How to Draft Contracts: Everything You Need to Know
Business owners want to know how to draft contracts which is an agreement that two or more parties enter into that is legally binding.3 min read
Some business owners want to know how to draft contracts. A contract is an agreement that two or more parties enter into that is legally binding and enforceable by a court. “Parties” to a contract can be individuals, business entities, or other institutions. The subject of a contract is typically the exchange of some type of goods or services. A contract must include all relevant information about the exchange. Essentially, anyone can draft a contract on their own; an attorney is not required to form a valid contract.
What Are the Elements of a Valid Contract?
In order for a contract to be legally valid and binding, it must meet certain requirements. Contracts are generally governed by the law of the state where the agreement was made. However, contracts for the sale of goods are governed by the Uniform Commercial Code (UCC)—standard guidelines that govern commercial transactions.
At its most basic level, a contract forms when one party offers to exchange something of value to another party, who then accepts. To expand, there are some core elements that every contract must incorporate to be considered valid:
- Contractual intent
- Lawful subject matter
- A valid offer
- A valid acceptance
- An exchange of an item that has value
- A written document (in certain circumstances)
The first step of forming a contract is for one party to make an offer. Before another party accepts the offer, there are a few situations that could play out. For instance, the offeror could revoke the original offer before the other party accepts. For a revocation to be considered legal and not a breach of contract, it must occur before there is any kind of acceptance. If the other party accepts and the offeror subsequently revokes their offer, it will be considered breach of contract. Similarly, if the offeror agrees to keep the offer open for a certain period of time—also known as an “option contract”—the offeror cannot revoke the offer until that period has ended.
The other party could also reject the offer completely or make a counteroffer. A counteroffer becomes the new offer, and the original offeror must either accept, reject, or make another counteroffer.
Accepting a contract is fairly straightforward. There are a number of different ways a party can communicate their acceptance:
- Verbal or written acceptance
- Performance of the exchange
- Promise to perform
- Partial performance
How to Write a Valid Contract
To begin writing a contract, make sure to include the basic information about the exchange. The contract should include the names of the parties involved, the date the contract will go into effect, and a description of the goods or services to be exchanged.
The provisions of a contract should be written in specific language, and the terms should all be well defined. Any ambiguity will only result in misunderstandings or disputes between the parties, which can increase the chances of litigation. The terms of the exchange should be written in detail. If the contract will govern the sale of goods, it should describe the goods (color, size, make, model, etc.), how many are to be exchanged, and the total asking price. It should also describe when and where the goods are to be exchanged.
The parties to a contract are always free to modify its terms, as long as they both agree to those changes. If they wish to do so, they must attach a written addendum with their signatures and date and attach it to the original contract.
It is a good idea to include a termination clause. A termination clause will dictate how the contract will terminate and how long the contract will last. If the contract covers a one-time exchange, the termination clause should state that it will end upon completion of the transaction. If the contract is governing an ongoing relationship, the termination clause can stipulate how many days are required if a party wishes to terminate the contract.
A contract should always include what happens in the event a party breaches the contract. Depending on if a court deems a breach minor or major, there is usually some form of remedy available to the non-breaching party.
If you need help drafting a contract, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.