers of a company are usually given service contracts that are different to a contract of service or employment contract. This is because directors and officers are not always employees and the effect of employment law is different.

Shareholders' agreement

an agreement between all of the shareholders about how the company should be run and the application of the rights of the shareholders. This acts as a contract between the shareholders. The company itself is not bound by it, as it is not a party to the agreement.

Stamp duty

a tax on transactions. Only applied to specific types of transactions eg dealings in land and buildings, shares and ships.

Subject to contract

words used on documents exchanged by parties during contract negotiations. They denote that the document is not an offer or acceptance and negotiations are ongoing. Often the expression without prejudice is used when subject to contract is meant.

Tender

is a bid or formal offer. A proposal of terms is extended generally (‘put out for tender’ or ‘competitive bidding’), inviting prospective parties to respond by making a bid or tender.

Termination

the action of terminating something or the fact of being terminated.

Underwriter

a person who signs as party to a contract. Now usually only applied to insurance contracts where the underwriters are those who agree to bear all or part of the risk in return for the premium payments. Underwriters at Lloyd’s of London are also known as names.

Unfair terms

some terms are made unfair by legislation and will not be enforced by the courts and may even be interpreted against the person who included them in the contract. The legislation mainly protects consumers, but can also apply where there is a business-to-business contract in which one party is significantly more powerful than the other.

Void

a void contract is one that cannot be performed or completed at all. A void contract is void from the beginning (ab initio – see the Latin terms below) and the normal remedy, if possible, is to put things back to where they were before the contract. Contracts are void where one party lacks the capacity to perform the contracted task, it is based on a mistake, or it is illegal.

Warranties

promises made in a contract, but which are less than a condition. Failure of a warranty results in liability to pay damages (see the financial terms below) but will not be a breach of contract unlike failure of a condition, which does breach the contract.

Without prejudice

a term used by solicitors in negotiations over disputes where an offer is made in an attempt to avoid going to court. If the case does go to court no offer or facts stated to be without prejudice can be disclosed as evidence. Often misused by businesses during negotiations when they actually mean subject to contract.