Contractual agreement: Overview, definition, and example
What is a contractual agreement?
A contractual agreement is a legally binding arrangement between two or more parties that outlines their rights, responsibilities, and obligations. This agreement is formed when the parties agree to specific terms and conditions, which are enforceable by law. Contractual agreements can be written, oral, or implied, but written agreements are the most common and provide the clearest proof of the terms agreed upon. A contractual agreement ensures that each party understands their commitments and that there are legal remedies available if any party fails to fulfill their obligations.
In simpler terms, a contractual agreement is a deal between two or more people or organizations that sets out what they will do for each other, with the law backing up the agreement.
Why is a contractual agreement important?
A contractual agreement is important because it provides clarity and security for all parties involved. It clearly defines the terms of the arrangement, ensuring that everyone understands what is expected of them. If one party fails to meet their obligations, the other party can take legal action based on the terms of the agreement. Having a formal contract helps prevent misunderstandings, resolves potential disputes, and offers protection if things go wrong.
For SMB owners, understanding and using contractual agreements is essential for ensuring that business relationships, such as with suppliers, clients, and employees, are clearly defined and legally enforceable.
Understanding contractual agreement through an example
Imagine your business is hiring a contractor to complete a project. You and the contractor agree on the scope of work, deadlines, payment terms, and other details. To make the agreement official, you both sign a written contract that outlines these terms. The contract serves as a legal record that both parties have agreed to the terms and provides protection if any issues arise, such as the contractor failing to meet deadlines or deliver the work as promised.
In this case, the contractual agreement ensures that both your business and the contractor are clear on what is expected and provides legal recourse if the terms are not met.
Example of a contractual agreement clause
Here’s an example of what a contractual agreement clause might look like in a business contract:
“The Contractor agrees to perform the services described in Exhibit A, and the Client agrees to pay the Contractor a total amount of [$X] upon completion of the services. The services must be completed by [specific date], and any delays will result in a penalty of [$Y] per day.”
Conclusion
A contractual agreement is a vital tool for ensuring that business transactions and relationships are clear, fair, and legally enforceable. For SMB owners, using contracts helps define expectations, prevent disputes, and provide a legal framework for addressing issues that may arise. Whether hiring employees, partnering with other businesses, or securing suppliers, a well-written contractual agreement offers protection and helps maintain smooth, professional business operations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.