Contracts 101: Must-Know Training for Non-Lawyers

A Primer on Contracts

Contracts are fundamental to almost every business transaction. From agreements with customers to terms of private employment to larger development and supply arrangements, contracts are the lingua franca of commercial relationships. However, most people are not lawyers and might have little idea what lawyers mean when they talk about "contract formation," "terms and conditions," "legally binding" or even "party." All you really need to know – logically and in a business context – are the basics of contracts, including offer and acceptance and consideration.
Simply put, a contract is a legally-enforceable agreement between parties, who can be individuals, companies, associations and other legal entities. The agreement may be for something valuable, such as goods, services, intellectual property, money or proprietary information. Both parties must agree to the terms. The agreement may be formal, in that the parties discuss its terms then execute a written document, or it may be informal, such as when you hire a babysitter for an evening. When parties agree to something informally, however, the agreement may not be legally binding.
In order for a contract to be binding and legally enforceable, there must be an offer, acceptance and consideration (among other things). A contract is formed when one party (offeror) makes an offer to another party (offeree), and the offeree accepts the offer. For there to be an offer, there must be a specific promise or commitment to enter into a specific agreement. That offer must be clear enough that a reasonable person would be able to tell if the offer has been made, and by accepting the offer, the other party agrees to the specific terms.
Not any promise or general offer will constitute a valid offer. A general "invitation to treat," including advertisements, "calls for tenders," catalogs or price lists, would not be considered offers because an offer is an actual proposal. An offer must be sufficiently serious or explicit that if accepted , it would create a valid contract between the parties.
A counteroffer is an offer made in response to the original offer. A counteroffer will change the terms of the initial offer, and thus create a new offer which, upon acceptance, would form an agreement with the original offer. If the counteroffer is accepted, then a disagreement over the original contract will form a binding contract. So, when you quote a price for services, and the customer responds with a lower price, that is actually a new offer.
There is a great deal of emphasis on the "consideration" aspect of a contract. Consideration means some kind of exchange of value. Legally, there must be at least one monetary term that both parties intend to be binding, such as a price, discount, decrease in payment, promise to pay or waiver of a claim, or else the contract cannot be valid. A contract without consideration is as if there were no contract at all.
Unless otherwise agreed, a contract comes into effect when one party provides or performs the object of the contract (the acceptance) and the obligations required of that party are fulfilled. If a party significantly changes the terms of the contract before the other party performs, that party has counter offered and the contract is not binding. And there must be an intention that the parties are entering into a legally binding agreement. This means, for example, if an initial contract includes the same subject matter as an earlier negotiation, but has no intention of incorporating the terms and duties of that previous "agreement," the new contract will not form a binding agreement.
The elements of a legally binding agreement are basic knowledge for anyone who will be working with contracts. We cover the details and nuance of contracts elsewhere. But unless you are a lawyer, and unless you plan on doing contract work, this is all you need to know.

Types of Contracts

The types of contracts which the non-lawyer may encounter fall into a number of different categories, as described below.
Service agreements
A service agreement is a contract for the provision of some form of service or the performance of an activity. The most common type of service agreement is an employment agreement, which is made between an employer and its employees, although there are a variety of different agreements which fall within that category. Other examples include user agreements for social media sites, contents agreements between a publisher and a content contributor, and service agreements in relation to the provision of any form of activity.
Purchase orders
A purchase order specifies purchases of goods on behalf of the purchaser. It is a frequent misunderstanding that a purchase order is a contract for the sale and purchase of goods, but in many instances it may not have the effect of being a binding agreement, despite it having the label of a purchase order. A purchase order may be a stand-alone document or may be created subject to terms and conditions attached to the order or incorporated into the order.
Non-disclosure arrangements
A non-disclosure arrangement protects confidential information that is disclosed in the course of an existence of some form of commercial relationship. Such a relationship may be between parties to a contract or under a Confidentiality Deed, which is sometimes called a non-disclosure deed. Although non-disclosure arrangements are frequently entered into prior to the parties entering into a contract or transaction, they are also entered into at various stages of the life-cycle of a business or project, such as during its operation, in the course of a dispute or prior to the sale of a business, among many others.

