How to Draft a Contract

Last Updated: June 19, 2020

Knowing how to draft a contract is an amazing skill to have in your arsenal. Contracts vary depending on the business relationship and for many, writing a business contract can be overwhelming. So, where do you start?

Before the Pen Hits the Paper 

Time is money. Do not waste your precious time skipping ahead to the contract without having all of the important details. The very first steps in the contract drafting process include:

  1. The Parties to the Contract – This seems simple enough, right? But it is a fairly common issue. The parties must be correctly identified. Close enough is not good enough. The legal names need to be clearly stated, especially if it is an agreement with an entity. The entity’s entire legal name should be spelled out (LLC, LLP, etc.). Also, confirm you are dealing with the right person and that they have the authority to enter into the agreement.
  2. Determine Whether the Parties can Legally Enter into a Written Contract – What does that mean? They need to be over the age of majority. The age of majority varies from state to state but is usually eighteen. The next requirement is that the individual is mentally competent to enter into the agreement, which encompasses being under the influence of drugs or alcohol. The individual cannot be forced to sign the contract, which in legal terms is referred to as duress or coercion. If the court finds any of the above issues, the agreement will more than likely be unenforceable.
  3. Do the Parties Agree? Before drafting a contract, it is a good idea to have a conversation with the individuals regarding the scope of work, pay, and other relevant information. 

Write it Out 

The contract should be in writing. In some situations, verbal agreements may be legally binding, but they are hard to prove and even more challenging to enforce. Securing a written agreement is more secure because it clearly states each party’s obligations, rights, and remedies.

Focus on the Basic 3 Elements of a Contract 

All contracts must include three essential elements: Offer, Acceptance, and Consideration. If any of the pieces are left out, the contract will be unenforceable.

  • Offer = Communication – The offeree, the person receiving the offer, must have firsthand knowledge of the offer so that they have the power of acceptance. Simply put, the offer must be communicated.
  • Acceptance – represents the offeree’s intention to accept the terms of the offeror’s (person extending offer) offer.
  • Consideration – The parties must be able to demonstrate a bargained-for exchange agreement and illustrate the legal value of the deal representing if there is either a benefit to the promisor (the person extending the promise) or that there is an evident detriment to the promisee.

Details Matter 

The meat of the contract should detail the obligations, rights, and remedies of each party. The terms of the contract should be extremely meticulous, spelling out all agreements between the parties. Do not rely on a gentleman’s agreement or handshake deal. Verbal agreements outside the four corners of the contract are generally not accepted by a judge.

We are human; we forget things. Do not sweat! If you forget to add something, the contract can be amended. The parties must agree in writing to any amendment or modification to the original contract.

Money, Money, Money

The parties must agree on the terms of payment. The agreement needs to state who pays who, when, and any other stipulations the parties agreed to. To eliminate confusion, the method of payment should be included, along with the mailing address or email address where payment can be accepted.

Termination and Duration of the Contract

How long will the contract last? Is It for a specific duration, or is it open-ended? The answer to these questions should be detailed in the contract. There are also circumstances where a contract can be terminated. The parties’ agreement on when the contract can be terminated, and the process should be incorporated into the agreement.  

Some situations that may warrant the termination of a contract include:

  • Non-payment
  • Failure to perform
  • Failure to meet deadlines

These are some examples that illustrate a direct breach of contract. A detailed termination clause ensures that the non-breaching party is protected should they decide to terminate the contract because of the other party’s breach of the termination clause.

 How to Resolve Disputes and Remedies 

All contracts should include a dispute resolution provision. It details how the parties agree to resolve any issues that may arise under the agreement. The parties can agree to a variety of dispute resolution methods other than court, including mediation or arbitration. Another important factor is in the event of a dispute, which party will be responsible for legal and attorneys fees.

Which State Will Govern the Agreement?

Contract law varies from state to state. It is always a good idea to obtain legal advice as to what requirements your state may have to ensure you are in compliance. It is not uncommon, especially in business transactions, for the parties to live or do business in different states. The parties must agree on which state’s laws they want to apply to the agreement.

Confidentiality 

In business agreements, parties often exchange privileged information. The parties will more than likely have access to trade secrets and protected business practices. It is vital to consider confidentiality if you do not want the other party disclosing such information. A confidentiality clause will bind them from sharing certain business information under the agreement. A confidentiality clause may also be labeled as “non-disclosure.”

Simplicity Eliminates Wordy Legalese 

Complicated legal jargon such as “therefore, “whereby, “whereof,” “heretofore,” are examples of legalese. These words are found in some parts of the contract, typically at the very beginning and the end. But the meat of the agreement does not have to be so wordy. Surprisingly, contracts do not need all of the legalese to be enforceable. Keep it simple, clear, and concise.

When you are detailing the scope of work, keep it straightforward and easy to understand. The terms of payment should also be simply put. The agreement should not be misleading or hard to read; those are things a judge may take into consideration and could deem the contract unenforceable if the agreement is intentionally misleading.

Is your Contract Enforceable? 

The goal of drafting a contract is ensuring its enforceability. A well-crafted contract will protect your business interest, which is vital to your company’s success. Becoming acquainted with legal terms takes time. It also takes time to master the art of contract drafting. Consulting with an attorney can review your contracts to make sure you have hit all of the requirements.

Access Contract Templates

ApproveMe provides access to an abundance of contract templates that can help you get started drafting a contract. Our WP plugin replaces the way you get contracts signed. Our E-Signature plugin is quick and easy. It is how your business will be one step closer to its prime.

Some types of contract templates we’ve got available:

  • Real Estate Contracts (Basic Leases, Month to Month, Home Repair, Construction, etc)
  • Independent Contractor Agreements
  • Small business Startup Documents
  • General Employment Contracts (Interns, FT and PT Hires)
  • Sales Contracts (for Goods or Services)
  • And More!

It’s always best to get things proofed by a local legal professional as well, as it’s impossible to account for all local legalities with a contract template – though these documents will get you 95% of the way there and cover all general situations. There may also be cases where having one state vs another as the legal location for disputes may benefit you more than others.

 

NEXT ARTICLE >>  Is Your Contract Enforeable?

 

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