Contract law Vocabulary

contract law vocab

While negotiating a contract, we come across several legal terms, many of which have a different meaning than we have known. The legal meaning of some of the most common terms which frequently come across in contract negotiation is given below. Please remember, these are not technical definitions. Rather, these are a general description of the sense of the various terms.

ADR– this is short for alternative dispute resolution, or ways to resolve disputes outside of the courtroom. The term typically encompasses negotiation, mediation and arbitration.

Arbitration– is a well-established and widely used means to end disputes. It is one of several kinds of Alternative Dispute Resolution, which provide parties to a controversy with a choice other than litigation. Unlike litigation, arbitration takes place out of court: the two sides select an impartial third party, known as an arbitrator; agree in advance to comply with the arbitrator’s award; and then participate in a hearing at which both sides can present evidence and testimony. The arbitrator’s decision is usually final, and courts rarely reexamine it.

Assignment– the transfer of rights or duties by the assignor to the assignee. This may occur only by agreement or by operation of law, for example, when someone dies or when a company is bankrupt.

Battle of the Forms– a common business situation where business parties establish their relationship by sending standardized forms to each other. Often, the terms of the forms do not agree, and it can be difficult to tell if the parties have concluded a contract, and if so, what the terms of that contract are.

Boilerplate- the clauses, generally appearing at the end of a contract, which are used to settle general matters such as choice of law, notice procedures, amendment procedures, interpretation issues, dispute resolution mechanisms and the like. The term also has a more general definition meaning any standardized or preprinted form for agreements. The term is also used to talking about the ‘small print’. For example, the small print after a TV commercial about a product or contest which list all the various restrictions.

Choice of Law or Governing  law- often, the parties to a contract will specify which rules of law should be used to resolve any dispute between them. Particularly in international transactions, the choice of law can be a significant point of negotiation among lawyers. Choice of law (what legal principles will be used to resolve the dispute) should be distinguished from the choice of forum (where the dispute should be resolved) and choice of dispute resolution method (litigation or some form of ADR).

Common Law- this term, when contrasted with Civil Law, refers to legal systems which have their origin in the British legal system. The legal system of Commonwealth countries and the United States is from the common law tradition. It may also refer to the method of analysis that a court uses to interpret a statute, regulation or other rule of law, and may include the concept of precedent.

Conciliation– is a method of Alternative Dispute Resolution for amicable resolution of a dispute. A method of ADR whereby a third party, who is usually neutral, meets with the parties and assists them to find a way to settle their dispute.

Condition Precedent– an event that must happen before a contract or a contractual obligation goes into effect.

Condition Subsequent- a happening which terminates the duty of a party to perform or do his/her part.

Consideration- a common law concept which requires (in essence) that a promise be part of an exchange to be enforceable as a contract.

Contracts of Adhesion- standardized contracts, usually presented on a take-it-or-leave-it basis, to parties of unequal bargaining strength.

Covenant- this term used in a contract means a promise which, if not carries out, will carry legal consequences. Often, covenants are divided into Affirmative Covenants (the things the promisor agrees to do) and Negative Covenants (the things the promisor agrees not to do).

Cure Periods- often, when a Default occurs under a contract, the obligor may have a certain period of time to cure the Default before the obligee is allowed to exercise Remedies. Sometimes the obligee is required to give notice before the time begins to run (in which case lawyers will speak of “Notice and Cure Periods”). Notice and Cure Periods are sometimes more casually referred to as “grace periods”.

Default- the circumstances where an obligor under a contract is considered to be in breach of the contract. Informal written contracts, Defaults often include failure of a Representation or Warranty to be true when made, failure to perform any Affirmative or Negative Covenant, insolvency or bankruptcy, as well as other enumerated situations tailored to the specific circumstances.

Delay– occurs when one party does not meet the agreed timelines. If there is no clause regarding delay and “time is of the essence” of the contract, then the parties must perform the contract in a reasonable time.

Direct loss- is a loss which arises naturally and directly from the breach of contract or negligence. Losses will be treated, by the courts, as direct losses if they were reasonably foreseeable by the parties as being a likely consequence of a breach at the time that the contract was entered into.

Entire Agreement– is a clause which attempts to limit the contract to the written document as opposed to the series of events taking place before and during the contract term which may alter the nature and terms of the contract.

Equity- this term, which is often used to mean fairness, also has a more technical legal meaning. It used to be that the Common Law system was rather rigid, and in order to obtain relief, a litigant had to fit into a limited class of situations. Sometimes, this rigidity produced results that seemed very unfair. Eventually, the second type of court was created to hear those cases – those where there was “no remedy at law” but “equity” demanded a remedy. In most jurisdictions, the separate court systems, consisting of “Courts of Equity” have been abolished, but in many areas the distinction between cases sounding in “law” and those sounding in “equity” persist. In other contexts, “equity” refers to the amount by which a property’s value exceeds the debt (or Liens) against it. The legal concept of equity in this sense is not known to the civil law (Romano-Germanic) system and can cause problems. For example, in a US or UK contract, “” equitable remedies” does not mean “fair, reasonable, and just” but refers to remedies applied under the common law concept of equity. In practice, this means remedies other than plain compensation-e.g., a court order for specific performance of the contract, or an injunction.

