Sometimes the administrative side of a business can seem complicated or, at times, repetitive. In reality, however, it is fundamental to the success and growth of a business. In addition to the legal, tax and accounting aspects, contracts and their provisions are equally important.
A written contract is a must (including – or especially – when you have a personal relationship with the customer or supplier in question). It clarifies the expectations and obligations and offers help in unforeseen situations.
Please see below the definition and purpose of a contract, the sections of a contract, the types of contracts and other useful information about contracts.
In a nutshell
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What is a contract?
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The sections of a contract: what should a contract include?
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Types of contracts
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Useful information about the contracts that can be concluded in Romania
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What is a contract?
According to the definition, a contract is an agreement between two or more persons who wish to establish, modify or terminate a legal relationship. This definition underlines one of the characteristics of an contract, i.e. the agreement of the parties.
➡️ Access the Business EDU section and you will discover various materials focused on essential business notions, useful to any entrepreneur, including materials about contracts.
The sections of a contract: what should a contract include?
In order for a contract to be valid, efficient and simple for each and every one of the parties involved, it should not exceed 100 pages. And in its pages you will find the contract sections presented below:
Contracting Parties
This section is also called the subjects of the contract and refers to the entities which conclude the contract (natural persona or legal entities). Depending on the type of contract, the parties are referred to by different terms. For example, we will have seller and buyer for sale-purchase contracts, lessor and lessee for lease contracts, bailer and bailee for commodatum contracts and so on.
Scope of a Contract
It lists the reason for which each and every party decided to execute the contract in question. For example, in a sale-purchase contract, the scope of the contract consists in a good that is about to be sold and the price that is going to be charged. The scope of the contract must meet a number of requirements:
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it must be included in the civil circuit;
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it must be identifiable;
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it must exist at the time of the execution of the contract or in the future;
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it must meet all applicable legal terms.
Body of a Contract
All the claims the parties have as a result of the execution of the contract are mentioned in the body of the contract. Thus, each and every party shall be entitled to request the other party to behave in a certain way, carry out or to refrain from certain actions. The provisions of the body of the contract can be established freely, but within the limits of the legal provisions.
Liability Terms of a Contract
Practically speaking, the liability terms in any contract must take into account the interest one intends to protect. If the interest is to limit your liability, you must include express limitation clauses in the contract, as the limitation of liability does not generally operate under the law. The party who is usually interested in limiting its liability is the supplier/provider, the customer/beneficiary being more interested in increasing the supplier/provider's liability.
In order not to risk being held liable to an unknown and unintended extent, it is of the essence to include or carefully review the liability terms in the contract.
Final contractual terms
When executing contracts, it is important to pay equal attention to the main aspects related to the scope of the contract and the final terms. They generally include important information about the liability of the parties: the contingency clause, the express denial of any "unusual" clauses, covering the entire agreement, negotiated terms, terms regarding the competent court or terms regarding multiple counterparts.
You can learn more about them from the final terms material .
Types of contracts
Contracts can be classified into several categories, depending on their scope. We have several types of civil contracts (types of commercial contracts) and other examples of contracts.
Types of civil contracts (types of commercial contracts) by content
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Unilateral contract: characterized by the existence of obligations only for one of the parties (one party is the creditor and the other is the debtor);
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Bilateral contract: both contracting parties have rights and obligations
Examples of contracts by purpose
Depending on the purpose pursued by the parties, contracts can be classified as follows:
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for good consideration: every party wants to obtain a material benefit (commutative or random contract);
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Free of charge: a person is willing to transfer an asset to another person without having any financial claims (selfless acts, acts of kindness).
Depending on the form of the contract
Depending on their form, contracts can be classified as follows:
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consensual contracts (executed by the parties under their mutual consent);
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solemn contracts (their validity is influenced by the compliance with a legally imposed form);
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real contracts (agreement to carry out a duty regarding a real property)
Contracts classified by their correlation
Depending on the correlation between them, contracts can be classified as follows:
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main contracts (independent, which do not depend on another contracts);
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ancillary contracts (which depend on a master contract).
Classification according to the effects of the contract
Depending on their effects, contracts can be classified as follows:
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constitutive contracts (give rise to a new civil law);
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transfer contracts (transfer of a civil right from one patrimony to another);
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declarative (consolidate a pre-existing subjective civil right).
Services contracts
Services contracts are the most common contracts used in practice. We will present hereinafter some of its features and everything you need to know depending on which party you will be in the commercial contract (provider or beneficiary).
