A Review: What Is Contract Drafting?
Contract drafting is a stage in the contract lifecycle where parties set out the terms and conditions of their agreement in writing. During this stage, the parties stipulate the clauses they must observe, along with other relevant details such as compliance requirements and key dates. This process typically follows the initiation of a contract request.
How To Write Contracts? (Simple Steps)
Contracts may vary in their objectives and terms. However, the drafting process generally follows these consistent set of steps:
Step #1: Determine if all parties can participate.
Drafting a contract is pointless if it cannot be enforced against all parties involved. This rule exists to protect individuals who may lack the knowledge or expertise to fully understand the agreement. As a result, if these individuals sign a contract, the agreement may not be legally binding.
Minors generally cannot enter into legally binding contracts. Similarly, individuals who are deemed mentally incapable may also lack the legal capacity to enter into a contract. In most cases, mental capacity is determined whether a person can understand the nature of the agreement and the consequences of entering into it.
Step #2: Determine the consideration.
Consideration is a crucial component of a contract and should always be clearly stated. Without it, a contract will not be valid. After all, a contract is not a gift — it involves an exchange.
Consideration can manifest as something of value that each party agrees to give or promise in return for the other party’s action or promise, such as providing goods or services, designing a piece of work, developing software, transferring ownership of property, or simply paying money.
This can also appear in contracts as a promise to refrain from doing something, such as agreeing not to build a property above a certain height.
Step #3: Determine the contract’s terms.
Once the consideration is agreed upon, the parties should structure the terms of the contract in a way that allows each party to achieve their intended outcome in good faith. This means the agreement must be made without any attempt at deception or misrepresentation.
In the contract terms, the parties should also specify when the considerations must be fulfilled. Here’s an example of a term in a contract:
Contractor shall maintain such books and records for (insert name’s) review for at least six years beyond the Term of the Contract unless (insert name’s) authorizes a shorter period in writing.
Step #4: Consider using a confidentiality clause.
In business contracts, intellectual property — such as trade secrets or other sensitive information — is often involved. For this reason, including a confidentiality clause is highly recommended.
A confidentiality clause recognizes that sensitive information will be shared and requires both parties to take steps to protect it. This helps maintain trust and ensures that the contract is executed with confidence.
For example, a confidentiality clause may read:
The parties hereto agree that each shall treat confidentially the terms and conditions of this Agreement and all information provided by each party to the other regarding its business and operations. All confidential information provided by a party hereto shall be used by any other party hereto solely for the purpose of rendering or obtaining services pursuant to this Agreement and, except as may be required in carrying out this Agreement, shall not be disclosed to any third party without the prior consent of such providing party.
Step #5: Determine the dispute resolution and termination clause.
After the other terms of the contract have been established, it is important to include a dispute resolution clause, which helps both parties manage conflicts and outline remedies in advance.
Equally important is the termination clause, which specifies what actions or events can trigger early termination and the steps each party must take if the contract ends before its agreed terms.
Together, these clauses give you a legal safety net, helping safeguard your interests and reduce the risks associated with disputes or early termination.
Step #6: Finalize the core contract structure.
Once all parts of the contract have been drafted, the parties should ensure that the contract is organized and internally consistent. This means:
- Confirming that there are no conflicting terms.
- Checking that all obligations, responsibilities, and dates are accurately recorded.
- Ensuring that all necessary clauses are included and clearly worded
Key Elements to Consider When Drafting Contracts
While the specific of each contract may differ, some core elements are common to all agreements. Here are ways on how you can successfully integrate them:
- Intention – Ensure the parties intend the agreement to be legally binding.
- Offer – Clearly state what one party is proposing to do, provide, and refrain from doing.
- Acceptance – Confirm how the other parties will show their agreement to your offer, whether through words, actions, or performance, to establish mutual assent.
- Consideration – Specify what you and the other parties will give, do, or refrain from doing in return, ensuring the agreement reflects a mutual exchange.
- Capacity – Ensure that all parties have the legal ability and authority to enter into the contract.
- Valid Purpose – Verify that the contract’s objectives are lawful and specify the governing law or jurisdiction
Best Practices for Contract Drafting
Drafting strong contracts is essential for any business that wants to protect its interests and operate smoothly. Here are some practical tips to help you create clear, enforceable, and effective agreements:
Maintain Clear and Accurate Drafting
- Keep contracts concise and clear. Make it clear, concise, and easy to understand. More importantly, ensure that the contract states, in simple terms, what you are agreeing to.
- Correctly Identify the Parties. Ensure that the individuals or entities listed in the contract are the ones legally responsible for fulfilling the agreed-upon obligations. Accurate identification helps make the contract enforceable and prevents disputes over who is bound by its terms.
