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From the smallest local shop to the largest multinational corporation, contracts are vital to the long-term success of any business. They outline the terms to which each side agrees, hold parties accountable for what they will deliver, and safeguard business finances and peace of mind.

The problem is that contracts can be confusing - often, very confusing. How well do you know the fundamentals of contracts and the contracting process? If you answered "not as well as I'd like to," you're not alone.

No matter your title or department, it's important to understand how what goes into your contracts and how they are put together. Explore our three-part introduction to contracts - Contracts 101 - and get up-to-speed today!

Table of Contents

Ready to get back to basics? Welcome to Contracts 101.

Chapter 1:

The Contract

Get an introduction to the most prevalent contract types across industries.


Chapter 2:

The Contract Journey

Learn how a contract goes from an idea to a legally enforceable document.

Chapter 3:

Who's Involved

From sales to legal, explore who plays a role in the lifecycle of a contract.

Chapter 1: The Contract

1.1 What Are Contracts?

Contracts are legally enforceable agreements between two or more parties, either to do or deliver something in return for money (or something of value), or to establish a formal relationship. Contracts can be oral, written, or a combination of oral and written. Written contracts are the best to use to protect your business with precise terms, should you ever end up in court.

1.2 How Is Content Organized in a Written Contract?

Every single word in a written contract has legal implications. Language and the context it is presented in is vital to protect the parties of the contract. During a dispute, content details are examined to determine intent. Contracts are usually organized using the following elements:

  • Opening language, which identifies the parties of the agreement and the effective date. The opening of a contract may also include a recital, or summary of facts or background information about the contract's origins.
  • Operative clauses, which are the details explaining what the parties are agreeing to. Operative clauses are introduced with defined terms, which explains what certain words mean throughout the contract. Clauses are often organized using headings and numbers. Operative clauses may include a statement of priority, which states which part of a contract takes priority over another in case of a conflict. Other clauses may cover the length of the contract or outline termination and renewal terms. Operative clauses usually fall into one of three categories:
    • Rights, which allow either party to do or not do certain things. Some clauses will cover a waiver of rights, meaning although there is the right to do something, the party agrees not to do it.
    • Obligations, which outline what each party must or must not do. Obligation clauses typically include a time definition.
    • Representations, which explain legal facts or information that is relevant to the contract.
  • Execution clauses, which include signature blocks for all appropriate parties to sign and print names. A signature block is typically a tabular layout with boxes or lines where the person (and possibly a witness) can sign and print their name. In some cases, the signature blocks appear at the front of the document with a summary of important terms; this is an optional format and done via preference. Contracts may also include schedules, exhibits, and other attachments, which are used to supplement operative clauses without overloading the main language of the contract. The contract refers to these documents, which are attached as separate documents.

1.3 What Are the Major Types of Contracts?

Common types of business contracts include:

  • Sell-side contracts (sales or revenue agreements), where a business agrees to sell products or services to a customer in return for money.
  • Buy-side contracts (vendor or purchasing agreements), where a business agrees to buy products or services from a supplier and pay money for them.
  • Channel contracts (partner, reseller, or distribution agreements), where a business establishes a relationship with a channel partner that will help sell a product or service.
  • Employment contracts, where employees are hired.
  • Governance contracts (shareholders or partnership agreements), which governs the operations of a business.
  • Confidentiality or nondisclosure agreements

1.4 What Is the Difference Between a Master Agreement and Standalone Contract?

For buy- and sell-side contracts, a standalone contract rolls all important terms into a single agreement at the time of signature.

For buy- and sell-side contracts, a master agreement creates a framework of contractual terms for the ordering of products or services and allows a buyer to make one or more order over time, in an open-ended fashion.