Contract Provisions

Affirmative Obligations – These are promises that a party has to perform which benefit the other party. These obligations in the agreement will set forth things such as; a party’s duty to obtain certain consents, submit documents or notices, or pay fees.
Conditions Precedent – This is an obligation that must be performed before a party is required to do anything. These should be reviewed carefully because if not timely done they can allow a party to delay or stop obligations under the agreement.
Representations and Warranties – These are promises in a contract or representations regarding the status of some issue. Generally, they are statements made by one party about something that is material.
Indemnification – An indemnity is a promise to keep another party whole if an event occurs. This has many variations but usually involves one party assuming the damages of another. Generally, this includes payment of reasonable fees and expenses in addition to damage payments.
Termination – This allows a party to terminate the contract generally with the payment of a fee for the most part. However, if the termination is based on a breach of contract assement must be taken to determine the resulting damages.
Liability – These clauses are included to limit or expand liability. They can be broad in their scope and extent or limited to a particular area. This will typically include a cap in the amount of damages along with the duration of liability.
Dispute Resolution – There many forms but most commonly alternative dispute resolution. A review of these clauses is important in knowing how a dispute will be resolved when it arises.

Contract Warning Signs

A crucial component of negotiating and entering into a binding contract is a proper understanding of what the contract does or doesn’t say. A contract that contains ambiguous language or terms could signify an unequal bargaining process, or they could mean that one party to the contract did not fully understand the terms. Contracts with unfair terms may contain payment obligations that are far too high, escrows that are not properly defined, lending language that puts lenders at a disadvantage, or terms that otherwise put one party at a significant disadvantage.
Further, contracts that appear to be overly complicated or take too long to read may be doing so for a reason. Often, parties to a contract will draft the contract in such a way as to obfuscate the real risk, and proper understanding of the contract could prevent the uninformed party from assuming the better bargain. For example, a loan agreement may appear to only be giving a loan on favorable terms, but does it include rights to service the property, rights to sell the property at or near foreclosure, or rights to earn additional fees? Does it include requirements for personal guarantees? Is the true interest rate concealed in complex calculations with "late fees"?
Part of the problem with arbitration clauses and waivers of right to jury trials is that they appear in complex contracts in the middle of thousands of words of other provisions. Further, many of the concerns with arbitration relate to the fact that arbitrators are less likely to decide in favor of consumers while advertising finding in favor of corporations. One way to determine whether or not arbitration clauses may be unfair to one party is to consider whether the arbitration agreement is a "take it or leave it" agreement, or whether both parties have agreed to the arbitration clause.
Other examples of red flags include:
Although the above is by no means an exhaustive list of potential red flags, it may alert a non-lawyer to the possibility that the contract may contain some unwelcome surprises. If anything does seem amiss, that may be an indication that the contract should be reviewed by an attorney.

Tips for Negotiating with Vendors

To adjust the odds in your favor when negotiating contract terms, you can enact a variety of time-tested strategies to strengthen your position and be fully prepared to negotiate. Such strategies include the following: Preparation for negotiation will serve you well — from understanding the business advantages of the contract being negotiated to the concerns and interests of those involved on both sides of the table. Most importantly for non-lawyers , it is best to avoid several common pitfalls before entering into contract negotiations: It is vital to safeguard your interests whenever you are entering into a contract or agreement. Mastering contracts can help you do just that — becoming familiar with the types of contracts that serve the needs of you or your organization, understanding boilerplate contract language and how it can alter your exposure, becoming aware of the potential pitfalls of contract negotiation and implementation, and more. In short, the risk management you seek can be achieved if you understand the processes and procedures involved in contract negotiation and implementation — achieving strong negotiation skills will enable you to protect your interests as best as possible.