- Clearly Define All Terms and Clauses. Each contract should clearly spell out the specific terms and clauses that govern the agreement, such as obligations, timelines, payment details, and responsibilities. Even if something was discussed verbally, documenting it ensures enforceability and prevents misunderstandings between the parties.
- Ensure Clause Consistency. Make sure that all clauses in your contract align with each other and don’t contradict any terms. Consistent language prevents confusion, reduces the risk of disputes, and ensures that the contract is enforceable.
Manage Professional Obligation and Risk
- Engage with an authorized representative. Working with someone who lacks the proper authority can lead to delays due to repeated back-and-forth for approvals. Moreover, only representatives with the appropriate authority can enter into agreements that are legally enforceable.
- Specify Payment Obligations. Clearly outline how and when payments will be made, whether in installments, upon completion of work, or after meeting specific milestones. Also define the acceptable payment methods and any conditions tied to payment, so both parties know exactly what is expected and to prevent potential disputes.
- Include Termination and Dispute Resolution Clauses. Clearly define the circumstances that could lead to early termination of the contract and outline the steps each party must take if such a situation arises. Similarly, establish a process for resolving disputes, whether through negotiation, mediation, or arbitration, so that conflicts can be handled efficiently and without resorting to costly court proceedings.
- Pick a Governing State Law. Select a single state’s laws to govern the contract to avoid complications if the parties are in different jurisdictions. Typically, you can choose the state where your business is located, where the contract will be performed, or where the majority of obligations will be carried out. Specifying this upfront provides clarity and reduces legal uncertainty in case of disputes.
- Seek Guidance When Drafting. If you’re unsure about how to word a clause or structure a term, consult a legal expert or experienced colleague. Getting advice during drafting ensures your contract is clear, enforceable, and effectively protects your interests from the start.
Utilize Contract Management Tools
Manually writing contracts from scratch can be a time-consuming task that is often prone to error. Contract lifecycle management (CLM) tools help streamline the contract drafting process while mitigating legal risk.
For instance, a global financial institution with operations in 56 countries used Lexagle to reduce contract writing time for its customer contracts from 4 days to 10 minutes by using its template builder feature. Similarly, a Philippine manufacturing company used Lexagle’s AI contract analysis feature to review key terms and address potential compliance issues. This led to 25% fewer contract disputes.
Start a conversation with our specialists to see how Lexagle can expedite contract drafting for your organization without sacrificing compliance.
Common Mistakes To Avoid When Writing Contracts
Even with careful drafting, contracts can still contain pitfalls that create confusion and legal risk. Here are some of the common mistakes that you should be mindful of:
- Vague or Ambiguous Language – Using unclear or imprecise wording can create disagreements over interpretation, making contract enforcement difficult.
- Undefined Key Terms – Parties may interpret key terms differently when they aren’t clearly defined, creating confusion and potentially undermining enforceability.
- Unclear or Missing Scope of Work – Disputes or misunderstanding may arise if a contract does not clearly define what each party is supposed to do.
- Incomplete or Overlooked Payment Terms – Failing to define payment amounts, schedules, modes, and conditions can lead to non-payment and disrupt the cash flow of your business.
- Missing or Weak Termination Clauses – Without clear termination provisions, parties are uncertain on when or how the agreement ends.
- No Dispute Resolution Process – If no dispute resolution mechanism is defined, parties may have to resort to litigation to resolve conflicts, which can be time-consuming and costly.
- Unenforceable or Illegal Provisions – Clauses that violate laws or public policy are not legally binding.
- Contradictory or Inconsistent Clauses – Conflicting provisions within a contract can cause confusion and make enforcement difficult.
- Undefined Governing Law or Jurisdiction – Failing to specify which laws govern the contract or where disputes will be adjudicated can create uncertainty and complicate legal enforcement, especially in cross-border agreements.
Frequently Asked Questions
Here are answers to some of your contract drafting questions:
Why is contract drafting important?
A drafted contract protects all parties by clearly outlining obligations and measures for resolving disputes, providing a reliable framework if issues arise.
Are verbal contracts legally valid?
Yes, verbal agreements can be legally binding, but they are much harder to prove in case of a dispute. Having the contract in writing provides clear evidence of the terms agreed upon and makes enforcement far more straightforward.
Who can draft contracts?
Traditionally, a company’s legal team drafts contracts to ensure they are fully compliant and enforceable. However, with AI-powered CLM platforms like Lexagle, business teams across functions — such as sales, HR, and procurement — can now efficiently draft standard contracts while legal focuses on review and high-risk agreements.
