Contract Terminology: Contract terms you need to know (2023)

Assuming you’re not a legal professional, if you’ve ever read through a contract in detail, you’ll likely have come across a number of unfamiliar contract terminology that you’ve probably not seen in any other circumstances.

There’s a broad range of contractual terms, including various latin phrases, which are used in legal documents and will be understood by those drafting them on behalf of businesses.

This legalese can be a impenetrable to the layman and can create an unnecessary barrier to all parties being able to fully understand the content of a contract.


In order to help you overcome any unfamiliarity with clauses in a contract, we’ve created this handy jargon-buster, which outlines the commonly-understood meanings of contract terminology.

It’s worth pointing out that it’s not exhaustive and you should still consult with a legal professional if you’re looking to create or amend an official document, even if it's edits to common contract terms.

In the meantime however, if you’ve ever been flummoxed by a legal contract termsuch as “force majeure” or “mutatis mutandis” then read on.

Contract terminology Glossary

You can visit our contract terminology glossary for a comprehensive list of legalese. Below are some of the most important phrases you need to know.


Ab Initio (Ab Init): Latin, meaning from the beginning.

Alternative Dispute Resolution (ADR): methods of attempting to resolve a dispute without going to court. Arbitration, Mediation and negotiation are types of ADR. Contracts may contain a clause requiring the Parties to that contract to follow specific processes if a contract-related disagreement occurs. Such a clause may prevent a Party from starting court proceedings at all or without first following the prescribed process.

Arbitration: a method of dispute resolution where a private tribunal determines the resolution of a dispute between the Parties to a contract.

Assignment / Novation: the Parties to a contract may, under agreed conditions, transfer or assign (novate) any of their liabilities, rights or obligations under the contract to a third party.

Bankruptcy: the official legal status of a person or organisation that cannot repay the debts owed to creditors.

Bona Fide: Latin, meaning in good faith. Usually implies a level of trust that the Parties to a contract are acting honestly without any hidden motives.

Breach of Contract: failure by a Party to a contract to comply with one or more Conditions of the contract. A breach of contract will make the whole thing Void and can lead to Damages being awarded against the breaching Party.

Capitalised Terms: A word or a group of words can be defined to have specific meaning in a contract, to prevent misinterpretation of that word or group of words. By convention, such definitions are indicated by capitalising the first letter of each word in the term, such as 'Building' or 'High Value Property'. The definitions may be pre-defined, appearing in a specific definitions clause, where each defined term is followed by the desired meaning of that term. Definitions may also or instead be post-defined, appearing in the body of any particular clause after a group of words, such as 'Duties are to commence between 6am and 8am ('Start Time')'.

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Caveat Emptor: Latin, meaning let the buyer beware. The buyer is responsible for ensuring that what they are acquiring under a contract is really what they want. An error of judgement by the buyer in this regard is not grounds for making the contract.

Condition: an essential or fundamental term in a contract. Failure of a condition results in Breach of Contract.

Confidential: a secret or something that should not be disclosed except under specified circumstances.

Consideration: the benefit given by each Party to a contract to the other Party in exchange for the contractual promise of another Party to the contract. The benefit exchanged can be something physical like equipment, monetary, behavioural like an action or inaction, anything that has some value to the provider of the benefit.

Counterpart: a copy of a contract, often created so that each Party to the contract may have its own copy. A contract may contain a Counterparts clause allowing the Parties to each sign their own copy of the contract rather than require all Parties to sign the one copy.

Cure Period: when a Default occurs, the breaching Party may have a certain period of time to cure the Default before the non-breaching Party is allowed to exercise Remedies. The non-breaching Party may need to give notice to the breaching Party before the time period.

Damages: an amount of money sought or awarded to a Party to a contract to compensate for the loss that Party has suffered due to a Breach of Contract.

Deed: a special type of legally binding and enforceable contract that does not require Consideration to pass from one Party to another.

Default: the circumstances where a Party to a contract is considered to be in Breach of Contract.

Deliverables: a collective name for all those tangible things that a Party to a contract is required to supply, often by an agreed date.

Entire Agreement: a clause in a contract stating that the written document is the complete understanding between the Parties. Any statement or promise made by a Party to the contract that is not in that written document will not be considered part of the legally binding contract, and cannot be relied upon in relation to the contract.

Excuse: something that forgives performance and bars enforcement of a contract. If performance of a contractual obligation of a Party to the contract is excused, this relieves the non-performing Party of liability with respect to that obligation.

Express Terms: the terms actually written in a contract or verbally agreed before or at the time the contract is made. See Implied Terms.

Force Majeure: the circumstances or situations described in a contract that may prevent one or more of the Parties to the contract from performing their contractual obligations. The occurrence of such circumstances or situations may excuse the affected Party.

