Definitions of terms commonly used in legal contracts
Are you not quite sure exactly what some of the terms in your legal contracts mean? You ought to be! Use this plain English glossary of the most commonly used business legal terms to make sure you fully understand your obligations and commitments:
Acceptance - the unconditional agreement to an offer. This creates the contract. Before acceptance, any offer can be withdrawn, but once accepted the contract is binding on both sides.
Agent - somebody appointed to act on behalf of another person - known as the principal. The amount of authority that the agent has is subject to agreement between the principal and the agent. However, unless told otherwise, third parties can assume the agent has full powers of authority.
Arbitration - using an independent third party to settle disputes without going to court. The third party acting as arbitrator must be agreed by both sides. Contracts often include arbitration clauses nominating an arbitrator in advance.
Breach of contract - failure by one party to a contract to uphold their part of the deal. A breach of contract will make the whole contract void and can lead to damages being awarded against the party which is in breach.
Collective agreement - term used for agreements made between employees and employers, usually involving trade unions. They often cover more than one organisation. Although these can be seen as contracts, they are governed by employment law, not contract law.
Comfort letters - documents issued to back up an agreement but which do not have any contractual standing. They are often issued by a parent or associate company stating that the group will back up the position of a small company to improve its trading position. They always state that they are not intended to be legally binding.
Company seal - an embossing press used to indicate the official signature of a company when accompanied by the signatures of two officers of the company. Since 1989 it has been possible for a company to indicate its agreement without use of the seal, by two signatures from the directors or company secretary, plus a formal declaration. However, some companies still prefer to use a seal and the articles of a company can override the law and require a seal to be used.
Conditions - major terms in a contract. Conditions are the basis of any contract and if one of them fails or is broken, the contract is breached. These are in contrast to warranties, the other type of contract term, which are less important and will not usually lead to a breach of contract - but rather an adjustment in price or a payment of damages.
Confidentiality agreement - an agreement made to protect confidential information if it has to be disclosed to another party. This often happens during negotiations for a larger contract, when the parties may need to divulge information about their operations to each other. In this situation, the confidentiality agreement forms a binding contract not to pass on that information whether or not the actual contract is ever signed. Also known as a non-disclosure agreement.
Consideration - in a contract each side must give some consideration to the other. Often referred to as the quid pro. Usually this is the price paid by one side and the goods supplied by the other. But it can be anything of value to the other party, and can be negative - eg someone promising not to exercise a right of access over somebody else's land in return for a payment would be a valid contract, even if there was no intention of ever using the right anyway.
Consumer - a person who buys goods or services but not as part of their business. A company can be a consumer for contracts not related to its business - especially for goods or services it buys for its employees.
Due diligence - the formal process of investigating the background of a business, either prior to buying it, or as another party in a major contract. It is used to ensure that there are no hidden details that could affect the deal.
Employment contract - a contract between an employer and an employee. This differs from other contracts in that it is governed by employment legislation - which takes precedence over normal contract law.
Exclusion clauses - clauses in a contract that are intended to exclude one party from liability if a stated circumstance happens. They are types of exemption clauses. The courts tend to interpret them strictly and, where possible, in favour of the party that did not write them. In customer dealings, exclusion clauses are governed by regulations that render most of them ineffective but note that these regulations do not cover you in business dealings.
Exemption clauses - clauses in a contract that try to restrict the liability of the party that writes them. These are split into exclusion clauses that try to exclude liability completely for specified outcomes, and limitation clauses that try to set a maximum on the amount of damages the party may have to pay if there is a failure of some part of the contract. Exemption clauses are regulated very strictly in consumer dealings but don't apply for those who deal in the course of their business.
Express terms - the terms actually stated in the contract. These can be the written terms, or verbal ones agreed before or at the time the contract is made - see implied terms.
Franchising - commercial agreements that allow one business to deal in a product or service controlled by another. For example, most car manufacturers give franchises to sell their cars to local garages, who then operate using the manufacturer's brand.
Going concern - accounting idea that a business should be valued on the basis that it will be continuing to trade and able to use its assets for their intended purpose. The alternative is a break-up basis, which sets values according to what the assets could be sold for immediately - often much less than their value if they were kept in use.
Implied terms - terms and clauses that are implied in a contract by law or custom and practice without actually being mentioned by any party. For example, in a contract to supply services there is an implied term that the service will be carried out with reasonable care and skill. Terms implied by custom and practice can always be overridden by express terms, but some terms implied by law cannot be overridden, particularly those relating to consumers - see exemption clauses.
Incorporate - inclusion in, or adoption of, some term or condition as part of the contract. It differs from its company law definition where it refers to the legal act of creating a company.
Injunction - a remedy sometimes awarded by the court that stops some action being taken. It can be used to stop another party doing something against the terms of the contract. Injunctions are at the court's discretion and a judge may refuse to give one and award damages instead.
