September 5, 2024
by Mary Clare Novak / September 5, 2024
In simple terms, a contract is a promise.
Whether that promise is to follow through on a predetermined action, refrain from an activity, or exchange goods--it all depends on the agreement at hand. But have you ever found yourself in a sticky situation due to a poorly worded contract? A seemingly small oversight can lead to significant legal and financial consequences.
Mastering the art of contract writing is essential for businesses and individuals alike.
A well-crafted contract should:
Consider using contract management software to simplify the process by automating tasks and ensuring compliance. Even if you trust the other party in the agreement, terms can be forgotten, and loyalties can be trusted. If you make an oral agreement and the other party doesn’t comply, there’s not much proof that they were required to.
Play it safe. Write a contract. Here’s how to go about it.
Chances are this is your first time writing a contract. It’s a big step, but it doesn’t start with sitting down with a pen and paper and writing out terms and clauses. Even before you go about considering the essential elements of a contract, you need to do some preliminary thinking.
The first thing you need to do is determine if your agreement even requires a contract. Again, it’s possible that your deal can be taken care of with an oral agreement. A good rule of thumb to follow is to ask yourself if something of significant value is being exchanged, such as labor or services, time, intellectual property, or material items.
Common instances that will involve any type of contract include buying or selling a home or car, starting a job with a new employer, or offering your services for a particular period of time (like a contract employee).
Once you’ve determined that your agreement calls for a contract, you need to make sure that you meet all the requirements to make it valid. There are a few other necessary elements of a valid contract you’ll have to include in the writing portion, but at this point, you should be thinking about the four things that are necessary to move forward legally.
Capacity refers to a person’s ability to enter a legally binding contract. There are certain groups that can’t be held accountable for their obligations:
You can still enter a contract with someone that falls under one of those categories. However, since they lack capacity, they can void the contract at any time without breaching the contract.
Legality covers whether or not the subject matter of the contract is legal. If the agreement includes any illegal activities, the contract isn’t valid.
Similar to capacity, you can technically still make a contract that contains illegal subject matters. However, if the other party doesn’t hold up their end of the deal, you have no argument that they are liable for damages in court because the contract was illegal to begin with.
Consideration is the exchange of one thing of value for another. If your agreement lacks consideration, you won’t have a reason to form a contract.
Examples of valid consideration include money, services, taking a certain action, or refraining from one. Things that don’t count as real consideration are taking action voluntarily or performing existing duties.
Mutuality refers to the idea that if one party is bound to the contract, then both parties must be. If one party can opt out of the agreement at any time and the other lacks that ability, courts will likely rule the contract invalid.
Before you write up the official offer and expect an acceptance in return (those terms will be covered later on), make sure that all parties involved have a good idea of the agreement.
Drafting up the actual contract is quite a bit of work, so ensure that everyone knows what to expect. Have a discussion with everyone involved to go over the terms and conditions so anyone can mention if something seems off or needs to be adjusted before the offer is written.
If you’ve decided the contract is necessary, gained an understanding of the requirements of a contract, and verified that all parties are in agreement, it’s time to write the actual document. It’s important to note that writing the draft or using a contract template might take some time, but paying attention to detail should not be sacrificed.
The first part is easy. Start with the most basic information of the agreement, like the names of the parties included and the date of the exchange. Specify which party is the buyer and which one is the seller. If the contract is between two businesses, make sure to use their full legal names. You can also include other identifying information, like someone’s title, here.
The opening statement might look something like this:
“This contract is between ___ and ___.”
Or this:
“Alex Jenkins and Ben Smith hereby agree as follows:”
Now’s the time for further elaboration. Describe what goods or services are being exchanged in clear, readable language and in as much detail as possible. Remember that an agreement had been made in good faith earlier between the two parties, so it’s important to abide by those terms as much as possible.
State the agreement, or what one party is promising to another and vice versa. Make sure to use short and simple sentences with clear language. Courts usually rule how a contract would be interpreted by the average person, and your average person isn’t a lawyer. If some terms seem a little bit ambiguous, include a section that defines each word as it will be used throughout the contract.
When elaborating on the exchange, make sure to use as much detail as possible. Don’t assume anyone will abide by anything that isn’t explicitly stated in the contract. If you don’t put it in writing, there are no guarantees.
Here’s an example of a poorly written statement about the details of the exchange:
“Alex agrees to write an article for Ben’s website.”
Signing a contract that includes this statement on the exchange is risky for both parties. On Alex’s side, there are no details that guarantee compensation or placement of the article. For Ben, he will have no idea when the article will be completed or if it’s appropriate in length.
Here’s another try with a bit more detail:
Alex Jenkins (seller) agrees to write a three-page article for Ben Smith's (buyer) website, whatishappening.com. Alex Jenkins agrees to have the article completed by August 20, 2020, for a flat rate of $100.
In this situation, both parties know exactly what they’re getting.
If your contract includes the exchange of goods, describe the object as thoroughly as possible. Instead of saying that you’re going to sell Alex Jenkins your red car, including the make, model, year, and delivery date.
It’s possible that you would prefer that the other party keep the contents of the contract and your personal details a secret. If this is the case, you can include a non-disclosure agreement (NDA) or a mutual NDA. This means that both parties would take legal action if the other revealed confidential information.