Governing Law: the union, country or state / provincial laws applicable to a contract. The Governing Law will be used by the courts to interpret and make decisions about the contract in the event of a contractual dispute where the Parties are not based in the same union, country or state / province. This clause is normally coupled with a Jurisdiction clause.

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Implied Terms: the terms that are implied in a contract by law, custom and practice without actually being mentioned in writing or verbally by any Party to the contract. Terms implied by custom and practice can always be overridden by Express Terms, but some terms implied by law cannot be overridden at all.

Indemnity: a contractual obligation on a Party to a contract to compensate for any loss another Party to the contract may suffer in the circumstances that are the subject of the Indemnity, such as payment of reasonable court costs in the settlement of a contractual dispute.

Injunction: a court order sought by a Party to a contract to make another Party to the contract do or stop doing something. It is sought urgently where the whole purpose of the contract would be defeated and Damages would not adequately compensate the Party seeking the Injunction for the loss it is likely to suffer from the other Party’s actions or omissions.

Insolvency: the situation where a person or business is unable to meet their financial obligations. See Bankruptcy, Liquidation and Receivership.

Intellectual Property Rights (IPR): legal rights relating to the ownership of intellectual, industrial or artistic work, including, Inter Alia, patents (inventions), designs (graphics), trademarks (names or marks used to identify goods) and copyrights (rights of authorship).

Inter Alia: Latin, meaning among other things. This is often used in contracts to indicate that what is being specifically referred to is part of a larger group without having to name all the elements of the group.

Joint and Several Liability: in a contract where the Parties act together as partners, as well as being responsible together, each Party is also individually liable for the entire contract.

Jurisdiction: the place where a Party to a contract without any Alternative Dispute Resolution clause must bring court proceedings if there is a dispute about the contract.

Key Performance Indicator (KPI): a qualitative or quantitative factor that can be measured to assist in determining whether or not a contract is, or is on track for, meeting its objectives. KPIs should be regularly and systematically reviewed in order to identify any issues or concerns as early as possible.

Liability: a Party to a contract's legal obligation, on its Breach of Contract, to compensate another Party to the contract for any harm so caused.

License: a method by which the owner of physical or Intellectual Property (the licensor) allows someone else (the licensee) to use it in some prescribed manner, typically but not always for a royalty or a fee.

Limited liability: a Party to a contract's financial liability may be limited to a fixed sum, commonly some fraction or multiple of the value of the fees paid by another Party to the contract over the preceding 12 months.

Liquidated Damages: a contract provision that estimates and fixes in advance the sum payable as Damages for a Party to the contract's Breach of Contract.

Liquidation: the formal dissolution of a business by the sale or transfer of its assets to pay a debt. This often occurs as a result of Insolvency, but a solvent business can be liquidated if it no longer wishes to continue trading.

Litigation: the conduct of court proceedings to resolve a dispute.

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Mala Fide: Latin, meaning in bad faith, opposite of Bona Fide.

Material Breach: a Breach of Contract which has a serious, not merely trivial or inconsequential, effect on the benefit which the non-breaching Party to the contract would otherwise have gained from the contract.

Mediation: a form of Alternative Dispute Resolution where an independent person meets with the Parties to a contract to help them formulate their own resolution to a conflict.

Mutatis Mutandis: Latin, meaning changing whatever ought to be changed.

Obligation: something which must or must not be done by one or more Parties to a contract.

Party: Any individual, group or organisation participating in a contract. 'Parties' has a corresponding meaning.

Period: The length of time a contract is expected to be in force (see also 'Term').

Pro Rata: Latin, meaning for the rate, or assigning an amount to a fraction according to its share of the whole.

Pro Tempore (Pro Tem): Latin, meaning for the time being.

Quid pro quo: Latin, meaning something for something. The basis for definition of Consideration in a contract, where each Party to the contract should offer something to the other.

Receivership: the appointment of a licensed insolvency practitioner to take over the running of a business that cannot meet its financial commitments.

Recitals: A section in a contract that states who the Parties are and their reasons for entering into the contract. Sometimes called 'Background' or 'Preamble'.

Remedies: the measures, including Damages and Injunctions, that can be taken by a court to help a Party to a contract in the event of Breach of Contract by another Party to the contract.

Representations: statements or promises made as a fact by one Party to a contract to another Party to the contract.

Rights: the things a Party to a contract is entitled to do or not do as the case may be.

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Risk of Loss: allocation of responsibility for covering the risk of damage to or loss of goods being transported long distances after a sale has been completed, but before delivery has occurred. If the seller bears risk of loss during transport, the seller has a responsibility to provide substitute goods should the goods get lost or destroyed in transit. If the buyer bears risk of loss, the buyer generally must pay for the goods, even though they never arrive. Often parties cover the risk of loss with insurance.

