Unless you have legal experience, you’re probably not familiar with many of the Latin phrases and jargon and other complex terminology that makes up most official business contracts. Contract language can be confusing; it’s one of the main reasons why there are so many business lawsuits!
When people don’t understand the terms they are agreeing to, they can’t have accurate expectations of what is required of themselves and the other parties involved. Parties may each interpret ambiguous wording differently, and what was supposed to be a solid, mutually beneficial business deal can instead end up as an expensive, time-consuming court battle. That’s why it is so important to make sure that you fully comprehend any legally binding arrangement that you sign or present before entering into it.
At The Law Office of Josiah Young, P.C., our experienced and highly knowledgeable California contract lawyers draft and review clear, strong contracts that minimize risk and maximize growth. We don’t leave our clients in the dark when it comes to their venture’s future; our goal is to explain, without legalese, exactly what the contract in question will do (and what loopholes it may include) so you can make empowered choices about moving forward.
It all starts with understanding. Here are a few of the most common legal contract terms you may encounter if you are signing or presenting a business contract and what they mean!
Ab initio – A Latin term meaning “from the beginning”. If a contract is declared “void ab initio”, it was invalid from the start, and treated as if it never existed at all.
Abeyance – When referring to real estate agreements, this means a temporary suspension of the right to the ownership of a property or title until the rightful owner is determined (“held in abeyance”).
Acceptance – One of the essential elements of any legally binding contract – the compliance with the terms and conditions of the contract. Without acceptance, the contract can’t be formed. Acceptance can be express (explicit agreement), conditional/qualified (counteroffer agreement), and implied (indicating agreement).
Addendum – An addition of new terms to an existing contract that doesn’t change the original terms.
Alternative dispute resolution (ADR) – Method of resolving a legal disagreement without taking it to court. Arbitration, mediation, and negotiation are all forms of ADR. Some contracts include a clause that prevents parties from initiating a lawsuit without first following a process of attempting alternative dispute resolution first.
Bid (bid amount, bid appraisal, bid conditioning) – A bid is essentially a quote. If a buyer makes an enquiry, and the supplier provides an offer of services, that is a bid. A bid can be assessed (appraisal) and evaluated (conditioning).
Bona fide – A Latin term meaning “in good faith”. Contract law requires all parties that enter into a contract to act in good faith, without intentional deception.
Breach of contract – A failure of one of more parties to uphold the terms of the contract. There are several categories; minor breaches describe when one party doesn’t uphold one part of the contract but ultimately delivers the promised goods/services, major breaches describe when one party delivers something completely different than specified, anticipatory breaches describe when one party knows ahead of time that obligation will go unfulfilled, and actual breaches describe then one party refuses to deliver what was promised.
Consideration – Another one of the essential elements of a contract, without which the agreement can’t be formed. Consideration is where something of value was promised in exchange for the action or nonaction; it is what distinguishes a contract from a gift.
Cure period – When a contract is breached, the contract may set forth a period of time for the party that committed the breach to remedy the situation before the other party can take action against them.
Default – The circumstances that describe when a party to a contract is considered to be in a breach of contract.
Discharge – In contract law, this refers to when both parties have fulfilled their obligations and are released from the contract’s terms.
Force majeure – A common contract clause that defines the specific circumstances that will release parties in a contract from liability (e.g., “Acts of God”).
Forum selection clause – Specifies where the parties will resolve any disputes that arise (a particular court). By accepting this clause, parties may waive the right to file suit anywhere else.
Franchise – A type of commercial agreement that allows one party to conduct business under the product, property, and/or business name of another party.
Frustration – (A “frustrated contract” or “frustration of a contract”). Renders the contract null and void because performance by one or both parties is impossible, though no fault of their own. This is fairly rare.
Indemnification – A promise by one party in a legally binding contract to compensate another party in the contract for a loss under specific circumstances; think of it as an assumption of liability. For example, an insurance company indemnifies an insured client for covered losses they suffer.
Injunction – A court order to stop the actions of another party (or require them to do something). In breach of contract cases, an injunction may be ordered.
