Common Contract Terms Explained

Prior to entering into any contract, it is important for all parties to understand common contract terms. Having a full understanding of these terms will enable all parties to enter into the contract fully informed of what they are signing, with a clear understanding of the responsibilities of each of the parties. In every contract, there is an offer, acceptance and consideration.


The most basic contract term that needs to be understood is “contract.” Before entering into a contract, parties must understand exactly what a contract is and exactly what the specific contract terms mean.

Barron’s Legal Guide defines contract as, “a promise, or set of promises, for breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” A contract, defined by ‘Lectric Law Library, is simply “An agreement between two or more competent parties in which an offer is made and accepted, and each party benefits.” Essential requirements to enter into a contract include having the competency to enter into a contract, proper subject matter, consideration and mutuality.

Parties to a contract must understand the type of contract they are entering into. The type of contract will largely depend upon what the contract is needed for. For instance, as explained by USLegal, a bilateral contract is a contract in which there are mutual, reciprocal promises between the two parties, requiring an act of performance or non-performance by both parties, with each party to the contract being both a promisor and a promisee.  A unilateral contract, on the other hand, is a promise that is made by only one of the parties in exchange for performance or non-performance by the other party.

Express or implied contracts are contracts where the terms of the contract are stated by the parties to the contract. The terms of the express or implied contract may be in writing or can be an oral contract. Whether in writing or made orally, the terms of the contract as a whole must state the intentions of the parties.

Acceleration clause

When one or more parties to a contract breaches the contract, the remaining parties can demand full performance of the contractual terms immediately. This clause is commonly included in financial contracts with terms allowing for payment in installments. Examples of contracts in which an acceleration clause may be included are mortgages, major credit cards or store credit installment contracts.


In contract law, acceptance is the unequivocal, unconditional acceptance of the exact terms of the offer.

Arbitration clause

An arbitration clause sets provisions for impartial, independent and binding arbitrators to settle contract disputes that may arise under the contract.


Boilerplate refers to the “standard contract terms” which are typically found at the end of the contract, according to Business Contracts Kit for Dummies Cheat Sheet. Boilerplate terms will not have an effect on the essence of the deal that is described in the contract. Governing laws, arbitration clauses and force majeure clauses are examples of boilerplate terms.

Breach of contract

A breach of contract occurs when one or more of the parties to a contract fails to perform the terms of the contract in the manner of or within the specified time of the terms of the contract. A contract breach also occurs when one or more parties only partially performs the terms of the contract, or does so in a deficient or defective manner.

An interesting fact to note is that AllBusiness explains that in a written contract, the statute of limitations is four years in a written contract, but only two years in an oral contract.

Remedies to a contract breach may be awarded by the courts if a breach of contract action is initiated. Common remedies include money damages awarded to the party or parties who are injured as a result of the contract breach. Another remedy may include an order of specific performance.


Consideration, explains the ‘Business Contracts Kit for Dummies Cheat Sheet,’ is a benefit or a right that contract parties exchange with each other “in order to form the contract.” Consideration may involve a promise to do something or to not do something. Consideration must be something that has value to it.

Entire Agreement

The entire agreement clause protects parties to the contract by declaring that the contract represents the complete and final agreement between all the parties.

Force Majeure clause

The force majeure clause excuses a party from performing their obligations of the contract due to unforeseen circumstances that are beyond their control.

Indemnification clause

Indemnification can be simply explained as being a clause in which contract parties agree to hold another party harmless against future claims. According to USLegal, in ‘Contracts Indemnification Law & Legal Information,’  Indemnification is “the act of making another ‘whole’ by paying any loss that another might suffer.” Examples that further explain indemnification are also given.

When the indemnification clause is included in a contract, it protects parties from being financially responsible for the negligence or actions of another. It is imperative to understand the scope of the indemnification clause and the limitations of the indemnification clause prior to signing the contract.

Liquidated damages

In the event that one or more parties to a contract fails to live up to the stated terms of the agreement, those parties are liable for a reasonable, specific amount of money or “liquidated damages.” The amount of liquidated damages will be determined in the liquidated damages clause of the contract.


A contract offer is explained very briefly by AllBusiness, who says that an offer is the promise to carry out the terms of the transaction “in exchange for the consideration.”  

Severability clause

Severability allows for an invalid portion of a contract to be written so as to reflect the original intent of the parties to the contract, and to keep the valid portions of the contract binding and enforceable. For example, if there were typographical errors or incorrect dates inadvertently entered to the original contract, severability would permit the re-writing of the invalid portion, while keeping the balance of the contract fully enforceable while the portion with the error would be corrected. Another example is when, according to ‘Severability Law & Legal Definition,’ a contract agreement actually consists of several contracts and the breach of one of those contracts is not a breach of the overall contract. Nor is severability an excuse for one of the parties to refuse to honor the contracts or parts of the contracts that have not been breached.

Contract law may seem somewhat confusing or intimidating to individuals who are not familiar with commonly used terms associated with contracts. When those terms are fully explained, all the parties to a contract can be more informed, and therefore confident, that the terms are clearly understood and agreed upon in good faith with intent to fulfill all aspects of the contract.