Contracts are a part of everyday life. Whether you are renting an apartment, opening a bank account, or starting a business partnership, contracts define the terms and conditions of the agreement to protect all parties involved. Drafting a clear, concise, and legally sound contract is crucial to avoid misunderstandings and disputes later on. This comprehensive guide will walk you through the key steps and considerations when creating a contract.
A contract is a legally binding agreement between two or more parties that outlines the terms and conditions of their relationship and transaction. Contracts provide clarity on each party’s rights, responsibilities, and potential liabilities. They can cover a wide range of business and personal transactions, including sales agreements, employment terms, service contracts, real estate deals, prenuptial agreements, and more.
Having a well-drafted contract brings many benefits. It sets clear expectations between the parties involved, minimizes the risk of disputes arising, and provides documentation to fall back on if issues do appear later on. For more complex deals, a solid contract is absolutely essential to safeguard your interests. Even relatively simple agreements can benefit from outlining terms and conditions in writing.
This comprehensive guide will take you through the key steps and considerations when drafting a contract. We will cover:
- Understanding the basics of contract law
- Defining the purpose and scope of your contract
- Detailing the parties involved
- Outlining terms and conditions
- Specifying contract duration and termination clauses
- Addressing dispute resolution
- Adding confidentiality, non-compete, and other clauses
- Reviewing and revising before finalizing
- Executing the agreement
Let’s get started on outlining how to create a complete, legally sound contract.
Understand the Basics of Contract Law
Before diving into the drafting process, you need a foundation in the basic principles of contract law. Having an awareness of the essential legal elements of a contract will ensure you cover the necessary bases.
A contract is simply an agreement between parties that the law will enforce. Contract law determines which agreements are legally valid and sets the remedies if one party breaches or violates the terms. Though specific regulations vary by state or country, there are some core elements that apply to all contracts:
One party makes an offer to enter into an agreement, which includes the key terms and conditions of the proposed contract. This offer creates the potential for a binding agreement if accepted.
The other party indicates their acceptance of the offer. They agree to the contract according to the exact terms outlined in the offer.
The exchange of something of value between parties, such as money, services, goods, or a promise to perform an act. Consideration is what binds the parties to the agreement.
Both parties intend to enter into a legal and binding agreement. Evidence of mutual intent could include a written contract document, verbal agreement, or actions implying agreement.
Understanding these essential elements allows you to draft a document that meets the basic criteria for an enforceable contract. Be sure to research any additional requirements that apply in your particular state or country. With the basics covered, we can move on to the specific steps for drafting a solid agreement.
Define the Purpose of the Contract
Before putting pen to paper, you need to clearly define the purpose and objectives of the contract. This involves identifying:
- The nature of the agreement (sale, lease, service contract, etc.)
- The specific goods, services, or other performance covered
- The reason each party is entering into the contract
Taking time to clarify the intended goal and subject matter upfront will inform the entire drafting process. Consider some examples:
- Employment contract: Outlines the position title, duties, compensation, benefits, and termination conditions for an employee.
- Lease agreement: Details the rental terms for a property, including duration, rent rate, security deposit, and use restrictions.
- Sales contract: Specifies the item description, quantity, pricing, delivery, inspection, and warranty terms for a product sale.
- Service agreement: Defines the specific services provided by a contractor or freelancer, including scope, timeline, quality standards, and payment schedule.
In each case, you need to tailor contract specifics to accomplish the main purpose while protecting both parties’ interests. Clarify any areas of complexity particular to the transaction. The more clarity at the outset, the better.
Draft your contract to achieve your desired goals and minimize uncertainty. Now let’s look at identifying the parties involved in the agreement.
Identify and Detail the Parties Involved
A contract involves a transaction or agreement between two or more parties, typically referred to as:
- The Buyer: The individual or entity purchasing goods, services, property, etc.
- The Seller/Service Provider: The individual or company providing goods, services, etc. in exchange for payment or other compensation.
- The Lessee: The individual or company renting or leasing a property, space, equipment, etc.
- The Lessor: The owner or authorized agent renting or leasing property, space, equipment, etc. to another party.
Early in the contract, you should clearly identify all parties involved by their full legal name and contact information. List details like:
- Full legal name, including suffix (LLC, Partners, etc.) if any
- Primary contact person’s name and title
- Phone numbers
- Email addresses
Referencing “the Buyer” or “the Seller” in the body of the agreement avoids excessive repetition of the parties’ names. But you still need to define exactly who those labels refer to upfront.
Specifying the details immediately removes any doubt about the identity and roles of the parties involved. Now we can dive into the real substance of the contract.
Outline the Terms and Conditions
The terms and conditions form the main body of the contract. This is where you detail the who, what, when, and how – essentially the rights and responsibilities of each party. Key terms to specify include:
Description of Goods or Services
Provide an itemized description of the exact goods, property, services, or other items covered by the contract. Be as precise and detailed as possible.
- Goods: Specify quantity ordered, product name/model numbers, size, colors, or any other relevant specifications.
- Services: Outline the scope, specific tasks, deliverables, performance standards, etc. Include quantities if applicable.
- Property: Describe the address, acreage, square footage, applicable encumbrances, state of repair, etc.