Estoppel– an equitable concept that prevents a party from raising an argument when the party has acted unfairly, fraudulently, or otherwise inappropriately.

Events of Default– when a Default remains uncured under any applicable Notice or Cure Period, contracts typically provide that an Event of Default has occurred. Once an Event of Default has occurred, the obligee may generally pursue Remedies.

Excuse or Waiver- something that forgives performance and bars enforcement of the contract. If the performance of a contractual obligation is excused, this relieves the nonperforming party of liability.

Exclusion– is intended to limit the liability or risk of a party to the contract in negligence and contract.

Execution- (1) signing; the parties execute the contract by signing it; (2) performance; the parties may execute a contract by carrying out their obligations and duties; (3) enforcement of a judgment, order or writ (execution of judgment); (4) in criminal law, carrying out a death sentence. This word is a good example of polysemy- words with multiple meanings – in legal language.

Force Majeure– an “act of God” which prevents one party from performing the obligations owing under a contract. Commonly such things as war, riots, earthquakes, floods, strikes and the like are included.

Frustration or Impracticability– A legal doctrine closely related to Force Majeure. If some unanticipated event makes the performance of the contract unusually burdensome, some legal systems will allow a party to be excused from the contract under the doctrine of impracticability. Different legal systems have varied requirements for invoking this doctrine.

Guarantee– is a collateral promise to answer for the debt or obligation of another. A guarantee is a secondary obligation, becoming operative only where the principal debtor is in default; because it is a secondary obligation, should the primary obligation be unlawful or invalid or unenforceable, the guarantor or surety cannot be compelled to make payment under the guarantee. A guarantee should be distinguished from an indemnity, which is a primary obligation to compensate for the loss of another; in the latter case, the unenforceability of the principal debt will not render the indemnity unenforceable.

Indemnity– an agreement in which one party agrees to reimburse another party if it is held liable. And indemnity is in the nature of a guarantee, but typically is used when the party offering indemnity has some interest in, involvement with, or control over the events leading to liability. Indemnity clauses are often found in commercial contracts and may be coupled with “hold harmless” provisions. In a “hold harmless” provision, the first party says that they will not hold the second party responsible for certain actions, even if the first party might otherwise have the right to do so under applicable law.

Independent Contractor– this term is usually used to contrast with “agent” or “employee”. The basic idea is that an independent contractor is free to do only that work that it contracts to do, in the way it contracts to do it. In contrast, an agent or an employee is subject to the discretion or control of the party for whom they are working. The chief importance of the concept is in the context of vicarious liability- a person is generally not responsible for the misdeeds of its independent contractor, while it may be liable for the misdeeds of its agents or employees.

Intellectual Property-  is a right given by law to a person in connection with intellectual, industrial or artistic work. Intellectual property includes, among other things, patents (inventions), designs (graphics), trademarks (names or marks used to identify goods) and copyrights (right of authorship), Due to the information revolution, the nature and extent of information which is protected as intellectual property is a rapidly changing field.

Limitation of Liability– clause regulates liability that arises from a breach of contract or negligence in performing the contract. Common exclusions are all types of economic loss and indirect or consequential loss. In effect, the clause acts as an instruction to the arbitrator/court regarding the award of damages. Therefore, where a breach of contract leads to a direct loss which is permissible under the limitation of liability clause, the arbitrator/court may award damages accordingly.

Negligence-is the omission to do something which a reasonable man would do, or doing something which a prudent and reasonable man would not do. To sustain a claim in negligence, a claimant must show that (i) he was owed a duty of care by the defendant; (ii) the defendant was in breach of the duty of care; and (iii) the breach was the cause of the claimant’s loss or injury.

Novation- An agreement between parties to a contract to substitute a new contract for the old one. It extinguishes (cancels) the old agreement. A novation is often used when the parties find that payments or performance cannot be made under the terms of the original agreement, or the debtor will be forced to default or go into bankruptcy unless the debt is restructured.

Joint Venture- a very broad term used in many different contexts. In its general sense, it means more than one person getting together for the purpose of making a profit in a speculative enterprise. In this regard, it is very similar to a consortium or partnership, but it tends to be used for limited undertakings. Often, in reference to profitable activities done in cooperation with foreign governments or foreign companies.

Letter of Credit- a financing device whereby a bank, at the request of a customer, agrees to pay a beneficiary upon satisfaction of certain conditions. Typically, the conditions are limited to the presentation of specified documents. The bank makes the agreement as a service to its customer and will seek reimbursement from its customer if is required to make payment under the terms of the Letter of Credit.