Intellectual property rights (IPR) – A broad term relating to rights that the owner of work has. The scope of intellectual property rights including patents for inventions, designs for graphics, trademarks for names or logos, copyrights for authorship, and more.
Inter Alia – A Latin term meaning “among other things”. Often used in contracts to signal that what is being discussed is part of a larger group without having to name all of the elements of that group individually.
Invitation to treat – When a buyer asks for a quote from a seller.
Liability – In contract law, this refers to the legal duty of a party that breaches a contract to compensate the other party for the harm that their failure to fulfill obligations cost.
Limitations Clause – An exemption that sets a maximum amount of compensation a breaching party will have to pay the other.
Liquidated damages – A pre-agreed sum of money that a breaching party will have to pay the other if a breach occurs.
Material breach – Refers to a serious breach of contract that harms the non-breaching party.
Mitigation of damages – A legal principle that requires the affected party in a breach of contract situation to take reasonable steps to reduce the amount and severity of damages suffered. For example, say that a commercial tenant contracts with a plumbing company to fix a leak, but then the company abandons the job, breaching the contract. The commercial tenant cannot just do nothing and allow the leak to worsen, which could lead to mold and warped floors and other issues; they must hire another plumber and seek to fix the problem. It is their legal duty, even though they were wronged, to decrease the effects of the breach as much as it is up to them.
Mutatis mutandis – A Latin phrase that means “by changing those things which need to be changed.” This is frequently used in contracts to signify that a new clause has the same meaning as a previous clause but with state changes. This prevents having to include all the terms of a previous contract in a new one (for example, a service agreement may stay the same, and just have a new date).
Mutuality – This is another essential element of a contract, and refers to a “meeting of the minds” about the agreement. Mutuality means that both parties understood and agreed to the contract’s terms. If there is no mutual agreement, the contract may be deemed unenforceable later.
Novation – The replacement of one of the parties in an agreement between two parties, with the consent of all three parties; “to novate” is to replace the old contract and implement a new one that is the same except for the parties’ names. For example, a sub-lease isn’t a novation, it is an assignment, because the original contract still exists and the primary leaseholder is responsible for the actions of the sub-letter. But if the tenant signs a lease over to another party, that is novation.
Offer – This is another essential element of a contract, where one of the parties makes a promise to take some specified future action (think of it as the beginning of the formal elements). An offer, plus an acceptance, plus mutuality and a few other elements, typically constitutes a legally binding contract.
Pecuniary damages – All damages that can be calculated in terms of monetary amounts.
Principal – The main parties to a contract. May appoint agents or factors to make contracts on their behalf.
Pro tempore – A Latin term meaning “for the time being”.
Quasi contract – A quasi contract is a provision of common law that allows for monetary recovery to occur, even if there wasn’t a legal contract, but the circumstances warrant recovery as though there had been a promise. Think of it as a retroactive agreement. For example, if a pizza is delivered to the wrong address, and the homeowner accepts the pizza, they are obliged to pay for it.
Quid pro quo – A Latin term meaning “something for something”. This concept is the basis of the consideration element of a contract, where each party needs to offer something of value to the other.
Recitals – This term, sometimes called the preamble, refers to the introduction of a contract; an overview or summary of the contract.
Redlining – In the context of contract law, the stage of negotiations where parties make suggested changes and revisions before signing to agreed upon terms.
Rescind – To cancel a contract.
Romalpa clauses/Retention of title clauses – These clauses ensure that ownership of goods pass only on full payment, helping the supplier avoid the consequences if the buyer were to become insolvent.
Severability – A contract provision that renders the rest of the contract still enforceable even if some of the terms are voided.
Signatory – A signer of the contract.
Unconscionable – Contracts may be declared void and may be unenforceable if there is clear unequal bargaining power or one-sidedness. If clauses are clearly in one party’s favor and buried in small print, for example, they may be declared unconscionable.
Waiver – The surrendering of rights by parties to the terms of a contract.
Warranties – Promises made in a contract.
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