The Many Facets of Contracting Part 2: Contract Types

This is the second entry in a series dedicated to the many facets of contracting, as well as how each particular facet and all its relevant components relate to contract management. You can read Part 1 here. 

A contract isn't just a contract. Granted, contracts are agreements that are created to impose enforceable obligations, but there are actually quite a few different types of contracts. Here are a few of the more prevalent types of business contracts, along with their relationship to the contract management process:

Bilateral Contracts

Bilateral agreements are usually the contract of choice for personal and business transactions. In these types of contracts, two or more parties mutually agree to perform some action in exchange for the other party's performance of some other action. These actions may occur concurrently or sequentially, but the contract dictates that both sides must perform in some way to fulfill the terms of the agreement.
 
For contract managers, these may be super simple to manage because there may be a one time action that has to be completed and then bam, things are done. On the other hand, they may be incredibly complicated to oversee because there may be a bunch of things that have to happen over a long period of time. Using contract lifecycle management software will definitely help with monitoring performance for these agreements because it will keep the information centrally organized and customized alerts can be created to stay on top of all of the key milestones.

Option Contracts

This sort of contract usually crops up between a buyer and a seller, giving the buyer the "option" to do (usually purchase) something at a later date. If/when the buyer decides to go for it, the buyer is said to exercise the option, meaning they are exercising the right to do (or purchase) the agreed upon item.

Contract management software is also useful for these contracts because the option often has a window that extends far into the future. And, in some cases, the option is actually contingent on certain things happening over time prior to that end point, which means someone has to pay attention to whether those things occur. As a result, contract management software with specialized alert features that generate email reminders will help managers keep up with what is happening so that when the option comes up, they know where things stand.

Adhesion Contracts

An adhesion contract is often called a boilerplate or standard form contract. In general, a company that engages in repetitive, high volume contracting (such as software licensing) creates a standard contract that it uses for basically every client. It wouldn't be prudent to renegotiate terms for every deal, so this eliminates that costly redundancy. It certainly makes transactions more efficient, although it isn't entirely fair for the other party since they don't have a say in hammering out the terms.
 
From the contract management perspective, using this sort of contract makes oversight a whole lot easier because there are a ton of contracts that contain the same terms. Unfortunately, these are also the ones that can create problems because the other party didn't have a say in drafting the terms and often isn't familiar with the details, so attention must be paid to whether the signatory is complying with the agreement. Contract management software is particularly helpful for these to keep track of expiration and renewal dates.

Aleatory Contracts

In this sort of arrangement, there can be one or more parties who agree to perform some action, but that performance is contingent on some event happening. So, there is a contract, but no one really does anything until that particular event arises. This is most commonly seen in insurance contracts. For example, if a company buys fire insurance, then they are the "insured" and the insurance company is the "insurer." The insured makes monthly or annual premium payments to the insurer, and if/when the company's warehouse burns down, the insurer performs by coughing up the cash for recovery.
 
These contracts generally don't require tons of regular oversight, but when that (usually) inauspicious event occurs, managers are going to want the contract accessible and searchable. The reason, of course, is that these contracts usually contain a lot of specific terms explaining the triggering event, like what it is and what it is not. Thus, these contracts should be stored in an online contract repository that offers quick search functionality and easy folder organization, so that they can be quickly pulled and reviewed when needed.
 
Even though all contracts may seem the same, the different types definitely have their own nuances. Regardless of the type of contracts your company is handling, CLM software undoubtedly simplifies the monitoring process.

This blog post on contract types provided by ContractWorks contract management, part of SecureDocs, Inc. is intended for informational purposes only and is not updated regularly. Please note that SecureDocs, Inc. is not engaged in rendering legal, accounting, or other professional services or advice, and any content provided is not intended to be a substitute for legal advice.