Definitions of contractual terms
Anyone considering or ready to start up his or her own business should be familiar with contractual terms. At times official explanations can seem like it is another language. Use this guide, written in plain English to understand most contractual terms. It is very important to understand what your obligations and commitments are as a business owner.
Acceptance - unconditional agreement to an offer. The agreement creates the contract as solid and binding on both sides. Prior to signing, any party is free to withdraw. Any conditions have the effect of a counter offer and must be accepted by the other party before being valid.
Agent - A person appointed to act on behalf of another - known as the principal. How much authority the agent has is subject to agreement between both parties. If not told otherwise third parties can assume the agent has been given full powers to deal.
Arbitration - an independent third party used to settle disputes out of court. The arbitrator must be agreed upon by both sides. Contracts can have clauses nominating arbitrators in advance in case the need arises.
Breach of Contract - failure by one party to a contract to meet all of the contract agreements. A breach makes the whole contract void and can lead to damages being awarded to the injured party.
Collective agreement - term for agreements made between employees and employers. Usually involves trade unions. These are often covered by more than one organisation and can be seen as contracts but are not governed by contract law. Employment law covers these.
Comfort letters - these have no contractual standing and are used to back up an agreement. Often issued by a parent or associate company to say they will support the smaller company to improve its trading position. They do state they are not intended to be legally binding, and are also known as letters of comfort.
Company seal - an embossing press indicating the official signature of a company when accompanied by the signatures of two officers of the company. Since 1989 companies have been allowed to indicate agreement without using the company seal. Instead the required 2 signatures accompanying a formal declaration. However, a lot of companies still prefer to use a seal. The articles of a company can require a seal be used and override the law if they wish.
Conditions - these are the major terms in a contract. A condition is the basis of any contract. If one fails or is breached the whole contract is breached. These are in contrast to warranties which are less important and don't usually lead to breach of contract, but rather a price adjustment or damages paid.
Confidentiality agreement - Made to protect confidential information if it has to be disclosed to another party. This can happen during negotiations for a larger contract, if either party needs to divulge more information concerning their operations to each other. When this happens the confidentiality agreement forms a binding contract that information will not get passed on to any other party, even if the said contact is never signed. Can be known as a non-disclosure agreement.
Consideration - In a contract each side benefits in some way, they give each other some consideration. Also known as quid pro quo - see Latin contract terms page in this guide. This would usually be a price paid by one in exchange for goods supplied by the other. But anything of value to the other party can be used. The arrangement can also be negative e.g. a promise not to exercise a right of access over another person's land in return for payment. This would be a valid contract even if the person never had an intention of using the right.
Consumer - Anyone who buys goods and/or services but not as a part of their business. Companies can be consumers for contracts unrelated to its business - especially for the goods and services purchased for employees. Charities are also considered to be consumers.
Due diligence - refers to the formal process of investigating the background of a business. This might happen prior to buying it or as another major party in a contract. Used to see there are no hidden details that might affect the deal.
Employment contract - The contract between the employer and employee. It differs from other contracts because it is governed by employment legislation and this takes precedence over normal contract law.
Exclusion clauses - These clauses are designed to exclude one party from any liability should a certain circumstance happen. They are types of exemption clauses. The courts interpret them strictly, and where possible, in favor of the party that did not write them. In the case of customer dealings, regulations govern to make the majority of exclusion clauses useless. But the regulations do not cover the business dealings.
Exemption clauses - these clauses are designed to try and restrict the liability of the party writing them. These can then be divided to become exclusion clauses which try to exclude liability completely for a specified outcome and limitation clauses, which try to set a maximum amount of damages to pay if some part of the contract fails. Exemption clauses are strictly regulated in consumer dealings but don't apply for those deal in the course of their business.
Express terms - The terms that are actually stated in the contract. Can be written or verbal and agreed before, or when, the contract is made.
Franchising - Commercial agreements allowing one business to deal in a product or service governed by another. For example, car manufacturers give a franchise to a local garage to sell their cars under the car manufacturers brand.
Going concern - accounting idea that a business should be valued on the basis of continuing trade and able to use assets for intended purpose. The break-up basis is the alternative which sets values according to what the asset could be sold for immediately. Usually much less than value if kept in use.
Implied terms - some terms and clauses are implied in a contract by law or custom and practiced without being mentioned by any party. An example of this is in a contract to supply services there is an implied term that the services will be carried out with reasonable care and skill. Implied terms by custom and practice can always be overridden by express terms. Some implied terms can't be overridden, particularly those relating to consumers. See exemption clauses.
Incorporate - To include in, or adopt, some term or condition as part of the contract. Different from the company law definition where it refers to the legal act of creating a company.
Injunction - when a court stops a certain action from taking place. It can be used to stop another party moving to do something against the contract. Injunctions are entirely the court's decision, and the judge can refuse to issue and injunction opting to pay damages instead.