1.5 What Are Other Names for Contracts?

Different industries call classic contracts different names. These include:

  • An insurance policy is a specialized financial service contract where an insurance company sells a compensation service for certain losses
  • loan agreement is a specialized sell-side contract where a lender lends money or provides credit
  • An engagement letter is how legal and professional services firms describe their sell-side contracts
  • software license is a contract that grants a license to use software

1.6 Is a Deed a Contract?

Some contracts are called “Deeds” — for example, a “Deed of Non-Disclosure.” This is a legal quirk whereby a contract is very one-sided because there is a lack of “consideration” from one of the parties, where they don't offer anything of value in the bargain. Contracts executed as “Deeds” may be considered invalid or valid and enforceable despite the lack of consideration. Local laws can vary.

1.7 Is a ‘Deal’ a Contract?

Sometimes the word “deal” is used as a substitute for “contract.” “Deal” is an ambiguous term with no special legal meaning. It is possible, for example, to use “deal” in a way that refers to a set of related contracts between the same parties that happen to be executed at the same time. Or, “deal” can be used synonymously with “contract.” The parties must be clear about what they mean when they use “deal” to describe a contract. The term's validity can be hard to prove, particularly without a written agreement.

1.8 What Is the Difference Between Contracts and Documents?

One contract may be made of several documents. For example, a contract may start as a 20-page agreement on Day 1, then be modified by a two-page amendment on Day 100, then be modified by another five-page amendment on Day 200. At this point, the terms of the contract are contained in all three documents.

Conversely, one document can spawn multiple contracts. For example, an agent signs a single contractual document on behalf of several different people or companies they represent. These parties are called the underlying “principals.” If there are five principals represented by the agent, the one contractual document creates five separate legal contracts.

1.9 Are There Any Rules to Contracts?

Not really. It may be possible to sign a document that amends one contract and creates a new one. There may not be a need for a written document at all. Rules vary by country, region, and industry. Because contracts are often negotiated by at least two lawyers on opposing sides, the end result of the final contract may contain many complex clauses, words, and meanings.

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Chapter 2: The Contract Journey

2.1 What Is the Typical Contract Lifecycle?

A contract will typically follow a lifecycle with the following steps:

  • One of more drafts will be created before the contract is signed
  • The contract will be signed and will be activated
  • The parties perform their obligations according to terms of the contract
  • If the contract is a master, one or more orders may be drafted, negotiated, and signed
  • Parties may change contract terms through amendments over time
  • If certain rights or triggers in the contract require it, parties may send each other formal “notices”
  • A contract may be renewed for a certain term when the original term ends
  • A contract may be assigned or replaced by one party to another, in events such as a merger
  • The contract may expire or be terminated

2.2 What Happens Before the Contract Is Drafted?

Classic pre-contractual processes may include:

  • Informal discussions between parties intending to transact business
  • Formal proposal stage that includes substantial written details that would be expected to be carried into the contract
  • Creation of a formal term sheet or “heads of agreement” containing substantial written details that would be expected to end up in a complete and final contract
  • A request for proposal where proposals are requested and provided

2.3 What Details Are in the First Draft of a Contract?

The first draft of the contract is where one party proposes a complete set of terms and conditions of the contract based on whatever commercial terms have been discussed. There may be an argument over which party gets to complete the first draft in business contracts.

First drafts may contain “boilerplate” clauses, which are common and standard clauses often placed at the backs of contracts. Boilerplate clauses are usually agreed upon and not edited in contracts.

2.4 What Happens During Contract Draft Negotiations?

If both parties are willing to negotiate, the parties will edit and exchange new versions of the contract draft. Sometimes internal approval processes must be met during draft negotiations, which are recorded for audit trail purposes.

2.5 What Happens to the Final Draft of a Contract?

The final draft may need a final formal approval by each party. When the parties arrive at a contract acceptable for everyone, a final draft will be prepared for signature, or “execution.”

2.6 How Are Contracts Signed?

Contracts become active or live when they are properly executed/signed by all parties. Signatures may be “wet” signatures (pen on paper) or “digital” signatures (via an online signature service). Digital signature is convenient but is not yet universally accepted.

