Drafting a Contract: A One-Stop Guide
“A valid contract requires a voluntary offer, acceptance, and consideration.”
― Robert Higgs
So many business activities originate in our daily lives. Every day, we engage in countless transactions. Contracts and agreements are more commonly used by business people than by stay-at-home mothers. Every day, someone makes agreements or contracts. Contracts are the cornerstone of every transaction, from paying your newspaper or electricity bill to closing huge deals in the business. Examples of Contract: Commercial Contracts, Business Contracts, Employment Contracts, Lease Agreements, Insurance Agreements, Financial Agreements, etc.
Whether you are a small business owner or a senior manager of an organization, knowing how to draft a contract is a crucial skill.
What is a Contract?
A contract serves as the basis for all legal relationships involving two or more parties. A contract is a written statement of the terms and conditions agreed upon by the parties involved, including natural persons, big or small businesses, and other legal entities, which governs their future interaction explicitly. The contract must be registered after it has been created, approved by the parties, and signed.
When drafting a contract, the terms of an agreement are explicitly stated.
The purpose of drafting contracts is to produce a legally binding written document that is crystal clear, concise, and as close as possible to the intentions of the parties. Therefore, one must be thorough with contract law to become an expert in drafting any transaction contract.
Once a draft is ready, it needs to be revised. In my opinion, everyone should ideally have a contract checked before signing and reaching an agreement with the other contracting parties. This type of review may be referred to as a pre-contract review, although the post-contract review is the practice we see most often in our experience.
Simply put, a contract review is the thorough analysis of the terms, clauses, and conditions contained in the contract. This is an attempt to understand each clause as well as the purpose behind the wording of that clause. Anyone can thoroughly review the contract on their own or enlist the professional help of lawyers and solicitors to do the review on their behalf. We must bear in mind that contract review can resolve many problems and issues at an early stage, thus avoiding long-term loss or harassment.
Why Drafting a Contract Important?
This issue has been under discussion for a very long time. The two main types of contracts are written and oral. Oral agreements between the parties to a contract are a system of understanding in which the parties consent to and carry out the terms of the agreement. Written contracts are agreements between the parties wherein each term of the agreement is explicitly stated and documented. Though both types of contracts are generally considered to be valid, the latter is much more easily relied upon and is much simpler to work with in terms of their ability to be enforced.
Because of their nature, oral contracts are very challenging to establish in a court of law. This becomes every lawyer’s first line of defence to get out of any disagreement or legal action brought against their client because nothing is expressly recorded. In such circumstances, the victim will find it challenging to establish the existence of an oral contract between the parties that is legally binding and enforceable upon the parties to such contract and that the victim has suffered due to the breach of specific terms so agreed upon under such contract.
Therefore, using a written contract is always recommended. Such a contract will include particular clauses that may have been drafted by one or more parties, but it won’t be regarded as legally binding until all parties to the contract have agreed to it. This results in a written record of the terms that were agreed upon. In practice, it is much simpler to rely on these contracts because they explicitly state the relationship between and the rights and obligations of the parties, removing any potential for ambiguity in the future.
What is the Basic Procedure to be followed during Contract Drafting?
- First, it is important for the person writing or reviewing the contract to understand why it is being created. One needs to be aware of the contract’s subject and object and the part each party will play in achieving those goals. The rights and obligations that the contract’s parties have toward one another must be outlined in the agreement. Each party is there to fulfil a specific role, and this role and purpose must be easily and clearly understood during the contract drafting and review.
- Second, it is vital to consider the contract’s viability, including whether the terms and conditions stipulated therein can be fulfilled, whether the parties can carry out their rights and obligations under the agreement, which party stands to benefit most from the agreement, and who will shoulder the majority of the risk during its term, and so on. Determining whether a contract is feasible requires providing answers to such questions.
- Third, it’s important to foresee potential issues, problems, and disputes that might result from the contract in the future. The individual drafting the contract and reviewing it must be able to recognize which terms and clauses may present a risk that could lead to future disagreements and/or losses between the parties. The contract’s loopholes must also be identified, as well as any variations in how the parties might later use them to the agreement (Boilerplate clauses are frequently used to deftly create and cover such loopholes).
What are Clauses and Terms in a Contract?
There are a few fundamental concepts and clauses that are crucial for the drafting of a contract. Some of the Contract Clauses as mentioned below:
- Determining the subject of a contract and its legality is the first and most important step in the drafting process. The nature of the contract will be determined by its subject. If a contract is subject to legal enforcement, that legal enforceability will also depend on the subject matter of the contract. This is the first thing to consider when reviewing a contract. Simply stating that the subject of a contract is illegal in the eyes of the applicable laws often suffices to win cases.
- Definition clause: A definition clause must be included in every contract. This clause contains all of the definitions for the various terms used throughout the contract. A contract may contain a definition of a term that may explain the term’s meaning specifically concerning the contract, even though the term may be used throughout the contract with a general meaning. Since the word has been expressly stated and agreed upon by the parties to the contract, no other interpretation will be accepted in such circumstances because it is binding on the parties.