Joint and several liability - Where parties act together in a contract as partners they are considered to have joint and several liability. As well as joint responsibility as partners, each individual is also liable for the entire contract. Meaning a creditor could seek to regain a whole debt from any one of the partners. That person would then need to recover the rest of the shares from other partners.
Joint venture - agreement between two or more independent businesses in an enterprise. Both will share costs, management, profits, or benefits arising from the venture. Exact shares and responsibilities are set out in the joint venture agreement.
Jurisdiction - This sets out the country or state that will govern the contract and where any legal action must take place. England and Scotland have different legal codes and this may need to be specified.
Liability - a business or person deemed liable is subject to a legal obligation. A business or person who commits a wrongdoing or breaks a contract/trust is said to be liable (responsible) for it.
Limited liability - In limited companies, an owner's liabilities is dependent upon the value of the shares they own. It may also apply to contracts where a valid limitation clause is included in the terms.
Liquidation - refers to the formal breaking up of a company or partnership by realizing the assets (selling or transferring to pay a debt). Usually when a business is insolvent, but a solvent one can be liquidated if it no longer wishes to trade. See receivership--and the page in this guide on finance contract terms.
Misrepresentation - Where one party to a contract makes a false statement which another party relies on. The party who has been misled can seek damages for their loss. The remedy of rescission - or putting things back how they were before the contact began - may be available. If this is not possible, or is too difficult, the court can award damages instead.
Non-executive director - Dopes not work directly for the company, but advises the directors of the company. Non-executive directors have the same full powers and authority of company directors and can bind the company to any contract.
Offer - an offer to contract must be made with the intention to create a legal relationship. It needs to be capable of being accepted with no impossible conditions and must be a complete offer. Meaning it does not require more information to define the offer, nor is it merely advertising.
Parent Company - if one company owns more than 50% of the voting rights of another company it is the parent company. Can occur if the parent has less than 50% but controls the board of directors of the subsidiary company. This would give the parent company the power to appoint and remove directors without referring to other shareholders.
Partnership - Where two or more people, or organizations, band together and carry on a business as a company.
Proxy - Someone acting on behalf of another person for a specific purpose. Or it can be the term referring to the form drawn up to allow the process to take place. A company shareholder can appoint a proxy (stand-in) to attend meetings and vote on their behalf for example.
Quorum - The minimum amount of people needed to run a meeting and make decisions.
Ratification - to give authority to an act already performed. A company general meeting can discuss and ratify an action taken place by a director. A principal can choose to ratify the act of an agent who may not have had the special power to perform the act or make the decision, but needed to do so under the circumstances.
Registered Office - Official company address as stated to on the Companies House register. Documents delivered to this address are classed as having been legally served to the company.
Repudiation - Has two meanings under contract law. Firstly, this is where a party refuses to comply with a contract. This then leads to a contract breach. Secondly, where a contract is made by a minor (under 18), who then repudiates it at, or soon after, turning 18. This repudiation voids the contract rather than a breach being caused.
Restrictive covenant - often included in long-term contracts and contracts of employment. It stops the parties working with competitors during an agreed period, and sometime thereafter. Unless carefully written the courts can see them as being a restriction of trade and not enforce them.
Service contract - Directors and officers or a company usually sign different service contracts than employees. As they are not always classed as employees and the effect of employment law is different.
Shareholder's agreement - Agreement between all shareholders stating how the company should run and how rights will be applied. This a contract between the shareholders and the actual company is not bound by it as the company is not a party to it.
Subject to contract - These words on the documents are exchanged by parties during negotiation denote the document is not an offer or acceptance. The negotiations are ongoing. Often the expression without prejudice is used when subject to contract is meant.
Trademark - registered name or logo protected by law. These must be granted through the patent office.
Underwriter - A person who signs as party to a contract. Now usually only applied in insurance contracts where the underwriters take all or part of the risk in return for a premium paid. Underwriters at Lloyd's of London are also known as names.
Unfair terms - If terms are made unfair by legislation they will not be enforced by the courts. They could be interpreted against the person who included them into the contract. Legislation mainly protects consumers, but also applies in a business-to-business if one party is significantly more powerful than the other.
Void - a contract that cannot be performed or completed at all is void. A void contract is void from the beginning - see ab initio in the Latin contract terms in this page guide - and the normal remedy.
Warranties - promises made in a contract which are less than a condition. The failure of a warranty results in a liability to pay damages--see page in this guide on finance contract terms. It will not result in a breach of contract like a failure of a condition would.
Without prejudice - term used by solicitors in dispute negotiations where an offer is made in an attempt to avoid court proceedings. If the case continues to court, none of the facts stated to be without prejudice can be used as evidence. Often misused by businesses during negotiation, when they actually mean subject to contract.