Severability: the allowance a contract for removal or correction of portions of the contract that are incorrectly or illegally drawn up, allowing the remainder of the contract to be valid and enforceable.

Term: either (a) the length of time for which a contract operates (see Period) or (b) any contract clause (see Condition).

Termination for cause: a contract may identify the conditions under which a Party to the contract could terminate a contract due to another Party's material breach of the contract, such as becoming bankrupt or insolvent, failing to comply with confidentiality provisions, or failing to perform obligations due to a force majeure event. Depending on the nature of the breach, the non-breaching Party may terminate the contract immediately with or without notice, or provide the breaching Party with prior notice and an opportunity to cure the breach within a certain time frame, after which the contract may be terminated if the breach remains uncured.

Termination for convenience: a contract may allow one or more Parties to the contract to unilaterally terminate the contract without providing the other Parties to the contract with any reason. Such termination may only be allowed at certain times such as on the contract anniversary or following the end of any initial term, may require some minimum notice period, and could require payment of an early termination fee by the 'buying' Party or the refund by the 'selling' Party of the unused portion of any prepaid fees.

Territory: any geographical area where a contract has force.

Third Party: an individual, group, organisation or other legal entity (eg. a company) that is not a Party.

Time is of the Essence: a statement indicating that the times specified in a contract are so critical that if one Party to the contract does not comply with the timing requirements, another Party to the contract can immediately Terminate for Cause.

Variation: the method agreed by the Parties to a contract for making changes to the contract after it has been signed. It usually requires that any change to the contract be in writing signed by all Parties.

Void: making a contract unenforceable in law.

Waiver: an intentional surrendering of rights by a Party to a contract. A 'no waiver' clause can be agreed stating that no provision in the contract may be waived, except by means of a writing signed by the Party to the contract against whom a waiver is sought.

Warranties: promises made in a contract. Failure of a warranty results in liability to pay Damages.

To better understand how to manage your contracts, you can download our free "Guide to Contract Management". This 38-page ebook covers all the stages of the contract lifecycle and gives you useful checklists for every step.

Contract Terminology: Contract terms you need to know (1)

FAQs

What are the important terms in a contract? ›

These include indemnification, force majeure, copyright, termination, warranties and disclaimers, and privacy. Without including these important clauses in your business contracts, you may find yourself facing exorbitant legal fees, legal battles that could last for years, and intellectual property theft.

What are the 7 elements of a contract? ›

For a contract to be valid and recognized by the common law, it must include certain elements— offer, acceptance, consideration, intention to create legal relations, authority and capacity, and certainty. Without these elements, a contract is not legally binding and may not be enforced by the courts.

What are the 10 essential elements of a contract? ›

Table of contents
  • Ensure your agreement is valid and enforceable.
  • Contractual Offer.
  • Contract Acceptance.
  • Signatory Awareness.
  • Contractual Consideration.
  • Contractual Capacity.
  • Contract Legality.
  • In closing.

What are the 5 main elements of most contracts? ›

A contract is a legal agreement between two or more parties in which they agree to each other's rights and responsibilities. Offer, acceptance, awareness, consideration, and capacity are the five elements of an enforceable contract.

What four 4 essential terms does a contract need? ›

A contract is an agreement between parties, creating mutual obligations that are enforceable by law. The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.

What are the 3 main requirements for a contract? ›

Elements of a Contract
  • Offer - One of the parties made a promise to do or refrain from doing some specified action in the future.
  • Consideration - Something of value was promised in exchange for the specified action or nonaction. ...
  • Acceptance - The offer was accepted unambiguously.

What are the six 6 key requirements for forming a contract? ›

There are six elements that make a contract legally binding or valid.
...
  • 1 Offer and acceptance. ...
  • 2 Intention to create legal relations. ...
  • 3 Consideration. ...
  • 4 Legal capacity. ...
  • 5 Consent. ...
  • 6 Illegal and void contracts.
Jul 1, 2021

What are the 8 essential elements of a contract? ›

The Essential Elements Of Contract are offer, acceptance, consideration, consent ,capacity, legality, meeting of minds.

What makes a contract legally binding? ›

Generally, to be legally valid, most contracts must contain two elements: All parties must agree about an offer made by one party and accepted by the other. Something of value must be exchanged for something else of value. This can include goods, cash, services, or a pledge to exchange these items.

What are the 5 components of the contract documents? ›

What are the Basic Contract Documents ?
  • Contract Agreement. ...
  • Scope of Work Definition. ...
  • General Conditions. ...
  • Special Conditions. ...
  • Bill of Quantities. ...
  • Work Schedule. ...
  • Drawings. ...
  • Technical Specifications.

