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What is a Contract and How is it Created?

What is a Contract and How is it Created?

November 15, 2018 Meghan Killian Contract Management  

A Behind the Scenes Look at Contracts

You don’t have to work in legal to come into contact with contracts. If you're in a profession where you request a lot of contracts, it is important to understand how they work. If you feel a little bit lost, don’t fret because we have you covered.

Contracts are agreements between two parties and they can be written, verbal, or both. When you are negotiating the terms of any deal, it's crucial that the expectations are visibly laid out so that everyone has agreed upon understandings and expectations. Contracts not only outline these agreements, but also protect against any breaches or other threats of risk. A company is built on contracts, and therefore it's vital to understand how they work and the value or risk they bring to your organization.

What makes a contract a contract?

While the benefits of contract management are invaluable, there is a lot that goes on behind the scenes to elicit the desired result. Content is organized in a specific manner and written with specific language to protect each party. This creates a vital defense, outlined by elements such as chosen opening language, operative clauses (rights, obligations and representations) and, lastly, execution clauses (defined through the use of signature blocks, schedules, exhibits, or other various attachments). Each element may seem daunting at first, but when broken down step by step we can see why every component is necessary.

The meaning of the word contract may appear ambiguous, especially since there are definition variations that fall under the umbrella of the word “contract.” A contract can be made of one, or hundreds of documents. Conversely, that very same document might appear in many contracts. Companies or parties may use the words deed or deal, neither of which are legal terms. If you run into those words, it is important to clarify the specific terms of the agreement in order to prove its validity. When multiple copies of a contract are made, they’re called counterparts.

Additionally, there are two different types of contracts. Standalone contracts will contain all important terms of the agreement in a single document at the time of signature. Master agreements are a framework of contractual terms for the ordering of products and services is created. There are different types of orders such as purchase orders, work orders, statements of work, and trade confirmations. Since there may be one or more orders being made under one contract, a master agreement typically confirms that the master and all the other orders are legally one comprehensive contract.

Next on Deck

Now that we understand the basics, it is time to put your contract together. The typical contract lifecycle follows a pretty standard plan. There are three major steps by which each contract is compiled:

First: Once the drafts have been authored, red lined, reviewed, and agreed upon by both parties, the final contract is signed (either in person or online), then activated.

Second: Both parties perform the obligations outlined in the contract, allowing for amendments whenever necessary. If necessary, a formal notice may also be sent.

Third: Contracts can be renewed, terminated, or merely expire.

Simple, right? Not exactly. The first draft of a contract is proposed by one party, offering another party the complete set of terms and conditions based on the commercial terms that have been discussed. First drafts generally contain a set of clauses that are standard, which are referred to as boilerplate clauses. Once both parties are in agreement and exchange their edits to the drafts, they will sign the contract.

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Meghan

Meghan Killian is Exari's Marketing Specialist.