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.
What Is the Objective of Drafting a Contract?
The goal of drafting a contract is to produce a legally binding document that accurately captures the parties’ agreement while presenting the terms in clear, precise, and concise manner. The contract should reflect the parties’ demands as closely as possible.
Key Elements to Consider When Drafting Contracts
While the specific of each contract may differ, some core elements are common to all agreements. These elements are explored in-depth in our contract basics guide, but it is important to ensure that the following are clearly reflected during drafting:
- 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
How To Ensure Written Contracts Are Legally Enforceable
When drafting an agreement, you should ensure that it incorporates all the core elements of a contract. The terms must clearly reflect the parties’ consent, and the contract should comply with any required formalities — such as signatures — depending on the applicable jurisdiction.
Who Can Draft Contracts?
Traditionally, a company’s legal counsel has been responsible for drafting contracts to ensure that agreements are legally sound. Other departments — like procurement, sales, or HR might also prepare drafts, but legal teams typically still handled final reviews, revisions, and high-risk agreements. This often made contract drafting a long and tedious process.
The rise of AI-powered contract lifecycle management platforms (CLMs) is changing this dynamic. For instance, Lexagle enables business teams to select contracts from a standardized template library and generate dynamic contracts in seconds, all of which are aligned with defined playbooks and company policies. Lexagle also offers automated routing based on predefined rules to ensure proper review and approvals.
This empowers non-legal teams to draft standard contracts efficiently, while allowing legal teams to shift their focus from routine drafting to oversight.
To see how an AI-powered CLM enables this in practice, you can watch this walkthrough of Lexagle: https://www.youtube.com/watch?v=QCIqGcFxkpo
What Type of Contracts Do Businesses Commonly Draft?
Businesses draft contracts every day to formalize agreements for various purposes. While the types of contracts vary, some are especially common in routine business operations, like:
- General Business Contracts – Agreements that define the relationships among stakeholders and govern daily business operations. These include partnership agreements, non-disclosure agreements (NDAs), and indemnity agreements.
- Bills of Sale - Legal records of sale between a buyer and seller, proving transfer of ownership for items such as vehicles or equipment.
- Employment Agreements - Contracts that the terms of employment, such as pay, benefits, and responsibilities.
- Licensing Agreements - Agreements that indicate how one party can use another’s intellectual property.
- Promissory Notes - Written agreements that define the terms of a loan, including repayment schedules and interest rates.
For a detailed breakdown of each type, check out our comprehensive guide to business contracts.
What Are the Common Clauses in Business Contracts?
When drafting a contract, you will encounter different clauses, each serving a specific purpose to clarify rights, responsibilities, and risk allocation. While every contract is unique, most agreement you will write would typically include the following types of clauses:
- Confidentiality and Non-Disclosure Clauses – Protect sensitive information shared between parties throughout the duration of the contract.
- Governing Law, Jurisdiction, and Dispute Resolution Clauses – Specify which laws apply, where disputes will be resolved, and the process for resolving conflicts, helping avoid uncertainty and delays.
- Liability and Indemnification Clauses – Allocate responsibility for losses or damages between the parties.
- Termination and Enforcement Clauses – Define how and when the contract may end, what happens if parts are invalid, and confirm that the written agreement reflects the full understanding of the parties.
For a full breakdown of the typical contract clauses and their purposes, see our guide to common contract clauses.
How To Draft Contracts? (Simple Steps)
While contracts may vary in their objectives and terms, 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
Common Mistakes To Avoid When Drafting 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 the 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.
Want to see how to avoid these contract drafting mistakes confidently? Check out our in-depth guide on contract errors and how to fix them.
Why Is Drafting a Contract Important?
Regardless of how simple an agreement may seem, it is always in your best interest to create a written contract. A strong relationship or complete trust between parties does not eliminate the possibility of mistakes or disputes. Having a drafted contract in place helps protect you and your business while providing a clear course of action if issues arise.
Without a contract, sensitive information could be exposed about your company, such as:
- Customer or client databases
- Sales and marketing plans or techniques
- Schematics for an invention
- Unique manufacturing processes
- Software, passwords, and system specification
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Leverage CLM Tools. Use CLM platforms to streamline drafting and reduce human errors. They can guide you through compliance checks, track revisions, and maintain an organized repository of contracts for easy retrieval and audit, saving time and mitigating legal risk.
The Best Tool For Contract Drafting: Lexagle
Writing contracts can be time-consuming and prone to errors, but using the right tool can make the process easier, faster, and more reliable. Lexagle is an AI-powered CLM platform equipped with features that streamlines the contract drafting process.
- Adaptive Contract Templates – Generate contracts in seconds using the latest, fully compliant templates aligned with your company’s playbooks and regulations
- Central Contract Library – Store all your contract drafts securely in one place, making them easy to access, share, and manage.
- Automated Review Path – Route contracts automatically based on configurable rules, ensuring the legal team or other stakeholders review drafts before execution.
- Draft Versioning – Track changes in your draft with audit trails, so you always know which version is current and can monitor revisions for accountability and compliance.
Ready to simplify your contract drafting? Book a demo to see how Lexagle can help your team create, review, and finalize contracts faster and more accurately.
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.
Disclaimer: This article is intended for informational purposes only and should not be considered legal advice. Lexagle does not provide legal services. Readers should consult a qualified legal professional for advice regarding their specific legal matters.