- Duration or Term of Contract: Regardless of how long the time frame may be, agreements are typically made for a specific amount of time. The term of the agreement is the period during which the terms of the agreement will apply to the relationship between the parties. The agreement terminates automatically when the term expires. In many cases, the completion of the objective for which the contract was entered into determines the length of the contract. For instance- To get to a place X, A, and B enter into a contract that will last for as long as it takes them to get there. Once they arrive, however, the agreement will end.
- Renewal clause: These clauses are added to contracts to eliminate the need to create new contracts periodically. A renewal clause can be added to the contract to ensure that it continues to have legal force without having to repeatedly draft and register new contracts if the nature of the work and the terms specified in it do not need to change for a lengthy period. These provisions are frequently found in the clause outlining the duration of the contract.
- A clause in a contract stating the amount of consideration and its legality is another crucial provision. It outlines the compensation that one or more parties are required to give the other party or parties in exchange for services rendered or goods produced by the latter. Such consideration must always be lawful, and it must be made using a tool or object that has been granted legal recognition by the relevant body of law. The entire contract will be void and incapable of being enforced if the consideration is paid with an illegal object.
- Inspection of products and goods: This provision assists the parties in protecting themselves from situations of fraud or misrepresentation that may occur as a result of inadequately high-quality products and goods delivered. Confirm that the goods they have received are of the quality that was agreed upon between them, this enables the buyer to inspect each good. On the other hand, it also offers a safety net to the selling party because, once the quality of the good is examined and approved, the buyer cannot hold the seller liable for any quality-related issues in the future.
- Provision for return or refund: This provision outlines all the scenarios and conditions under which the parties may return the product and/or request a refund of the purchase price. Contracts for the sale of mobile property typically use language like this.
- Another crucial clause that one should never neglect to draft and review is the one relating to dispute resolution and jurisdiction. When a disagreement arises between the parties to the contract, this clause specifies the method of dispute resolution or the legal action that will be taken by the parties. In the modern world, almost every contract contains this clause, and the majority of them choose an alternative dispute resolution system, such as arbitration, mediation, etc., to resolve disputes. The clause describing the jurisdiction in which any dispute will be resolved is another clause that is typically included in the dispute settlement clause. For instance, many multinational corporations have a jurisdiction clause that states that any legal action against the business may only be brought in a particular city, town, or region.
- Contract cancellation terms: These are the clauses that outline the conditions under which the agreement will be cancelled. It typically contains restrictions on certain actions, and if the parties violate one of these restrictions, the cancellation clause will be triggered, and the contract will be terminated. It also covers the obligations and rights to which the contract’s parties will be entitled if it is cancelled.
- Rights and obligations of the parties: Every contract is required to contain clauses that list the obligations and rights of the parties to one another. Every contract is based on these clauses; when they are broken, the parties typically have disagreements about what happened. To avoid ambiguity or vagueness, each party’s right and obligation must be stated precisely and in as much detail as possible.
- Force majeure: According to the Contract Laws, force majeure refers to all such unforeseen and unpredictable events and circumstances that may prevent one from carrying out their duty and thereby render the contract ineffective. The role of each party if a force majeure situation develops during the term of the contract is discussed in force majeure clauses, which cover a variety of contingencies, not just acts of God. This clause, which explains the division of expenses and costs incurred during contingencies, is frequently missed during the drafting and reviewing process but is just as crucial.
- Delegation of responsibility and liability: This clause is typically found in contracts and agreements relating to the production and sale of movable goods. The clause specifies what types of tasks can be assigned by the parties to other third parties and/or unidentified parties to the contract and who may be held accountable for any disputes that may arise due to inadequacy or inefficiency of goods and/or services provided by such third party.
- Expense payments: This clause specifies how expenses incurred as a result of the contract and during the term of the contract will be paid for. It specifies the manner of such payments and the ratio in which the parties to the contract may split the costs.
- Profit sharing: After the costs have been covered, it’s time to divide the revenue generated by the contract. The profit-sharing clause specifies how the parties will split the profit and how some may be used for other purposes agreed upon by the parties.
- Compensation: The compensation clause specifies the amount with which one must make up for another’s actions, inactions, or defaults that caused the latter to suffer a loss (financial, physical, or mental).
For the effective drafting of a contract, each of the steps above may require sub-details to be taken into account, while some contracts may need additional clauses depending on the business to which they apply. Contracts may be challenging. Before signing any documents, it’s critical to comprehend all of the terms of the agreement. It is recommended that you begin by consulting with legal and professional counsel. You can post your legal need on LegaMart if you require additional guidance on how to draft a contract. People of all nationalities, linguistic backgrounds, and socio-economic levels can easily connect with vetted and evaluated foreign lawyers thanks to LegaMart, the only global legal marketplace.