Knowing how to draft a contract is an important skill to acquire, no matter who you are, a small business owner, or a senior manager of a company. This information will help you create a contract that will be the most advantageous to you and be upheld in court, as well as keep you from entering into agreements that are not in your best interests.
You must already be aware of the importance of legal documents if you’ve found this article. A written contract serves as a legal record that a mutually agreed-upon arrangement became effective in addition to the actual work and money paid. However, the wrong agreement may have unintended legal repercussions and seriously harm the business. Keep reading, let’s start with what is a contract.
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What Is A Contract?
Any agreement that at least two parties who want to exchange something of value made in writing and that is legally binding is referred to as a contract. Even though all agreements are contracts, not all agreements are contracts.
Only agreements that result in a legal obligation, contain some kind of consideration, involve parties who are competent to contract, and are freely consenting are considered agreements. Terms and conditions agreements, privacy policies, and gentleman’s agreements are a few examples of agreements that aren’t regarded as contracts. To learn more, see agreement vs. contract.
What Does It Mean to Draft a Contract?
You put the terms and conditions of an agreement in writing when you draft a contract. A legally binding agreement between parties is referred to as a contract. The agreement’s rules are spelled out in detail in the document. Although an oral or written agreement can result in a contract, contract drafting usually refers to written agreements. Before agreeing on a final contract, parties may go through a number of drafts and engage in back-and-forth negotiations. When drafting a contract, it is important to ensure that it is brief and understandable while also ensuring that it is both legally binding and as close to all parties’ expectations as possible.
Why Draft A Contract?
It is typically in your best interest to create a written contract, even if the agreement is straightforward. Although a verbal agreement is legally just as enforceable as a written one, proving the existence of a verbal agreement is much more difficult (and therefore expensive). As a result, a written agreement is much less risky than a verbal one because it establishes a written record that precisely outlines each party’s obligations and rights in the event of misunderstanding or disagreement.
The requirements for written contracts can change depending on the state in which you live or conduct business, and different contracts have different needs. It will be easier to ensure that your contract contains all necessary clauses, terms, and details as required by your jurisdiction, business industry, and more if you work with an experienced lawyer to draft it.
How To Draft A Contract?
It takes several steps to draft a strong contract. The main steps include:
- Identify the participation of all parties: A contract can only be deemed valid if all parties to it are deemed capable. A contract cannot be compelled by threats of harm or coercion. Most of the time, contracts require that participants be older than 18 to participate. The parties to the contract must always be in a sound mental condition, which includes not using drugs or alcohol at the time of signing.
- Determine what to consider: A contract must clearly state the elements of consideration in order to be binding. Keeping this in mind, consideration refers to the exchange of something, such as intellectual property, services, goods, or the promise of exchange for compensation. Without consideration, there cannot be a contract.
- Set the contract’s conditions: The provisions of a contract should guarantee that each party will be able to get what they want out of the arrangement. Without attempting to use deception, you must come to terms in good faith. It is preferable to express the terms of a contract in writing rather than orally. It is much simpler to enforce a contract when it is documented in writing.
- Make a decision regarding the use of a confidentiality clause: If your contract involves trade secrets or any other confidential information, confidentiality agreements are helpful. You can guarantee that sensitive information is kept private by including a confidentiality clause. A person will be held in breach of contract if they violate the confidentiality agreement. This article discusses confidentiality agreements.
- Incorporate a clause for dispute resolution: How the parties will resolve a dispute over a contract breach is outlined in the clause. This can include who will be responsible for paying the attorneys’ fees and whether or not the parties will go to court or arbitrate their dispute. This provision should also specify the jurisdiction in which the breach should be adjudicated if the parties opt to litigate.
- Specify a clause for contract termination: When drafting an agreement, including the duration of the contract. Any actions that either party may take to cause early termination of a contract should also be specified in your contract. You might also want to include a clause that permits giving advance notice of termination without cause in contracts for ongoing services. It is typical to provide 30 days’ notice.
- Make sure all applicable laws are followed in the contract: Make sure that your contract is established within the parameters of all applicable laws. Your contract will become unenforceable if you don’t. To clarify this, you can state in your contract which jurisdiction should be used for interpretation.
- Verify that the contract complies with industry-specific requirements and other requirements: Many contracts also call for additional clauses that deal with the particular business or private circumstances they cover.