Multiple copies may be printed and signed, so when everyone has signed, everyone receives a fully signed contract. Multiple copies are called “counterparts.” The contract may contain a clause that explains that each counterpart, although a separate document, is the same contract.

Parties may also fax or scan signature pages and bind all signature pages to a single document. Because there may be multiple signed counterparts and multiple scanned signature pages, gathering them all together is required to prove there is a full set of signatures. A signed contract is passed to appropriate managers for the contract.

2.7 How Do Orders Fit With Contracts?

For master agreements, the detail of work to be done or products to be supplied will need to be explained in an order document. This order document is likely to be negotiated and approved similarly to a contract and may go through several drafts. Once the order is finalized and signed, the obligations described in that order are binding.

Over time, a master agreement may support many orders. Other names for orders include:

  • Purchase order
  • Work order
  • Statement of work
  • Trade confirmation

A master agreement typically ensures the master and all the orders are legally one comprehensive contract, but each order may be treated as a separate contract that incorporates the terms of the master agreement. The approach that applies should be explained.

2.8 How Are Contract Amendments Carried Out?

There are two forms of contract amendments:

  • simple amendment, which is typically a short document describing only the terms that are changed, leaving most of the original contract terms untouched.
  • An amended and restated contract, which is a consolidation of the original terms plus the amended terms, in a new single document that replaces the original.

Amendments may also go through multiple drafts, approval, and negotiation processes and are only effective when they are signed by all parties.

Orders, assignments, and renewal notices may be considered special cases of amendment.

Amendments can take many forms, depending on the agreed-upon terms of how amendments can be carried out. These may include documents labeled “amendment,” or letters or emails. An amendment document may amend more than one contract, such as when the same two parties have multiple contracts between them.

2.9 What Are Other Names for Contract Amendments?

Amendments are sometimes called “endorsements” in the insurance industry.

In some businesses, “side letters” are used to make modifications. These are usually regarded as amendments but may be considered separate contracts.

2.10 What Are Notices in a Contract?

A notice is a special form of communication specified in a contract that must be followed in certain circumstances. For example, notices may encompass the desire of one party to exercise a right of renewal or termination. To be effective, a notice may need to be sent in a specific format, through a specific channel, to a specific address, to a specific person.

2.11 What Are Contract Renewals?

Unlike “evergreen” contracts with no fixed term or expiration date that require no need for renewal, any contract with a fixed term will expire unless it is renewed. If a fixed term contract has no specifications on renewal, all parties must agree to renew on whatever terms they choose.

In other cases, the contract will describe a renewal process. This usually falls into one of two approaches:

  • An option to renew will give someone the right to renew by following the correct steps. These pre-agreed terms mean there is no need to consult with the other party for agreement. However, if the renewal steps are not followed, the contract will expire.
  • Auto-renewal declares that unless someone follows a pre-determined termination (opt-out) procedure, the contract automatically renews after the expiration date.

2.12 What Are Contract Assignments and Novation?

At some point during the contract lifecycle, there may be an event that requires interest transfer of the contract to someone else. Two classic examples are:

  • Corporate restructure: In this case, certain contracts may need to be transferred or “assigned” from one company to another.
  • Mergers and acquisitions: In this case, two or more separate companies are coming together. The contracts of all merged entities will be transferred/assigned to one surviving legal entity.

Assignment is usually a mini-contract that states as of a certain date, the original party to the contract is replaced by a new party, after which the new party takes on the old party's rights and responsibilities.

Novation is a special type of assignment. If a contract is novated, it has the effect of deeming the new party to have been responsible from the beginning of the contract, as if the old party never existed.

2.13 What Happens During Contract Disputes?

Contract disputes arise when something related to the contract or project changes, and questions come up about who has contractual rights to deal with the problem. The anticipation of disputes should be a factor when creating the contract so that they can be better avoided or dealt with.