License– this term has many meanings, depending on the context. Its general sense is permission to use the property of the licensor. It is often used in the context of Intellectual Property to mean the agreement by which the owner of the Intellectual Property gives someone else permission to use it, typically for a royalty or a fee. The license agreement is often used to transfer technology from one party to another. Absent the License, the licensee’s use of the Intellectual Property would be against the law. The term is also used in completely different contexts. For instance, a movie theatre ticket is often characterized legally as a “License”.

Lien- a creditor has a Lien on a piece of property owned by a debtor when the creditor has a contingent claim to that property. Sometimes, the debtor voluntarily gives the creditor a Lien as a form of security for payment; other times the creditor receives the Lien by operation of law. Usually, non-payment of the debt, or an Event of Default under any contract creating the debt, allows the creditor to Foreclose on the Lien.

Liquidated Damages-  when parties to a contract settle in advance the amount of damages which will be available should one party fail to perform. Liquidated damages clauses are generally subject to close scrutiny by Courts.

Partnership (including General Partnership and Limited Liability Partnership)- a voluntary (unincorporated) association of two or more persons for the purpose of making a profit. In a general partnership, all of the partners are personally liable for the debts of the partnership and have a management role. In a limited partnership, general partners exist alongside limited partners. General partners are personally liable and have a management role; limited partners are not personally liable and do not have a management role. Partnership as a concept is not known or recognized in all legal systems.

Recitals- in a formal written contract, the clauses, usually in the beginning, that explain who the parties are, and their purposes for entering into the contract (i.e., background). Sometimes called “Preamble”.

Remedies- the actions that can be taken upon an Event of Default. Sometimes an aggrieved party can take action on its own. Other times, the term “remedies” is used to describe the court procedures and decisions that are available to help an aggrieved party.

Representations and Warranties- statements made by a party in a contract which, if untrue, carry legal consequences. Sometimes representations and warranties need not be explicitly stated by the parties, but instead are implied by law.

Rescission- cancellation of a contract by mutual agreement of the parties prior to its performance.

Risk of Loss- who bears the risk if the goods covered by a contract are damaged or destroyed. Risk of loss is particularly important when goods are being transported long distances between the seller and the buyer. If the seller bears the risk of loss during carriage, and the goods are destroyed in transit, the seller has a responsibility to provide substitute goods. If the buyer bears the 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 so the ultimate loss may rest with an insurance company.

Secured Transaction- a voluntary transaction in which a debtor gives a creditor a Lien on its property to secure payment or performance of an obligation.

Security- this particularly confusing term is used in at least two very different contexts. First, it is used to refer to property that is subject to a Lien. The property is “security” for the debt secured by the Lien. A more precise term for this concept would be “collateral”. “Security” is also used in the context of investment securities-such as stocks, bonds, and other evidence of ownership or indebtedness which are regularly traded.

Severability or Blue Pencil Rule- the characteristic of a contract that allows for removal of duties or portions that are incorrectly or illegally drawn up. The parties may agree that incorrect, impractical, or illegal portions be severed from the agreement and replaced by language that best reflects the intent of the parties and comes closest to the business objective of those severed portions. Severance allows the remainder of the contract to be valid and enforceable.

Specific Performance– a court orders specific performance when it requires a party to carry out its obligation, rather than merely paying damages. Specific performance is an extraordinary and discretionary remedy, that is to say not usually available under the law and can only be granted by Civil Courts.

Tender-is a bid or formal offer. A proposal of terms is extended generally (‘put out for tender’ or ‘competitive bidding’), inviting prospective parties to respond by making a bid or tender. Do not confuse with legal tender, which is money.

Termination or Cancellation– of a contract signifies the process whereby an end is put to whatever remains to be performed thereunder. It sets out a procedure for notifying of a terminable fault and/or terminating the contract.

Unconscionability–  a U.S. concept which has its roots in Equity, and which allows a court to refuse to enforce a contract or a portion of a  contract which it considers to be particularly unfair.

Void- is absolutely null, empty, having no legal force, and incapable of being ratified. In contracts, it refers to an attempt at the formation of a contract which is equivalent to no contract at all.

Voidable- is capable of being voided, or later annulled. If a contract is formed but voidable, it may either by ratified or confirmed by conduct or else it may be voided by one of the parties once ratified, the promise is enforceable. If it is voided, it is unenforceable.

Waiver or Excuse – something that forgives performance and bars enforcement of the contract. If the performance of a contractual obligation is excused, this relieves the nonperforming party of liability.


About maheshspeak

I write randomly on law, jurisprudence, polity, travel, food and anything else interesting. You can also visit my personal homepage at
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1 Response to Contract law Vocabulary

  1. Pingback: Contract law Vocabulary — maheshspeak – CAPTAIN C O R N B E E F

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