The Basic Principles of Drafting a Contract

The Basic Principles of Drafting a Contract

Written By
Joy Cunanan
Updated on
May 28, 2022
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minutes

Fast economical growth in our rapidly moving world is essential for the success of your business. Contracts are written agreements agreed upon by all parties that provide accountability for the execution of tasks and ensure that the goals of the agreement are met with quality. 

A well-drafted contract can help protect the legal interest of your business, build better relationships with other parties, and minimize potential risks that your business may face. Knowing how to draft a contract ensures that your business receives the greatest benefits and allows you to defend yourself in court if necessary.

Whether you are an owner of a small business or a senior manager at a large company, knowing how to properly draft a complete contract is a crucial skill to have. Although every contract can be different, the drafting process of a contract follows the same basic steps. 

In this guide, we’ll go through each step of how to draft a contract, what happens in each step, and how you can make solid business agreements.

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Contract drafting defined

A contract is a legally binding agreement between parties. This document details the rights and duties governing an agreement. In other words, it is a promise that can be enforceable by law. This promise could ensure that the other party gets a specific task done or avoid it altogether. Contracts can also be created through either a written or oral agreement, however, contract drafting typically refers to written contracts. 

Contracts do not only guarantee a standard of practice but they also provide clear specifications to avoid any misunderstandings between parties,  which leads to better work efficiency. They also act as a written piece of evidence when or if a promise is broken — also known as a contract breach — and will offer your business protection and remedy. 

The goal when drafting a contract is to create a document that is both legally binding and as close to all parties' demands as possible, ensuring that the document is concise and clear. 

Let’s go through the basic elements that should always be included in drafting a contract.

Four basic elements of contract drafting

A contract is a legally binding agreement between parties. This document details the rights and duties governing an agreement. In other words, it is a promise that can be enforceable by law. This promise could ensure that the other party gets a specific task done or avoid it altogether. Contracts can also be created through either a written or oral agreement, however contract drafting typically refers to written contracts. 

  1. Offer - All contracts must have a valid offer and acceptance to be legally binding. One of the parties makes a promise to do or refrain from doing some specified action in the future. For example, a person who is trying to sell a car must make an offer to another person who is willing to potentially buy the car. That buyer must then formally agree to buy it — creating mutual assent. 
  1. Acceptance - There must be something of value in exchange for a specified action or nonaction. This could be an amount of money, a promise to do something, or an agreement to not do something. This is what helps distinguish a contract from a gift, which is purely voluntary and gratuitous and expects no promise of something in return.
  1. Consideration - The offer is accepted unambiguously. What this means is that all parties involved in the contract should share the same understanding and acceptance of the contract. Acceptance may be expressed through words, deeds, or performance as called for in the contract. Examples include action, money, property, and intellectual property.
  1. Valid purposes - The contract cannot be illegal so there is a need to check that it is valid. Certain contracts may also be unenforceable because they are immoral and against public policy. All contracts are also subject to governing law, so it will be important to specify where your contract might be potentially disputed, which is often the same country as your business, or your person.

Now that we’ve gone through the basic elements that are always a part of drafting a contract, let’s identify the main steps of drafting one in detail.

Steps in contract drafting

As previously mentioned, contracts are an essential part of running a successful business. Every contract can be different in terms of objectives and terms, but the drafting process mostly follows the same basic steps.

  1. Determine if all parties can participate.

Drafting a contract is pointless if it cannot be enforced on all parties. This rule is in place to protect those who may lack the expertise and knowledge on a certain situation from getting taken advantage of. This means if they choose to sign a contract, that contract will not be legally binding.

Minors, those under the age of 18 in most cases, do not have any capacity to enter into a contract. Those who are judged to be not mentally fit also may not enter into a contract. In most cases, what determines if someone has the mental capacity to sign a contract is whether they fully understand the meaning and the effects of the words within the contract or just the transaction itself. 

  1. Determine the consideration.

Consideration refers to what will be exchanged due to the contract. This could be in the form of goods or services or any other promise of compensation. A few examples include creating or designing a piece of work, developing software, transferring ownership of a car or a house, or just simply paying money. It can also be a promise to refrain from doing something such as not building a property over a specific height.

Considerations should always be clearly stated. Without this, a contract will not be valid.

  1. Determine the contract’s terms.

Once the considerations are agreed upon, the terms of the contract should allow all involved parties to receive their desired end goal which must arrive with no ill faith. This means no attempt at deception can be made.

Contract terms also state when the considerations must be met. 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.

  1. Consider using a confidentiality clause.

Oftentimes when a contract is being drafted, intellectual property such as trade secrets or other confidential information is involved, which is why using a confidentiality clause is recommended. 

A confidentiality clause acknowledges that sensitive information will be shared and ensures that both parties take measures to protect the confidential information. This helps to keep confidence in the execution of the contract. 

Here is a sample of what a confidentiality clause could look like: 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.