2.14 How Does a Contract Come to an End?

Contracts can end by expiring or terminating. Expiry means the contract time period ends, and there is no renewal. Termination ends a contract before it is set to end. The process to terminate the contract is usually explained in the contract. These termination rights may include:

  • Termination “for cause,” which means the “innocent” party can terminate the contract because the other party did or experienced something bad, such as broke the law or failed to perform obligations. The contract will usually contain a list of negotiated events deemed worthy for termination.
  • Termination “without cause,” also called “for convenience,” which means a party can terminate the contract for any reason.

The contract will contain stipulations for timing and mechanism in termination. Also, termination terms may apply to a master agreement and orders. Additionally, a “cross-default” clause may outline the linking of termination events under two or more separate contracts and deem them to be termination events across all contracts. Even when a contract is terminated, certain contractual rights and obligations may still be in effect. For example, these may include nondisclosure obligations, which may last years after a contract is terminated.

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Chapter 3: Who's Involved

3.1 Who Creates Contracts?

The people who may be involved in contract creation include:

  • Business people, including sales or procurements teams, who facilitate a business opportunity worthy of a contract. In some cases, these professionals may be authorized to prepare a first draft contract.
  • Negotiators or lawyers, who may be internal team members or external contractors.

3.2 Who Approves and Signs Contracts?

Approvers are generally designated by a company to handle various aspects of contract signage. A document outlining these responsibilities is sometimes called a “delegation of authority,” and it may contain different approval rules depending on contract value, type of issue, and level of risk.

Approvals can happen at various stages during the contract process:

  • Before the first draft is sent to the other party
  • Before any subsequent negotiated draft is sent back to the other party
  • Before a final draft is signed

The final draft will be signed by authorized people on each side. After signing, all parties should receive a fully executed copy, called a “conformed copy,” of the contract.

3.3. Who Manages Contracts?

The people who manage contracts typically comprise a “back office” operations team and make sure relevant contractual data is captured and made available to various systems. Examples of components to be managed include:

  • Parties of the contract
  • What type of contract it is
  • Effective and expiry dates
  • Contractual obligations for all parties
  • Pricing, discount, and payment terms

3.4 Who Analyzes Contracts?

To enhance business value and minimize risks, parties that may monitor and optimize contracts include:

  • Legal
  • Senior executives
  • Auditors
  • Regulators

3.5 What Are Parties, Third Parties, and Privity?

While devising and executing contracts, it is essential to identify parties to the agreement. A party is someone who is bound by the contract and who can enforce it. A third party is someone who is not a “party” to the contract, who is not bound by it, and who cannot enforce it.

Privity is a legal term. If you are privy to a contract, you are a party, and you can sue to enforce it. If you are not privy to the contract, even if you are mentioned in it, you are not a party and cannot sue to enforce it.

3.6 What Are Principals, Agents, and Trustees?

Contracts may be executed by one entity acting as agent for another entity. In this case, the contract is likely to declare this agency relationship and state that the agent is not a party but are simply signing the contract as agency of the other entity, called the “principal.”

Similarly, a person may enter a contract as trustee for a trust, in which case the party is the trust, and the trustee is the entity that does things for the trust. Because trusts are not legal entities, they must be represented by trustees, which are legal entities.

3.7 What Are Bilateral, Trilateral, and Multilateral Contracts?

  • A two-party agreement is a bilateral contract.
  • A three-party agreement is a trilateral contract.
  • An agreement between four or more parties is a multilateral contract.

For every obligation, right, representation, etc. in the contract, it must be specified which parties relate to each term and to which party each term is owed.

3.8 How Are Individuals, Corporations, and Legal Entities Designated in a Contract?

If a human being is a party, it may make sense to refer to “he” or “she” in a contract. If a corporation, organization, or non-natural person is a party, the contract should describe what type of legal entity it is, such as a company, partnership, government/sovereign, trust, etc.

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