- Present the agreement for approval: After drafting a contract, you must make it available to the other party so they can review it. The other party may agree to the terms of the agreement and take the next step of signing it. They have the option to submit a counteroffer if they reject the contract.
- Negotiate the terms of the agreement: If the other party counteroffers to your initial contract draft, you have the option of accepting that counteroffer or counteroffering back. The back-and-forth exchange of offers could continue until all terms are agreed upon by both parties. Reread the contract after each counteroffer to ensure that you are aware of all the modifications.
- Sign the contract: The final offer must be accepted by both parties in order for it to be signed and dated. Only at that point does the agreement take on legal significance. A copy of the contract should be obtained by each party for their records.
Remember that whenever you draft a contract, the last page of the document must be set aside for signatures and dates. A contract is not deemed to be in force until it has been signed and dated by all parties. Furthermore, before signing the contract, both parties must agree on all of its terms. A party should seek legal advice before signing any document if they are unsure of any terms.
It is crucial to include all relevant clauses and necessary wording because contracts frequently contain specific legal terms and conditions. Other typical terms and conditions include:
- Choice of law and forum selection
- Force majeure
- Liquidated damages clauses
- Time is of the essence clauses
What Should Be Included In A Contract?
All parties should feel secure and confident when they are bound by written agreements. You should use language that business owners are accustomed to and format your document accordingly. Additionally, it is worthwhile to go over your contract’s terms with the client before getting them to sign it at the end.
Here are the components typically found in a contract for the best outcome:
- Names and addresses of all contract parties
- How much money the offering party will receive in exchange for their services
- Legal purposes and mutual agreement
- Acknowledgment of competence by both parties
- Terms and conditions as appropriate
- Signature and date lines
You should always allot enough time to the contract drafting procedure. No matter how big or small your business is, you must safeguard your legal rights and those of your stakeholders. Otherwise, you run the risk of unintended and unwelcome consequences, which could put you liable.
Different Types Of Contracts
Contracts cover a wide range of legal issues and, when used properly, can be very effective. There are therefore many options available for you to select from. Learn about the types of contracts that are frequently used by both individuals and businesses in order to understand the type of contract you may need.
Every business owner should be familiar with the following common types of contracts:
Business partners were given partnership agreements to draft. If you’re a partner in a business or general partnership, you need to have a written partnership agreement in place to prevent misunderstandings. This guide will show you how to deal with profit-sharing issues, daily operations, and potential conflicts.
Sales contracts are employed in the commission of product sales. Although they are comparable to asset purchase agreements, they typically deal with sales rather than asset acquisitions overall.
Asset Purchase Agreement
Asset purchase agreements (APAs) are binding contracts used when buying large quantities of assets. Assets typically include sales of machinery and tools that exceed $500. Real estate deals are the only exception to this rule.
Commercial leases lay out the terms and conditions between you and a business tenant. These lease types differ from residential leases in that they address particular concerns regarding term length, variable rates, and insurance.
When hiring independent contractors, you must enact confidentiality agreements to protect trade secrets. You can include confidentiality agreements in your employment contracts so that you have legal protection and options in the event of unauthorized disclosure.
Joint Venture Agreement
When collaborating on a project or business venture with another company, joint venture (JV) agreements are the ideal legally binding document. A JV agreement will specify the terms for payment, licensure, and other issues, for instance, if another business plans to feature your products within theirs.
Service agreements are binding contracts that service providers can use to offer their knowledge to another business. They typically specify the project’s breadth and depth, the terms of payment, and the procedures for resolving disputes. Since they typically don’t offer a tangible final product, service businesses are always harder to protect, and ambiguity can be the death knell of contractual outcomes.
Read More: How To Sue Companies?
When Does A Contract Get Drafted?
Your particular requirements will ultimately determine how long it takes to draft a contract. It might take a few days to create a straightforward, one-page agreement, but it might take weeks or months to complete a lengthy, complex document. More significant transactions frequently involve the negotiation and renegotiation of a deal, which can significantly extend your timeline.
Can I Draft My Own Contract?
Contracts can be drafted by both individuals and companies. Contract law, however, is extremely technical and varies by state, province, and nation. If nothing else, you should at least have a conversation with a business lawyer to find out how they can assist you and how to make your signed contracts more effective.