  1. Determine the contract clause termination.

The termination of the contract clause is the length or duration of the contract. 

It is very common for business contracts to end due to negligence claims therefore you should state what consequences are on the line. Other important things to state would be what types of actions can lead to premature termination and what actions will be taken if for any reason there needs to be a premature termination of the contract. All of these would refer to a dispute resolution clause. 

  1. Offer the contract up for acceptance.

The next steps are very straightforward. Once the contract is drafted, you can offer it to the other party who can either choose to accept or deny it. If they accept, you may move on to the final step of signing. Otherwise, you may make a counteroffer. 

If the other party makes a counteroffer to your initial contract draft, you can either accept that counter offer or provide your own counteroffer in response.

  1. Sign the contract. 

A contract is not valid or enforceable unless every involved party signs it. Once a final offer has been agreed upon by all parties, you should conclude the contract drafting process by making all parties sign and date the contracts. 

It does not matter who ends up signing first or last as the order of signing does not provide any advantages to any party. Once signed, both or all parties should each obtain a copy of the contract. 

Importance of contract drafting

Even if you are only making a simple agreement, it is always in your best interest to create a written contract. Having a great relationship or complete trust with the other party does not mean accidents or mistakes cannot and will not occur. Thus, it is recommended to always have a contract in place to protect you and your company and to provide a solution if things go wrong.

Without a contract, sensitive information could be exposed to your company’s competition. This information could include:

  • Customer or client databases
  • Sales and marketing plans or techniques
  • Schematics for an invention
  • Unique manufacturing processes
  • Software, passwords, and system specifications

Having the right skills to draft an appropriate contract also means that you will have better clarity for your business, whether that is in contracts, agreements, or rights between all contract parties. 

Tips for contract drafting

As previously mentioned, being able to draft contracts is an essential part of conducting business. In order to grow and succeed, businesses must be skilled at drafting and negotiating contracts. If you’re still unsure about what the best way to draft a contract is, let us help you. 

Below, you'll find a few of our most useful tips for drafting contracts so that you'll have the best chance of creating a productive and fruitful partnership in the future. Let’s go through some of the best tips for contract drafting.

  1. Get it in writing. As previously mentioned, oral agreements are legal and binding in many situations, but incredibly hard to enforce in court. Although an oral agreement is technically just as enforceable as a written contract, it is much more difficult (and thus costly) to prove that a verbal contract exists. A written contract is less risky as it clearly details obligations and rights as opposed to oral agreements.
  1. Keep it concise and clear. Make your contract easy to understand, clear, and concise. Too many people think that contracts need to be nearly unintelligible in order to be enforceable. In fact, it is exactly the opposite. If there is one piece of advice we would give to any person entering into an agreement, it would be to make sure the contract simply says what you’re agreeing to.
  1. Deal with the right person. You want to make sure that the person you’re negotiating with has a certain level of authority. This is because you don’t want to waste time going back and forth with someone who has to get prior approval from their boss for every negotiation. 
  1. Correctly identify parties. Although this seems quite obvious, many people get the names of their parties wrong. Make sure this is correct so you can ensure that the correct people are and will be responsible for performing the obligations agreed upon.
  1. Indicate all of the details. As previously mentioned, you want to keep your contracts concise and short. At the same time, you also don’t want to leave out anything that could be of importance. Even if you’ve discussed something verbally with the other party, make sure it is all in writing to ensure that it is enforceable.
  1. Specify payment obligations. Whether you’re going to be paying in installments, when the work is finished, or when you are satisfied — all of this should be indicated. You should also consider what methods of payment you will choose to use.
  1. Agree on ways to solve disputes or terminate contracts. Always discuss and set circumstances that would lead to a termination, and agree on a way to solve disputes where if a breach or dispute happens the other party will be compensated. This will save you time and money so you don’t have to go to court every single time a breach of contract happens.
  1. Pick a state law to govern the contract. If you and the other party are located in different states, you should choose only one of your state's laws to apply to the contract to avoid sticky legal wrangling later. You may also want to consider where you will mediate, arbitrate or bring legal action.

Always get it in writing

Drafting a contract may seem daunting to delve into, but they don’t have to be. Think of it as just a document that outlines the general business between you and the other party.

Although it is not the most exciting thing to do, it is crucial in protecting you and your business and will help you minimize any risks and obstacles along the way. As your business grows, so will the number of contracts you will have to manage. Thus, having a good contract management platform will help you simplify the contract life-cycle. 

At Lexagle, we’ll help you digitally transform your contracting processes, giving you a smarter way to manage all your agreements. Check out our features here

The Basic Principles of Drafting a Contract
Author
Joy Cunanan
Joy is the Digital Transformation Manager at Lexagle. As a marketing professional in the Tech and B2B industry for over seven years, she is always on the lookout for the next best solution in the ever-changing online world. With a passion for helping businesses thrive and optimize operations, she shares her expertise in the power of contract lifecycle management and its capacity of easing the contracting process for busy organizations worldwide.

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