Contract Fundamentals

A contract is an agreement that creates legally enforceable obligations between parties. Understanding contracts requires grasping both the universal principles that govern them and the significant ways those principles vary by jurisdiction. Before providing contract-related assistance, establish: (1) the governing law (jurisdiction and legal system—common law or civil law), (2) the contract type, and (3) whether you're dealing with formation, interpretation, or enforcement issues. This primer covers universal principles; jurisdiction-specific formation details are in sub-slices.

Core Concepts

Formation requires meeting specific legal requirements that vary significantly between common law and civil law systems. Common law jurisdictions (United States, United Kingdom, Australia, Canada, most Commonwealth countries) require offer, acceptance, consideration, and mutual intent to be bound. Civil law systems (most of continental Europe, Latin America, much of Asia) focus on consent and "cause"—a lawful reason for the obligation—without requiring consideration. The practical implication: a promise that lacks consideration might be unenforceable under common law but perfectly valid under civil law. For detailed formation requirements, see Common Law Contracts Primer for common law systems and Civil Law Contracts Primer for civil law systems.

Capacity refers to legal ability to enter contracts. Minors, individuals with certain mental conditions, and intoxicated persons may lack capacity. Contracts with incapacitated parties are typically voidable (can be canceled) rather than void (never existed). Corporate authority matters too—verify that signers have power to bind their organizations.

Legality means both the contract's purpose and its terms must be lawful. Contracts for illegal purposes are void and unenforceable. Contracts containing illegal terms may be partially enforceable if the illegal provisions can be severed.

Contract Types

Bilateral contracts involve mutual promises—each party promises to do something for the other. Most commercial contracts are bilateral: "I'll deliver goods; you'll pay." Unilateral contracts involve a promise in exchange for performance: "I'll pay $500 if you find my dog." The contract forms only when the act is performed.

Express contracts have terms stated explicitly, whether orally or in writing. Implied contracts arise from conduct—ordering food at a restaurant implies agreement to pay. Quasi-contracts aren't really contracts but legal devices preventing unjust enrichment when one party benefits at another's expense without a true agreement.

Service agreements govern provision of services—consulting, professional services, maintenance. Key concerns include scope definition, deliverables, acceptance criteria, and performance standards. Licensing agreements grant permission to use intellectual property (software, trademarks, patents) under specified conditions. They address scope of use, restrictions, royalties, and what happens at termination. SaaS agreements are distinct from traditional software licenses: the vendor hosts the software, the customer accesses it remotely, and the relationship focuses on service levels, data handling, and subscription terms rather than installation and ownership.

NDAs (non-disclosure agreements) protect confidential information shared between parties. They define what's confidential, obligations of the receiving party, permitted uses, duration of confidentiality, and consequences of breach. NDAs can be mutual (both parties share secrets) or one-way (only one party shares). Employment agreements govern the employer-employee relationship: compensation, duties, benefits, termination conditions, and often restrictive covenants like non-competes and non-solicitation.

Consumer contracts between businesses and individuals trigger special protections in most jurisdictions. Terms must be clear and fair; unconscionable provisions may be unenforceable; certain disclosures and cancellation rights may be legally required.

Standard Clauses and What They Mean

Definitions matter more than they appear to. Defined terms control interpretation throughout the agreement. Pay attention to how key concepts (deliverables, confidential information, material breach) are defined—they often determine who wins disputes.

Representations and warranties are statements of fact (representations) and promises about conditions (warranties) that parties make to each other. They allocate risk: if a representation proves false, the representing party bears consequences. Common representations cover authority to contract, ownership of assets, compliance with laws, and accuracy of financial information.

Indemnification clauses require one party to compensate the other for specified losses, typically third-party claims. The indemnifying party usually must both defend (pay legal costs) and indemnify (pay settlements/judgments). Indemnification obligations often survive contract termination and may be excluded from liability caps. Watch for asymmetric indemnities that favor one party.

Limitation of liability caps damages one party can recover from the other. Common structures include caps tied to fees paid, exclusions of consequential/indirect damages, and carve-outs for certain obligations (indemnification, confidentiality breaches, willful misconduct). These clauses significantly affect risk exposure and are heavily negotiated.