Services contracts if you are the provider
Pay great attention to the drafting of the provisions to make sure the services included in the contract are detailed and accurate, in order to avoid the situation where, due to initially unknown circumstances, you have to perform various services without any additional remuneration. Thus, the customer has a clear picture of the services you committed yourself to provide for the agreed price.
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Any additional service will also have to be contractually specified, by means of an addendum to the master contract. It shall list the additional services that will be provided, their cost and the payment term (payment method).
Do not start providing additional services not listed in the contract without the explicit (written) consent of the client and without agreeing/mentioning their cost.
Make sure that your obligations are set out explicitly, clearly and with the required limitations. In practice, such obligations are:
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the specific performance standards, without including general references such as "all applicable standards";
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the completion by certain deadlines - the dates must be specified concretely;
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the supply of certain materials - specify whether the services will be performed by using the provider's or the beneficiary's materials;
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also check what the procedure applicable for the faulty services liability is;
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in case of subcontracting, the provider is responsible to the beneficiary for the quality of the services provided by the third party subcontractor, with a right of recourse against the latter. If, for example, the provider pays the entire debt, it shall be entitled to claim any excess costs incurred from the other subcontractors.
>> Read more about these terms in the dedicated material written by Raluca Nechimis, lawyer
Services contracts if you are the beneficiary
The same advice as with providers: make sure the services included in the contract are detailed and accurate. This will allow you to later claim their full performance from the provider.
For every services performance stage, before an invoice is issued, it is recommended to draw up an acceptance report which will be executed by both contracting parties or a partial/final acceptance protocol or any other document certifying the actual performance of the services.
It is also important to mention if the services were carried out in accordance with all applicable standards in the field and specify the deadlines and any related sanctions.
With regard to the intellectual property rights of third parties, the provider must guarantee that the provided services do not infringe the intellectual property rights of third parties (indicating the sanctions applicable in case of infringement).
If the provision of services requires travelling, this must be explicitly stated.
If necessary, it is also recommended to request insurance policies or letters of bank guarantee which cover the risk of failure of performance of the contract by the provider and ensure a quick recovery of the damages. If the enforcement of the policy or letter of bank guarantee is abusive, the issuing entities may have recourse against the enforcing beneficiary.
>> Read more about these terms in the dedicated material written by Raluca Nechimis, lawyer
Useful information about the contracts that can be concluded in Romania
Before executing any type of civil contract, it would be a good idea to take into account the information below. These are tips that will help you draft a perfect contract or know exactly which sections to pay more attention to before executing a contract.
Verbal agreements
Avoid relying on them. It is even advisable to insert a clause that excludes them and provides that an addendum must be executed by both parties in order to validly amend a contract.
Form
A good and valid contract does not have to be 100 pages long and use difficult to understand language. Sometimes contracts that are simple and to the point are the most effective.
Authorized persons
If you work B2B and your customers are companies, make sure that the signatory is authorized to represent the company (if it is the director of the company) or a person authorized by it, and ask for the power of attorney in question.
Payment methods
It is important to include details regarding the payment method (cash, bank transfer), payment terms and payment deadline (even if the payment is made in installments). Establish when the project can be considered completed and delivered based on objective details.
Billing
Mention the way in which the invoice will be sent to the customer, preferably by e-mail, and the address where the invoice will be sent to. It is also important to note that an invoice shall be a deemed accepted for payment unless challenged within a certain time interval.
Penalties
Set contractual late payment penalties, per day of delay, that you can bill if that customer doesn't always pay on time. Don't forget to mention the invoice's due date in order to be able to charge penalties.
Contract termination
An agreement is terminated upon its expiry of its term as well as under the mutual consent of the parties, by termination for default in case of one of the party’s failure to execute material obligations, as well as by unilateral termination for convenience by either party, in which case a notification procedure must be followed. Usually, a prior notice term is established in order to allow the completion of the works in progress, the length of such depending on the specifics of the activity.
Official correspondence between the parties
Establishes clearly the contact persons and the correspondence addresses. Without these details, things will get complicated in case of a legal dispute.
Procedure for customers/suppliers from other countries
It is important to establish the law governing the contract and the jurisdiction in the event of a dispute. Do not enter into contracts governed by legislation the provisions of which you do not know without seeking the advice of a specialist in that area.
Startarium offers you all the information you need about a successful business
Startarium gives you all the information and resources you need to plan and grow a successful business. Startarium is the most complex platform for early-stage entrepreneurs At Startarium, we strongly believe in the power of continuous learning - and that's because without being familiar with business concepts or what's new in your industry, it will be difficult to grow your business at the pace you want. Furthermore, here you will also find interesting information about the professional life and entrepreneurship in general.
Therefore, we hope that you will find useful all this information when drafting or executing any type of contract.
