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The Secret Science of Contracts

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Almost everyone handles a contract at some point in their lives, and business leaders endure the contract process nearly every day. Contracts are everywhere — but have you ever stopped to think about how they work?

Contract management is part art, part science, and part business. If you want your contracts to be strong and efficient, you need to know more about the secrets of contracts — including their history, their present, and their future.

The History of Contracts

Though it’s impossible to trace the origins of verbal contracts, written contracts — in the European style — have their foundations in Ancient Greek and Roman thought. The Greek philosophers, like Plato, put substantial effort into understanding how an agreement could be dissolved, while Roman lawmakers put down strict rules regarding different types of agreements and methods of enforcement.

True growth in contract law began in Medieval Europe. Judicial courts were dangerous places to resolve disputes; even in non-criminal cases, the losing party risked jail time by taking the matter before a judge and swearing oaths. Thus, most people craved evidence of agreement, which would dissuade frauds from dissembling in the deal-making and winning in court. Initially called covenants, these documents provided proof of arrangements — but access to their creation was severely restricted to the rich and powerful.

However, as some peasants gained wealth and authority through trade, greater interest developed in creating trade law that applied to every group. During the Industrial Revolution, a concept called “freedom of contract” slowly but surely allowed everyone, from powerful businesses to weak individuals, gain the ability to forge and uphold contracts.

The Reason Contracts Work

Today, through the evolution of contract law, developed nations have firm rules regarding what constitutes a legally binding contract. To function as a contract, a document must contain at least five elements:

Capacity. You cannot enter into a contract with someone who lacks the right to make contracts — i.e., someone who is below legal age or someone who is mentally handicapped. Additionally, neither party can be coerced into creating a contract.

Consideration. Both parties must benefit from the contract — and the explanation of these benefits appears in the consideration.

Specific details. Vague wording makes it difficult for a contract to be upheld in a court of law. You must be specific with your terms, detailing precisely what is at stake, what responsibilities the parties have, and what the repercussions will be upon termination.

Legality. It is impossible to create a legal contract concerning an illegal activity. You should be certain that both parties’ terms are legal before signing.

Format. Though some areas see verbal contracts as legally binding, most places require a written document.

Though most contracts contain more, these bare-bones elements can alone establish a valid, enforceable, legal contract. These elements are necessary because they establish that both parties understand their responsibilities for maintaining the relationship and reaping the benefits. Should one party fail to deliver, the other party has proof that they are owed something for their efforts. Then, either the offending party can alter its behavior, or the wronged party can go to court. That’s the gist of why contracts work: They compel each party to comply with the contract’s terms — or suffer the consequences.

The Future of Contracts

In many ways, the future of contracts is already here. Your business can already apply tech solutions to enhance your contract process. In fact, to maximize your business’s benefit from contracts, you should make use of a comprehensive contract management system. A suite of contract management programs assists businesses in document generation, document comparison, contract analysis, and contract visibility, which allows you to create and maintain your contracts with minimal effort. This type of software is likely the beginning of automation for the contract process.

Still, contract experts see an even tech-heavier future for contracts. Blockchain technology promises to alter much of the existing tech landscape, and smart contracts, which manipulate blockchain to compel parties to uphold their terms, could be the most significant change in the near future. Some smart contract providers already exist, but recent breaches in smart contract security is currently holding most businesses back from jumping headlong into the future of contracts.

Though no one can predict the future, it is almost certain that contracts will continue to exist. Just as contract law arose organically from the needs of the people, the future of contracts will directly address your business concerns. Like it or not, you will be handling contracts for the decades to come.

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