Force majeure excuses performance when extraordinary events (natural disasters, wars, pandemics, government actions) prevent a party from fulfilling obligations. Most clauses suspend rather than terminate obligations. Whether a particular event qualifies depends on the clause's specific language—COVID-19 litigation showed that "pandemic" must often be explicitly listed to trigger force majeure.

Governing law determines which jurisdiction's legal rules interpret the contract. Jurisdiction and venue determine where disputes are litigated. These are distinct: a contract might be governed by California law but require disputes be heard in New York courts. Choice of law matters enormously—the same contract language can produce different outcomes under different legal systems.

Assignment clauses address whether parties can transfer their rights or delegate their obligations to third parties. Many contracts prohibit assignment without consent, with exceptions for corporate reorganizations or sales. Anti-assignment clauses protect parties from suddenly finding themselves in relationships with unknown entities.

Termination provisions specify how the contract ends: expiration, termination for convenience (either party can exit with notice), or termination for cause (breach or specified events). Pay attention to notice periods, cure rights (opportunity to fix breaches), and post-termination obligations (return of materials, ongoing confidentiality, wind-down procedures).

Entire agreement (integration) clauses state that the written contract represents the complete agreement, superseding prior negotiations, representations, or agreements. These clauses can invalidate side letters or oral promises made during negotiation.

Amendment clauses specify how the contract can be modified—typically requiring written agreement signed by both parties. Despite such clauses, courts sometimes recognize oral modifications when parties clearly relied on them.

Severability provides that if one provision is found invalid or unenforceable, the remainder of the contract survives. Without severability, an unenforceable clause could void the entire agreement.

Negotiation Dynamics

The common belief that "boilerplate" clauses are non-negotiable is a dangerous myth. These clauses are standard in the sense that they appear in most contracts—not in the sense that their terms are fixed. Sophisticated parties negotiate indemnification scope, liability caps, termination rights, and governing law just as vigorously as price and scope.

What's typically negotiable depends on bargaining power, industry norms, and deal value. In most B2B contexts: liability caps (amount and structure), indemnification scope, termination rights, warranty periods, payment terms, and governing law/venue. In vendor-form contracts, buyers often accept more standard terms on lower-value deals but negotiate heavily on strategic relationships.

What's rarely negotiable varies by contract type. In consumer contracts, individual negotiation is typically impossible—it's take-it-or-leave-it. In some industries, regulatory requirements make certain terms non-negotiable. Insurance policies are heavily regulated, limiting negotiation. Standard-form securities documents have market expectations that resist deviation.

Negotiation leverage comes from alternatives (can you walk away?), relationship value (how much does each party need this deal?), and information (who knows more about industry norms and risks?). Understanding the other party's constraints often matters more than aggressive positioning.

Red Flags and Pitfalls

Procedural red flags suggest the contract may be unenforceable or that the other party is acting problematically: pressure to sign immediately without review time, abnormally small print, terms hidden in unrelated sections, presented as "standard" and "non-negotiable" when material terms clearly favor one party, refusal to provide a clean copy for legal review.

Substantive red flags are terms that create disproportionate risk: unlimited liability for one party while the other is capped or excluded; one-sided indemnification without corresponding protection; unilateral amendment rights (one party can change terms at "sole discretion"); automatic renewal with difficult cancellation processes; mandatory arbitration in inconvenient forums with class action waivers; broad intellectual property assignments beyond what the deal requires.

Unconscionability is a legal doctrine allowing courts to refuse enforcement of grossly unfair contracts. Courts examine both procedural unconscionability (unfair bargaining process—no meaningful choice, hidden terms, deceptive practices) and substantive unconscionability (unfair terms—grossly one-sided, oppressive, unreasonably favorable to one party). Most jurisdictions require both elements, though extreme substantive unfairness may suffice alone. Don't rely on unconscionability as protection—courts set a high bar and the doctrine is unpredictable.

Missing terms create problems when disputes arise. If the contract is silent on a material issue, courts will imply terms—sometimes based on industry custom, sometimes based on what's "reasonable," sometimes based on statutory defaults. These implied terms may not match either party's expectations. Better to address foreseeable issues explicitly.

