How to Draft a Contract in 3 Easy Steps
How to Write Contracts
A contract is an agreement that is legally enforceable. Although the word "contract" often refers to a written document, writing is not always necessary to create a contract. An agreement can bind both parties even though it is oral. However, some contracts must be in writing to be enforceable. All contracts must include an offer, the acceptance of that offer, and an exchange of value between the parties (which is known as consideration). If any of those elements are missing, the contract will not be valid. Hiring a lawyer to write or design a contract is often expensive and time consuming, so many people choose to set up their own contracts for simple business or personal dealings. Because a contract is legally binding on you and the other parties to the contract, always take great care in drafting a contract.
Discussing and Drafting a Contract
Discuss the specific details with the person with whom you are creating a contract.Both parties should agree upon the terms of the contract before drafting it.Usually, someone “offers” terms and the other party “accepts” terms.
- If the accepting party would like to negotiate before agreeing to the terms, that is fine. In most cases, once a counter-offer is introduced, the original offer no longer stands.
Consider the task or work to be completed.If either party need to conduct a service, does the performance specified in the contract need to be completed within a certain amount of time or by a certain date?
- For example, when negotiating terms for a construction contract, include specifications on when the work should be done. Additionally, include terms that address weather or other types of delays.
Discuss the exchange of funds.If the contract involves an exchange of funds, specify the amount of money that you will exchange. Make arrangements for accepted payment options as well. Include terms setting out what to do if more money is needed to complete the service or other potential problems relating to funds associated with the contract.
Consider whether the contract needs to be ongoing or one-time.If the contract sets up a long-term relationship between the parties, make sure to specify the end date for that relationship.
- For example, if you own a business that sells homemade pies and you enter into a contract to sell your pies to a local grocery store, you should specify the length of the obligation to sell the pies to the store, e.g. one month, one year, etc.
- If the contract simply covers a one-time transaction, there is no need to specify that the contract will end after the completion of performance. For example, if you sell your car to someone and write up a contract for the sale, you don't need to specify that the contract will cease to have an effect when you sell the car and the buyer pays the money.
Address how to handle problems related to the contract.Especially if your contract covers more than just one transaction, it is important to place provisions in the contract that discuss what happens if something goes wrong. Will either party have a way to get out of the contract if performance becomes very difficult or expensive? You can put provisions in the contract stating what your obligations would be in a situation like this.
- For example, say you make homemade blueberry pies and contract to sell the pies to a grocery store. If a shortage causes the price of blueberries to rise 200%, can you change the unit sale price?
Determine whether the contract must be in writing to be enforceable.Although not all contracts need to be in writing to be valid, it is a good idea to memorialize your agreement in writing to preserve evidence of the agreement and its terms. The following contracts must be in writing:
- A contract for the sale of land
- A contract that will last for longer than one year
- A contract for the sale of goods for a price of 0 or more
- A contract of marriage
- A suretyship contract, which is a contract saying that someone will pay another person’s debt if that person doesn’t pay
Write a contract that meets all requirements.Even if your contract does not need to be in writing, you should formulate a written document if at all possible. In order for a written contract to be valid, it should:
- Identify the subject of the contract
- Indicate that the parties have entered a contract
- State the essential terms reached in the discussion
- Include any additional details relevant to avoiding misunderstandings
Double-check all of the details within the contract.If the contract contains misleading or incorrect information, it could be considered voidable due to either fraud or mutual misunderstanding. Presenting information as clearly and accurately as possible can minimize this risk.
Have all parties sign and date the contract.Each party should sign and date the contract (also called executing the contract) to make it official. Having a space for a witness to sign or a notary to notarize the contract is also a good idea.
Make copies of the contract for all parties, and begin performance.After the contract is signed by all parties, make copies to distribute to everyone. This will insure that no one forgets the contract terms. Once the contract is executed (signed), it becomes legally valid, and performance can begin.
Writing a Termination Clause into the Contract
Specify the length of the contract.One-time exchanges automatically terminate once the parties complete the exchange. However, parties involved in ongoing service contracts may want to include terms for the termination of the contract.
Include language pertaining to breach of the contract.If one party does not perform or becomes unable to perform, the contract can have terms for what will happen to the contract. This should include whether or not a party is able to terminate the contract with or without a penalty or mitigation of damages.
- For example, “If Company X does not deliver the [product] within 3 weeks of signing this Agreement, X has breached the contract and Company Y is entitled to buy the [product] from another vendor and recover any difference in price from Company X.”
Add dispute resolution terms for handling a breach.Note what the remedy for the breach is. The remedy that is usually used in breach of contract actions is money. Typically, the non-breaching party is entitled to the amount of money that he or she would have received if the contract had not been breached.
- Parties can also place a predetermined amount of money in the contract that will be paid in the event of a breach. This would include language to the effect of: “If one of the parties breaches this Agreement, the non-breaching party is entitled to ,000.”
Note who will pay attorney’s fees and court costs.If a party to the contract breaches, and lawyers get involved, it is usually customary for each party to pay their own legal fees. However, parties can change the default rule by signing a contract that requires the losing side in a legal dispute to pay the attorney’s fees of the winning side. To include a provision for payment of attorneys fees, including language such as:
- “The winning party has the right to collect from the other party its reasonable costs and attorney’s fees incurred in enforcing this Agreement.”
Consider adding an alternative dispute resolution clause.Alternative dispute resolution is a term for various ways to settle a legal dispute short of litigation in court. ADR is usually faster, simpler, more efficient and more flexible than litigation.Also, using ADR is a private proceeding, which is good for businesses that do not want to hurt their reputation by engaging in public litigation. Types of ADR include:
- Mediation: a procedure where a neutral third person helps the parties talk through their dispute and come up with a solution that everyone is satisfied with.
- Arbitration: this procedure is similar to a trial: an “arbitrator” hears from both sides and then makes a deciding that will be binding based on the evidence presented by the parties.
- Negotiation: negotiation is where the parties resolve the dispute themselves, possibly with attorneys.
Spell out an ADR solution in the contract.Parties to the contract can decide to use an ADR procedure after a dispute arises, but it will be more difficult for them to reach an agreement on ADR procedures after a contract dispute arises. To write an ADR clause into a contract, use language similar to the following:
- “All claims and disputes arising under or relating to this Agreement are to be settled by mediation/arbitration/negotiation which will be conducted in the state of [whatever state the parties agree on].”
What is the best wording to use on a contract where someone will be paying money onto an account?
- Always write exactly what you mean. You will be held to the contract in court. Therefore, you may want to have a lawyer or other person read the contract to ensure that the terms listed are clearly understood by others.
- Never sign a contract you have not read or do not fully understand.
- This article offer legal information, but it does not offer legal advice. Consider having an attorney draft or review any contract into which you may enter.
Sources and Citations
- Contracts, Steven L. Emanuel, The Emanuel Law Outlines Series, pgs. C-2 - C-10.
- Contracts, Steven L. Emanuel, The Emanuel Law Outlines Series, pgs. 263-293.
- Chirelstein's Concepts and Case Analysis in the Law of Contracts, Seventh Edition (Concepts and Insights Series).
- Contracts, the Essential Business Desk Reference, Richard Stim (pgs. 15-16).
Video: Why You Must Always Use A Contract And How To Write One
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