Joint and several liability - where parties act together in a contract as partners they have joint and several liability. In addition to all the partners being responsible together, each partner is also liable individually for the entire contract - so a creditor could recover a whole debt from any one of them individually, leaving that person to recover their shares from the rest of the partners.
Joint venture - an agreement between two or more independent businesses in a business enterprise, in which they will share the costs, management, profits or benefits arising from the venture. The exact shares and responsibilities will be set out in a Joint Venture Agreement.
Jurisdiction - a jurisdiction clause sets out the country or state whose laws will govern the contract and where any legal action must take place. Don't forget that England and Scotland have different legal codes, and this may need to be specified.
Liability - a person or business deemed liable is subject to a legal obligation. A person/business that commits a wrong or breaks a contract or trust is said to be liable or responsible for it.
Limited liability - usually refers to limited companies where the owners' liability to pay the debts of the company is limited to the value of their shares. It can also apply to contracts where a valid limitation clause has been included in the terms.
Liquidation - the formal breaking up of a company or partnership by realising (ie selling or transferring to pay a debt) the assets of the business. This usually happens when the business is insolvent, but a solvent business can be liquidated if it no longer wishes to continue trading for whatever reason.
Misrepresentation - where one party to a contract makes a false statement of fact to the other which that other person relies on. Where there has been a misrepresentation then the party who was misled can get damages for their loss.
Non-executive director - a director who does not work directly for a company but advises the other directors. Non-executive directors have the full powers and authority of any other director and can bind the company to any contract.
Offer - an offer to contract must be made with the intention to create, if accepted, a legal relationship. It must be capable of being accepted, ie not containing any impossible conditions, must also be complete, ie not requiring more information to define the offer, and not merely advertising.
Parent company - where one company owns more than 50 per cent of the voting rights of another company it is the parent of that company which in turn becomes its subsidiary. It can also occur where the parent has less than 50 per cent but can control the board of directors of the subsidiary - that is, it has the power to appoint and remove directors without referring to other shareholders.
Partnership - when two or more people or organisations join together to carry on a business.
Proxy - a person who acts on behalf of another for a specific purpose, or the form used to make such an appointment. In a company a shareholder can appoint a proxy to attend a meeting and vote on their behalf.
Quorum - the minimum number of people needed at a meeting for it to proceed and make any decisions.
Ratification - giving authority to an act that has already been done. A company general meeting resolution can ratify an act previously done by the directors, or a principal can choose to ratify the act of an agent that was beyond the specified power of the agent.
Registered Office - the official address of the company as stated on the register at Companies House. Any documents delivered to this address are considered to be legally served on the company.
Repudiation - has two meanings in contract law:
where a party refuses to comply with a contract and this amounts to a breach of contract
OR
where a contract was made by a minor (a person under the age of 18) who then repudiates it at or shortly after the age of 18. In this instance the repudiation voids the contract rather than causing a breach of contract.
Restrictive covenant - is often included in long-term contracts and contracts of employment to stop the parties working with competitors during the period of the agreement and for some time thereafter. However, unless carefully written the courts will see them as being a restraint of trade and will not enforce them.
Service contract - directors and officers of a company are usually given service contracts that are different to an employment contract. This is because directors and officers are not always employees and the effect of employment law is different.
Shareholders' agreement - an agreement between all of the shareholders about how the company should be run and the application of the rights of the shareholders. This acts as a contract between the shareholders. The company itself is not bound by it, as it is not a party to the agreement.
Subject to contract - words used on documents exchanged by parties during contract negotiations. They denote that the document is not an offer or acceptance and negotiations are ongoing. Often the expression ‘without prejudice’ is used when what is really meant it ‘subject to contract’.
Trademark - a registered name or logo that is protected by law. Trademarks must be granted through the Patent Office.
Underwriter - a person who signs as party to a contract. Now usually only applied to insurance contracts where the underwriters are those who agree to bear all or part of the risk in return for the premium payments.
Unfair terms - some terms are made unfair by legislation and will not be enforced by the courts and may even be interpreted against the person who included them in the contract. The legislation mainly protects consumers, but can also apply where there is a business-to-business contract in which one party is significantly more powerful than the other.
Void - a void contract is one that cannot be performed or completed at all. A void contract is void from the beginning and the normal remedy, if possible, is to put things back to where they were before the contract. Contracts are void where one party lacks the capacity to perform the contracted task, it is based on a mistake, or it is illegal.
Warranties - promises made in a contract, but which are less than a condition. Failure of a warranty results in liability to pay but will not be a breach of contract unlike failure of a condition, which does breach the contract.
Without prejudice - a term used by solicitors in negotiations over disputes where an offer is made in an attempt to avoid going to court. If the case does go to court no offer or facts stated to be without prejudice can be disclosed as evidence.
Based on an article by BusinessLink