Payment Amount(s) and Schedule
Clearly define the payment amounts, due dates, and acceptable payment methods. Common options include:
- One-time lump sum payment upon contract execution or project completion
- Deposit upfront with balance due later
- Interval payments for ongoing services or projects
- Rental or installment payments on set dates
Delivery, Performance, or Completion Dates
Outline schedule and logistics requirements by specifying:
- Delivery or performance timeline, including any interim milestones
- The physical delivery location or site of performance
- Responsibility for shipping, transportation, and setup costs
- The process for inspection and acceptance of deliverables
Warranties, Standards, and Guarantees
Specify the product warranties or service guarantees provided, if any. This includes who bears responsibility in case of defects. Outline performance standards and quality metrics as well.
Specify the Term and Termination Conditions
Set clear expectations by defining both the effective date and duration of the contract. Be sure to outline the conditions under which each party can rightfully end the agreement.
- Effective or start date
- Completion or end date
- Term length (month-to-month, 1 year, etc.)
Consider whether renewal options or extensions are available.
Outline when and how either party can terminate the contract. Reasons might include:
- Expiration of the contractual term
- Material breach by one party
- Failure to meet performance standards
- Change in company ownership or bankruptcy
- Written notice provided within a specified notice period
- Specific circumstances that void the agreement
Also specify the steps required to terminate, any penalties, and the status of unfulfilled duties.
Address Dispute Resolution
Despite best intentions, disagreements and disputes sometimes arise. The contract should outline a plan for handling conflicts through negotiation, mediation, arbitration, or as a last resort, litigation.
- Negotiation: Require the parties to attempt resolving disputes through good faith negotiation between themselves or authorized representatives.
- Mediation: Name a neutral third-party mediator that the parties will engage if direct negotiation fails.
- Arbitration: Specify that unresolved disputes will go to binding arbitration before an arbitrator instead of court litigation. Outline details of the arbitration process.
- Litigation: Establish which state’s or country’s laws will govern the agreement. Also indicate the relevant court jurisdiction for any lawsuits.
The goal is to resolve issues fairly and avoid costly litigation. Ideally, outline a stepped approach starting with negotiation before escalating to mediation, arbitration, and lastly court.
Consider Confidentiality and Non-Disclosure Agreements
When a contract involves protecting sensitive information, include a confidentiality clause or separate non-disclosure agreement (NDA).
A contractual clause restricting one or both parties from sharing sensitive proprietary details covered in the agreement. Breaching confidentiality is grounds for terminating the contract.
Non-Disclosure Agreement (NDA)
A legal agreement defining private information shared between parties that cannot be made public or shared with others. Breaching the NDA may lead to legal action.
Common confidential information includes:
- Trade secrets
- Customer data
- Sales and marketing strategies
- Product designs and formulas
NDAs and confidentiality clauses help protect intellectual property and competitive advantage. Include them whenever necessary.
Add Any Additional Clauses or Provisions
Certain contracts may benefit from additional clauses covering specific issues between the parties. Typical additions include:
Indemnification Clause: Outlines compensation for loss or damages suffered by one party caused by the other party.
Force Majeure Clause: Defines unforeseeable events outside a party’s reasonable control (natural disasters, war, etc.) that may excuse contract delays or performance failures.
Non-Compete Clause: Limits one party from competing against the other, engaging with competitors, or starting a similar business within a geographical area for a specified time.
** Severability Clause**: Keeps the remaining contract valid if a portion is deemed legally unenforceable or invalid.
Governing Law Clause: Establishes which state’s or country’s laws govern the interpretation and enforcement of the contract.
Signature Block: Indicates where and how the parties will date and formally sign to execute the agreement.
Carefully consider which additional clauses are relevant to the transaction. Don’t add unnecessary provisions just for the sake of it.
Review and Make Adjustments
Before finalizing the agreement, thoroughly review the entire draft contract to spot any mistakes, inconsistencies, or areas needing improvement.
- Check for unclear, ambiguous, or conflicting terms.
- Ensure the contract is complete and covers all relevant aspects.
- Verify that the contract meets all legal requirements.
- Have key stakeholders and other parties review and provide feedback.
- Make revisions and adjustments where needed.
It is also wise to have legal counsel review substantial contracts before signing. An experienced lawyer can identify potential issues or necessary revisions. Investing in proper legal review can prevent headaches down the road.
Finalize and Execute the Contract
Once satisfied with the content, it’s time to formalize and execute the agreement.
- Print or generate a final PDF version of the contract document.
- Ensure all parties have access to a copy. This may require printing multiple copies to sign.
- Include signature fields for all parties to fill in and date by hand. Or use e-signature software if signing electronically.
- Signatures should be accompanied by printed names and titles of the signers.
- Save copies of the fully executed agreement for each party’s records.
Remember that signatures show mutual intent to comply with the contract. Both parties should keep a signed copy to refer back to if needed to resolve disputes. With that, you now have an enforceable agreement!
Drafting a complete contract may seem daunting, but following the key steps outlined here will set you up for success. First understand the legal basics, then clarify the purpose, define the parties, and outline the terms. Address dispute resolution, make revisions as needed, and execute with signatures.
No contract can anticipate every possibility, but covering these fundamentals will help safeguard your rights and create a mutually beneficial agreement. Where complex transactions or legal questions arise, don’t hesitate to enlist qualified legal counsel. Do your due diligence upfront and rely on a well-drafted contract to avoid misunderstandings down the road.
With a solid agreement in place, you can proceed confidently with the assurance that the contract establishes fair expectations and protections for everyone involved. Though the process takes diligence and attention to detail, the potential headaches avoided are well worth the effort. Here’s to drafting successful contracts and win-win partnerships!