How to Draft a Contract: Everything You Need to Know
Knowing how to draft a contract is an important skill to have, whether you are a small-business owner or a senior manager of a company. 3 min read
Drafting a Contract Overview
Knowing how to draft a contract is an important skill to have, whether you are a small-business owner or a senior manager of a company. This knowledge will help you craft a contract that will be of the greatest benefit to you and be legally defensible in court, while also preventing you from signing contracts that are not in your best interest. The drafting process itself will vary in the specifics from contract to contract, but follow the same basic process for most contracts.
Steps in Drafting a Contract
Drafting an effective contract is a multi-step process, the main steps of which are:
- Determining if all parties can participate in a contract. In most cases, contracting parties must be over the age of 18. In all cases, contracting parties must be judged mentally fit to sign a contract. This includes not being under the influence of alcohol or other drugs at the time of signing. Coercion and duress may not be used to induce a contract signing.
- Determining the consideration of the contract. The consideration is the exchange of some form of goods, services, intellectual property, or a promise of exchange for some form of compensation, without which a contract cannot exist. The elements of the consideration must be stated clearly for the contract to be effective.
- Determining the contract’s terms. The terms should allow both parties to receive their desired end from the deal and be arrived at in good faith, meaning no attempt at deception was made. Such terms are also preferably expressed in written rather than oral form, as having a record of the contract will make enforcing it much easier.
- Considering using a confidentiality clause. If trade secrets or other confidential information is involved in your contract, then a confidentiality agreement is highly recommended. Such an agreement will ensure your sensitive information remains secure; if not, a breach of contract will have occurred.
- Adding a dispute resolution clause. This will detail how a breach of contract is to be handled, including who will pay attorney fees, whether arbitration or litigation will be used, and (in the case of litigation) what legal jurisdiction the breach will be resolved in.
- Including a termination of contract clause. The length of the contract should be specified, as well as what actions by either party may bring about a premature termination of the contract. If the contract concerns ongoing services, a provision may be included to allow for prior notice (usually 30 days) to terminate the contract without cause.
- Making sure the contract adheres to the law. Whatever your contract concerns, certainty should be made that it has been established within the bounds of any applicable laws. If not, the contract in part or in whole will not be enforceable. What jurisdiction a contract is to be interpreted in can be stipulated in the contract.
- Reserving the last page for signatures and dates. If a contract is not signed and dated by both parties, it will not be considered to have been put into effect. All details of the contract should be understood by both parties before the contract is signed; if a party does not understand any element of it, legal counsel should be consulted.
- Offering the contract for acceptance. Once a contract is drawn up, it should be offered to the other party concerned for consideration. If they accept it as is, then it will be signed, but a counteroffer will often be made instead.
- Negotiating the terms of the contract. If a counteroffer is made, it is then up to you to accept the counteroffer or counter it with another offer. Often, such an exchange of offers will occur until a final offer that both parties agree upon has been negotiated. With every counteroffer the entire contract should be reviewed so as to be certain that all changes made to it are understood.
- Signing the contract. Once a final offer is agreed upon, both parties will sign and date the contract. Once this occurs, the contract will be legally binding. Both parties should keep a copy of the contract for their records.
Each of the above steps may require sub-details to be considered for the effective drafting of a contract, and many contracts will require additional clauses depending on the business the contract pertains to. If you need further advice relating to how to draft a contract, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.