What is the most basic rule to a contract? ›

Offer and Acceptance

The most basic rule of contract law is that a legal contract exists when one party makes an offer and the other party accepts it. For most types of contracts, this can be done either orally or in writing.

What are the most important clauses in a contract? ›

One of the essential elements for a contract to be considered valid is consideration. Consideration can be monetary or it may take the form of a promise to carry out a particular act (such as services, money, etc.). Duration of Payment: Time based payments – every 30 days, 45 days, etc.

What are the 4 classifications of contracts? ›

In general, contracts are classified along four different dimensions: explicitness, mutuality, enforceability, and degree of completion.

What are the 4 legal elements of an enforceable contract? ›

There are 4 elements of a contract, namely, an offer made by the offeror, an acceptance of that offer by the offeree, intention of the parties to create legal relations and consideration passes between the parties.

What makes a contract invalid? ›

If the subject matter is illegal, the contract will not be valid. All terms of your contract must not contravene any federal or state law. If the formation or performance of the contract will require a party to break the law, the contract is invalid.

What makes a contract null and void? ›

Updated October 7,2020: A null and void contract is a formal agreement that is illegitimate and, thus, unenforceable from the moment it was created. Such a contract never comes into effect because it misses essential elements of a properly designed legal contract or violates contract laws altogether.

What are the six elements of a valid enforceable contract? ›

If it is proven that an agreement has been reached, the agreement is generally considered a legally binding contract if all six elements of a contract are present. The six elements are offer, acceptance, consideration, intent, legality and capacity.

What are the parts of a contract called? ›

Contracts are made up of three basic parts – an offer, an acceptance and consideration. The offer and acceptance are what the purpose of the agreement is between the parties. A public relations firm offers to provide its services to a potential client.

What contracts are void? ›

A void contract is legally invalid from the moment the two parties sign it because it's illegal or violates public policy. Examples of a void contract include contracts where the parties agree to do something illegal, like committing a crime, or otherwise against the law even if the thing agreed upon isn't a crime.

What makes a contract void or illegal? ›

A voidable contract is one that a party is entitled to rescind, or to have set aside by the court, by reason of some external act or event that precedes the contract and constitutes an improper inducement to enter into it (eg misrepresentation, undue influence or duress).

What's the difference between an agreement and a contract? ›

A contract is an agreement, but an agreement is not always a contract. An agreement can be informal or it may be written; a contract may be verbal or written, but a contract will always be enforceable if it contains certain requirements.

Which contract is forbidden by law? ›

"... A void contract is one which has no legal effect.

How do I make a contract checklist? ›

A comprehensive breakdown of the contract checklist should include:
  1. Identifying the Parties. Name of each business or individual. ...
  2. Addresses of Each Party.
  3. Underlying Assumptions. This is what is expected of each party within the contract.
  4. Purpose of Contract.
  5. Terms. ...
  6. Disclaimers.
  7. Applicable state law considerations.
  8. Warranties.

What are the three main terms of a contract? ›

Typically, contract terms can be defined into three categories: conditions, warranties, or innominate terms.

What 3 things must a contract have? ›

Elements of a Contract
  • Offer - One of the parties made a promise to do or refrain from doing some specified action in the future.
  • Consideration - Something of value was promised in exchange for the specified action or nonaction. ...
  • Acceptance - The offer was accepted unambiguously.

What is the most important term in a valid contract? ›

1. Offer. The first element in a valid contract would be offer. An offer or a promise or an agreement needs to be in contract because if there is no offer than there will be no contract.

What are the 6 essential elements of a legally binding contract? ›

The Nature of a Contract

To be legally enforceable, an agreement must contain all of the following criteria: An offer and acceptance; Certainty of terms; Consideration; An intention to create legal relations; Capacity of the parties; and, Legality of purpose.

What are the four 4 key elements required to ensure a contract is enforceable at law? ›

There are four main elements of a contract, including offer, acceptance, intention to create a binding legal relationship and consideration. Can a Verbal Contract be Enforced?

What is the most ignored clause in a construction contract? ›

Dispute resolution clauses: These clauses are the most ignored of the 5 key clauses. This is because hope springs eternal at the start of a project and no one thinks a dispute will arise.

What are the 8 elements of a contract? ›

Essential elements of a valid contract
  • Offer and Acceptance.
  • Intention to Create Legal Relationship.
  • Capacity to Contract.
  • Genuine and Free Consent.
  • Lawful Object.
  • Lawful Consideration.
  • Certainty and Possibility of Performance.
  • Legal Formalities.

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