Leveraging Technology for Contracts

As the volume and complexity of agreements increase, it is virtually impossible for non-lawyers to stay organized, meet deadlines and understand and fulfill obligations without the use of technology. Contract management software can help non-lawyers keep track of renewal dates and be alerted when an agreement requires attention, and this alone can be valuable in allowing a company to avoid costly missteps.
In addition, storing contracts digitally can provide a central repository for contract versions, allowing non-lawyers to compare terms over time to assist in understanding a contract. Non-lawyers can use technology to assign an agreement’s terms to its provisions to make a contract searchable and thus more manageable, and also to track information associated with particular provisions (such as which vendor is providing a product or service described in a contract provision), eliminating the need for a non-lawyer to search through a physical filing cabinet and multiple agreements to document obligation fulfillment for an audit.
In addition to contract management tools, a variety of technology solutions exist for sales and other executives whose duties may require contract management knowledge. For example, as discussed in a prior blog post, artificial intelligence software programs that can predict the likelihood a company will be able to perform its contractual obligations exist. These artificial intelligence programs do an excellent job of spotting and assigning probabilities to obstacles that may prevent performance under a contract, allowing companies to address issues before they arise.

When to Get Legal Help

There are many reasons one might identify for getting legal advice: you want to be sure that the contract you are drafting is enforceable against the other party or parties; you have been fired and suspect that you have a claim for wrongful dismissal under either tort or contract law; or you are looking to make sense of a complex noncompete agreement signed in the past and whether it is still enforceable. These are just some of the reasons one should seek legal advice when preparing to draft a new contract or encountering legal issues in the workplace.
Getting legal advice before you sign a contract is very important. Even if you think that you understand the contract and what all the clauses mean, it is possible that there is hidden language inside the contract that makes a big difference. In a recent reported decision, the plaintiff sought over $12 million in damages against his former employer and the director of the company. The defendant signed a separation agreement that was more favourable than the standard contract of employment he had signed at the start of his employment. The plaintiff argued that his separation agreement was merely a variation of the employment contract and not a full and final settlement of his claims under the contract of employment. The judge disagreed. The lesson here is that it is better to seek legal counsel to make sure you understand the legal obligations that arise out of the agreements you are entering into. Unless you speak the legal language of the country, it is a good idea to speak to a local lawyer.
If you find yourself in the unfortunate situation of having a workplace issue with your employer, whether it be an injury arising out of the course of employment or because of being wrongfully terminated, the sooner you get legal advice the better. Even though you may be in great pain and do not know what to do to get your life back on track , it is very damaging to your case if you speak to the press or post your thoughts on social media, especially when your employer is involved. Many companies nowadays will use social media to advance their own positions and publicity campaigns both inside their organization and also attempt to discredit the legal arguments of the counter parties. Your lawyer can help devise an appropriate media strategy with you, so that you can take away some of the negatives that can be caused by social media.
Another situation in which you would want to get legal advice is when the law is gray. There are certain terms and conditions in a contract that are not common. For example, you have signed a noncompetition clause that prevents you from competing for business against your former employer. However, the noncompete clause expires in three years. You have also signed a confidentiality clause that prevents you from disclosing any of the confidential information you may have come across over the years. You think that the noncompete and the confidentiality provisions are equal in nature because they both restrict your ability to work. A lawyer will be able to explain to you the real difference between a noncompete clause and a confidentiality clause. In Canada, if you break a noncompete clause and go to work for a competitor, the competitor could be banned from hiring you, and your ex-employer could get damages against the employer and the employee who was working for the competitor. However, if you violate the confidentiality provision, not only could you be sued and have to pay damages, you could also be prosecuted criminally. There is a much graver penalty associated with the violation of a confidentiality clause than the violation of a noncompete clause.