Execution and Formalities

Writing requirements vary by contract type and jurisdiction. Common law systems have Statute of Frauds requirements for certain categories (land, long-term contracts, goods above thresholds); see Common Law Contracts Primer for details. Civil law systems have their own writing and formality requirements, often requiring notarization for significant contracts; see Civil Law Contracts Primer for details. Even when not legally required, written contracts provide clarity and proof.

Signature requirements have evolved with technology. Most jurisdictions recognize electronic signatures (E-SIGN Act in the US, eIDAS in Europe), but some documents—real estate deeds, wills, certain government filings—may still require wet signatures or notarization. Verify requirements for your specific situation.

Counterparts clauses allow parties to sign separate copies of the same document, with all copies together constituting one agreement. This facilitates execution when parties are in different locations. Combined with electronic signature acceptance, counterparts clauses enable remote contract execution.

Authority verification matters for organizational contracts. Ensure signers have actual authority to bind their organizations. For significant contracts, consider requiring board resolutions, certificates of authority, or opinions of counsel confirming signing authority.

Breach and Remedies

Material breach is a failure to perform that's significant enough to excuse the other party's performance and potentially terminate the contract. Minor breach (partial breach) allows the non-breaching party to recover damages but doesn't excuse their own performance obligations. The distinction between material and minor breach is often contract-specific and fact-intensive.

Common remedies include damages (monetary compensation), specific performance (court order requiring performance—typically only for unique goods or real estate), rescission (unwinding the contract), and reformation (court modification of contract terms). Contracts often specify remedies and limit or expand default legal remedies.

Notice and cure provisions give breaching parties opportunity to fix problems before the other party can terminate. Typical cure periods range from 15 to 60 days depending on breach type. Failing to follow notice and cure procedures can forfeit termination rights even when breach occurred.

Jurisdiction Matters

Contract law varies significantly across jurisdictions. Common law systems (United States, United Kingdom, Australia, Canada, most Commonwealth countries) rely heavily on precedent and treat consideration as essential for contract formation. Civil law systems (continental Europe, Latin America, much of Asia) are code-based and focus on consent and cause rather than consideration. Mixed systems exist (Louisiana, Quebec, Scotland, South Africa).

The differences between common law and civil law affect fundamental aspects of contract formation, interpretation, and remedies. Always establish the governing legal system before providing specific guidance. For detailed formation requirements:

• Common law systems: See Common Law Contracts Primer for offer, acceptance, consideration, mirror image rule, Statute of Frauds, UCC, and US state variations
• Civil law systems: See Civil Law Contracts Primer for consent, cause, no consideration requirement, code-based interpretation, and country variations

Within the US, state law governs most contracts, and states differ meaningfully. Delaware and New York are common choices for sophisticated commercial contracts due to their developed commercial law and predictable courts. California has strong consumer protection laws that can't be waived. The UCC, adopted with variations by all states, governs sales of goods.

International contracts add complexity: which country's laws apply, which courts have jurisdiction, how judgments can be enforced across borders. The UN Convention on Contracts for the International Sale of Goods (CISG) applies automatically to many international goods sales unless parties opt out.

Common Misconceptions

"All contracts must be in writing" — Many contracts are enforceable without writing. Oral contracts are valid for most purposes, just harder to prove. Writing is required only for specific categories (land, long-term contracts, certain value thresholds).

"I can get out of a bad deal by claiming I didn't read it" — Generally, signing a contract binds you to its terms whether or not you read them. Courts expect parties to read what they sign. Exceptions exist for fraud, unconscionability, or illegibility, but the bar is high.

"Boilerplate terms are non-negotiable" — Standard clauses are starting points, not fixed terms. The other party's form contract reflects their preferred position, not the only possible agreement.

"A contract is a contract—terms mean what they say" — Interpretation disputes are common. Courts consider context, industry custom, course of dealing, and rules of construction. The same words can produce different outcomes in different circumstances.

"We have a verbal agreement—that's enough" — For categories requiring writing (Statute of Frauds), oral agreements are unenforceable regardless of clarity or reliance. Even where oral contracts are valid, proving their terms without documentation is difficult and expensive.

"Once signed, a contract can't be changed" — Contracts can be modified by mutual agreement. Some contracts require written amendments; others can be modified orally or by conduct. Understanding your contract's amendment requirements matters.