How to Draft a Contract: A Comprehensive Guide
Contract language, or “legalese,” can seem foreign and overwhelming. However, most contracts follow a basic format. Once you understand what that is, it’s easier to understand the terms of the contract — or even write one yourself. This guide will walk you through the basics of contract writing.
What Is a Written Contractual Agreement?
A written contractual agreement is a written legal agreement between two or more people or businesses. A contract spells out exactly what each person or company agrees to do. For example, if you hire someone to paint your house, a written contract would say how much it will cost, what color the house will be, and when the job will be finished.
In a written contract, all the important details are laid out in a binding agreement. This includes who is involved (the parties), what they are agreeing to do (the terms), when it needs to be done by (the time frame), and how much it will cost (the payment). Sometimes, there are also rules about what happens if someone doesn’t do what they promised — often called a breach of contract.
One of the big advantages of a written contract is that it helps prevent misunderstandings. Since everything is written down, it’s easier for everyone to remember (and be held accountable for) what they agreed to. If there’s a disagreement later, you can look back at the contract to see what was originally agreed upon.
A written contract can also be used in court. If someone doesn’t follow what they agreed to in the contract, the other person can take legal action, and the contract will be used as evidence.
What Are the Most Common Types of Contracts?
Contracts can cover almost any type of agreement you can think of, from buying a car to signing up for an app. Here are some of the most common types you’ll see.
Asset Purchase Agreements (APAs)
These legal documents are used when someone wants to buy or sell important items, like a business or part of a company. For example, if a business owner wants to sell their company, they’ll use an APA to make sure everything about the sale is clear, like what parts of the business are being sold and how much it will cost.
Commercial Lease Agreements
These are used when renting out business spaces, like offices or stores. Unlike renting an apartment, commercial leases are more complex and often last longer. They outline things like how much rent will be, how long the lease will last, and who will pay for repairs.
Joint Venture Agreements
This type of contract is drawn up when two or more businesses decide to work together on a specific project but still want to remain separate companies. It details things like how much each business will contribute, how they will make decisions, and how profits or losses will be shared.
Partnership Agreements
Partnership agreements are needed when two or more people start a business together. The agreement lays out important details like how much money each partner puts in, how contracting parties will make decisions, and what happens if a partner wants to leave the business.
Sales and Service Contracts
These common contracts are used when buying or selling goods and services. For instance, if you hire someone to fix your roof, you’ll both sign a service agreement outlining what work will be done, how much it will cost, and when it will be finished. Sales contracts are similar but are used when buying or selling things like cars, electronics, or other goods.
6 Steps To Write a Contract Agreement
Drafting contracts doesn’t have to be complicated. The following guide will help get you started and make sure your contract covers all the details.
1. Identify the Parties Involved
Clearly identifying everyone involved in a contract guarantees there’s no confusion about who they are. Include the full names of the people, companies, or organizations that are entering into the agreement. If it’s a business, include details like the company’s legal name and address. For individuals, use their full legal names and addresses. This clarity is important because it defines who is responsible for fulfilling the contract’s terms and to whom it grants certain rights and obligations. Getting this part right helps prevent misunderstandings and ensures that the contract is legally binding for the exact parties involved.
2. Detail the Type of Exchange and the Terms
This is the heart of your contract. The subject matter breaks down exactly what the mutual agreement is and its conditions. Here’s what you should cover:
- Describe the service clearly: Instead of just saying “house painting,” specify details like the exact areas to be painted, the type of paint to be used, the number of coats, and any prep work included.
- Set terms for payment: Clearly state the total cost, including whether it’s a flat fee or based on hours worked. Detail how payments should be made, when they’re due, and any charges for late payment.
- Define the timeline: Specify when the work will start and when it’s expected to be finished. Include deadlines for ongoing services if the project is long.
- Outline quality expectations: Describe the standards the work should meet. For house painting, this could include smoothness of the paint, evenness of color, and cleanliness of lines.
- Include conditions for changes: Explain what happens if either party wants to change something, including any fees or notice periods required.
3. Include a Termination Clause
A termination clause explains in contractual language under what circumstances either party can end the agreement before it’s completed and what happens if they do. Here’s what a good termination clause usually covers:
- Reasons for termination: The clause should list the specific reasons that allow the contract to be terminated, such as not meeting deadlines, poor quality of work, or changes in certain circumstances.
- Notice requirements: State how much advance notice must be given before ending the contract.
- Procedure for termination: This part outlines the steps to follow to end the contract, such as sending a written notice explaining why the contract is being terminated.
- Consequences of termination: The clause should describe what happens after the contract is ended, such as settling payments for work already done, returning property, or handling confidential information.
- Opportunity to fix problems (Cure Period): Sometimes, the clause gives the party that’s not meeting the contract an opportunity to fix — or cure — the problem within a certain time frame before the contract can be terminated.
4. Consider a Confidentiality Clause
A confidentiality clause is an agreement that certain information shared between the parties during the contract will be kept private. It’s useful in business deals where sensitive information, like trade secrets, client details, or unique business strategies, might be shared.
Here’s what a confidentiality clause usually includes:
- Definition of confidential information: The clause should clearly define what kind of information is considered confidential. This can range from technical data, financial details, and customer lists to business plans.
- Obligation to keep information secret: The clause states that the parties involved must not share confidential information with anyone else who is not part of the contract. It creates a legal obligation to protect and keep the information private.
- Duration: This part specifies how long the confidentiality must be maintained.
- Exclusions from confidentiality: There are usually exceptions to what is considered confidential, such as information that is already publicly known or independently developed outside the contract.
- Consequences of breaching confidentiality: This outlines what happens if someone breaks the confidentiality agreement. This can include legal action like paying damages or other penalties.
5. Add a Dispute Resolution Clause
A dispute resolution clause is a plan for what to do if there’s a disagreement or problem. It explains how disputes about the contract will be settled without immediately going to court, which can be expensive and time-consuming.
Here’s what a typical dispute resolution clause includes:
- Negotiation and mediation: Before taking any legal action, the parties agree to try to solve the issue through direct negotiation. If that doesn’t work, they might agree to mediation, where a neutral third party helps them reach an agreement.
- Arbitration clause: Sometimes, the clause may require arbitration instead of going to court. In arbitration, a neutral third party hears both sides and makes a decision. The process is usually quicker and less formal than court, and the arbitrator’s decision is often final.
- Jurisdiction and governing law: This part specifies which state’s or country’s laws apply to the contract and where any legal proceedings should take place.
- Costs of dispute resolution: The clause might also cover who will pay for the costs involved in resolving the dispute, such as mediation or arbitration fees.
- Limitation on legal actions: Sometimes, there are limits on the time frame in which a party can take legal action regarding the contract.
6. Finalize the Contract With a Signatures Section
The last step is for everyone involved to sign the contract. This shows that they agree to everything written in it. It’s always a good idea to have a contract review attorney look over any contract before you sign it.
When you’re ready to set a signature date, electronic signatures can make the process quick and convenient. Electronic signatures are increasingly common and legally recognized just like traditional pen-and-paper signatures.
One big advantage of electronic signatures is convenience. People can sign documents quickly and from different locations, speeding up the process of finalizing contracts. You also won’t have to worry about losing the contract since it can be securely stored on the cloud by the signing service.
Simplify Contract Signing Anywhere and Anytime With jSign
No matter what type of contract you’re creating, jSign makes contract automation simple with electronic signing. You can sign, send, receive, and track e-signatures with just a few clicks. Once contracts are signed, you can securely store, organize, and retrieve them throughout the contract lifecycle. Contact us today to get started.
