How to Write a Contract Agreement: Everything You Need to Know
If you want to learn how to write a contract agreement, you should first understand how contracts work. 4 min read
Updated July 10, 2020:
How to Write a Contract Agreement
If you want to learn how to write a contract agreement, you should first understand how contracts work. Contracts are legally binding agreements between two parties that specify an exchange of value.
For example, a contract could specify the sale of goods for a specific amount of money, called a consideration. The parties could be individuals or businesses. Effective contracts clearly detail the terms of the agreement and provide each party with legal recourse in case the contract is breached.
Fundamental to all contracts is the concept of a good-faith agreement—the belief that each party has a vested interest in entering into and fulfilling the terms of an agreement. Any deception, misrepresentation, and violations of the terms of the contract contradict the spirit of the good-faith agreement and can be considered as a breach of contract.
Determine Whether You Need a Contract
Typically, having a contract is recommended when exchanging items of value such as intellectual property, services, and valuable goods. In addition, contracts are recommended for all business agreements. Although oral agreements are legally binding, having a written agreement can be very important when resolving disputes over the terms of the agreement.
Before drafting a contract or entering into an agreement, make sure that the terms of the contract are in accordance with applicable law. In particular, determine the jurisdiction that governs the contract. For example, if you are selling real estate in New York, then New York state law may preside over your contract. Next, make sure that both the purpose of the contract is legal within the applicable jurisdiction and that the terms that you would like to include in the contract are legal in that jurisdiction.
Drafting a Contract
Further, confirm the names and the identifying information of each party involved in the contract. Typically, when drafting a contract involving a business, it is recommended that you clearly identify each person executing the contract as either an individual or a representative of a business. Always ensure that each person is legally able to execute the contract.
For example, only general partners can enter a business agreement on behalf of a partnership. Also, be sure to discuss the terms of the agreement with each person entering into the contract to ensure that they fully understand the contract. Otherwise, the contract could be voidable.
Describe the Items Being Exchanged
In the contract, specifically and clearly describe the items or services being exchanged. Include descriptive details to explicitly identify and differentiate the goods or services being exchanged from other similar products and services. If money is being exchanged, identify the amount, payment schedule, payment terms, and the payment method in the contract. Ideally, you should write in simple, clear English that can be easily understood by all parties executing the contract.
In addition to descriptive information, an effective contract will:
- Clearly delineate the rights and responsibilities of each party and
- Provide a contingency plan if the contract is breached
First, in case the terms of the contract are disputed, decide whether you would like to handle disputes in or outside of court. If in court, detail in the contract the party that will be responsible for the attorney's fees. If outside of court, include an alternative dispute resolution clause in the contract. For example, you could decide to use one or more of mediation, arbitration, or negotiation to amicably resolve disputes.
Typically, a contract may be terminated either after the exchange of goods or services is complete or when the contract is breached. It is always recommended that you specifically describe a termination process in the contract. Include details such as notice periods and protocols for destroying any sensitive information that was exchanged. For ongoing services, you could allow either party to terminate the contract after a certain notice period.
Having a detailed contingency plan is vital to provide legal recourse in case of a breach of contract. The contingency plan could include a procedure for how damages will be assessed, and the monetary awards to each party for damages. These could include late fees and penalties for late or missed payments, notice periods and warnings, and additionally a termination procedure.
Making the Offer
When the contract draft is complete, discuss the terms of the contract with each party involved before finalizing the contract. This ensures that the terms of the contract are clearly understood by each party and that any major concerns with the contract are addressed up front. Next, finalize the contract and submit the contract draft to each party for review. Be prepared to negotiate the terms of the contract and ensure that each party is fully in agreement with the contract before it is signed. Once the contract is signed, each party is legally bound by the terms of the contract.
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