Every contract needs a method of termination. For one-time exchanges, the contract will end upon completion of both parties’ requirements. If the contract concerns an ongoing agreement, designate an end date for the contract or state how either party can terminate the contract.
This is also where you will include details if someone breaches the contract, which means they don’t abide by the agreement of the contract after it’s signed. On top of that, you’ll need to lay out dispute resolution terms if that breach occurs. Make a note of things like jurisdiction of court action and payment terms.
You should’ve checked for the legality of the subject matter before you started writing the contract. However, once all the details are squared away, you should do another confirmation that every single aspect of the contract is legal. Research the state and federal laws that apply to the contract so you can ensure that it can be enforced on both levels.
It’s format time. If you have all of the appropriate parts of a standard contract, the order should come naturally. It’ll usually look something like this:
At this point, you probably have a copy of the contract in your hand, ready to send it over to the receiving party. While a simple signature is all it takes to officially enforce the written agreement, there is plenty more work ahead before you get there.
Before the contract can be executed, you need to send the other party a draft, known as an offer.
It’s important to note that the draft of the contract at this point should reflect the agreement made in good faith earlier on, but it should also be exactly the way that you, the writer, want it. If the recipient accepts the offer, all they have to do is sign it, and it becomes legally binding. There’s no turning back for you at that point without breaching the contract.
If you want the contract to be finalized and signed by a certain time, include a date on which the contract either needs to be signed or rejected. If you don’t include a deadline, the timing depends on what the court sees as a reasonable time frame for the subject matter of the contract.
After you send the contract, the recipient can either accept it or reject it. If the recipient has no changes to the contract, that is known as an acceptance of the agreement.
However, if they come back with a modified version of the contract, it’s known as a counteroffer. If the recipient sends you a counteroffer, it terminates the validity of your original offer. It’s common for both parties to negotiate back and forth about the terms of the contract before they reach a final agreement.
Tip: Software contracts are a whole different story. Before you start your negotiations, make sure you understand the contract's contents.
After you’ve reached a final agreement and both parties are happy with the current state of the contract, it’s time to make it official. To do that, both parties need to sign and date the contract.
It’s possible that you negotiated and re-drafted the contract online. If this is the case, your signature will likely occur using e-signature software.
Contract parties have been concerned about signing a document online for some time, but an electronic signature is just as legally binding as one on pen and paper. After you sign, make sure to keep a copy for your own records and insist the other party does the same.
Above everything else, remember that once the contract is signed by both parties, it becomes legally binding and enforceable by law. If you don’t follow through on the end of the exchange that is laid out in a contract that you signed, that is a breach of contract, and there will likely be penalties. Sign with caution.
After you’ve signed a contract, you need to make adjustments in your daily, monthly, or yearly routine to abide by the terms you agreed to. This might involve adding a new employee to the payroll or crossing one thing off your to-do list.
Whatever the promise was, compliance should be your number one priority after signing a contract. And the best way to do that is by implementing a contract management strategy and software.
As your small business grows and changes, the contracts will pile up. From relationships with vendors to managing employees to closing deals with customers, you’re going to have a few different varieties of legal agreements on your hands. Non-compliance is a recipe for disaster, and a guaranteed way to get into legal trouble is not having a contract management system in place.
Contract management is a strategy that governs the creation, execution, and management of all of your company’s contracts. And no, this doesn’t mean throwing all of your documents into a filing cabinet.
When the time comes, be sure to invest in some contract management software. This tool will help your business automate the creation, tracking, and monitoring of all your contracts, no matter their subject matter. Contract management software will help you stay compliant in all of your agreements by prioritizing organization, accessibility, and awareness.
Writing a contract is a big deal. It can also be a bit time-consuming. You want it to be worth your while, and more importantly, you want to do everything you can to ensure that you are getting your value from the exchange.
Here are some tips for writing a tight contract that will make everyone happy.
One thing contract law loves is consistency. As you check for your contract's legality, part of that is making sure it abides by state law. If you and the other party live in different states, pick one state’s laws to apply to the contract and clearly state it in the document. This will avoid sticky situations later on.
When sending an offer to a business, quadruple-check that you are speaking with the right person before you start negotiations. If you aren’t connected with the decision maker and go through all of those discussions, it might be a waste of your time. If you are connected with someone who has to run everything by their boss, kindly ask to be connected to them.
When negotiating, make sure you are speaking with the person who has the authority to enter the company into a contract.
Contracts don’t have to be bursting at the seams with legalese. It can confuse people and cause problems during negotiations. To be fair and make sure all parties are as clear on the contract terms as possible, keep your wording and structure simple. Make sentences short, clear, and concise.
Legal agreements shouldn’t be taken lightly. When it comes to writing a contract for a complicated deal, it’s important to get everything in writing.
However, what’s even more important is effective communication between parties regarding the agreement itself.
Compliance is key after executing a contract. Learn the penalties associated with breaching a contract and avoid it at all costs.
This article was originally published in 2020. It has been updated with new information.
Mary Clare Novak is a Content Marketing Specialist at G2 based in Burlington, Vermont, where she is currently exploring topics related to sales and customer relationship management. In her free time, you can find her doing a crossword puzzle, listening to cover bands, or eating fish tacos. (she/her/hers)
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