The first stage of the contract lifecycle is the drafting stage. Contract drafting is one of the most crucial parts of the contract management lifecycle because it provides the foundation for the rest of the contract. Clarity and precision in contract drafting are essential for ensuring that both parties needs are met. Additionally, having a well-written arrangement during every business deal can help provide a strong layer of legal protection.
In this article, we’ll help you understand the basics of drafting a contract, including:
- the main elements that should be included in all contract drafts,
- the steps of the contract drafting process,
- agreement drafting best practices.
Organizational Parts of a Contract
Like most legal documents, all contracts follow a basic format, called contract parts. The style, length, and details vary widely by industry and the complexity of the transaction. However, every agreement contains at least some of the common contract parts:
The Contract Frame — The formal language at the beginning and the signatures at the end.
The Definitions Section — The definitions used in the contract.
The Business Section — Setting out the party’s rights and responsibilities.
The Termination Section — Deals with the end of the contractual relationship.
The General Provisions Section — Sometimes called the boilerplate, this section contains statements of policy that govern the contract.
Contractual concepts, unlike contract parts, consist of the operative language in the agreement. These are the words that create contractual obligations and rights and are the basis for contractual liability or authority. They also set out policies for regulating the contractual relationship.
An easy way to think about contractual concepts is to associate them with verbs. Just as every sentence must have a verb, every sentence in an agreement contains at least one of these concepts. These are:
Declarations — These set the policy for the contractual relationship and can be used to define terms. They do not create any obligation or liability. Declarations are signaled by the present tense of the verb. “The purchase price is $25,000” is an example of a declaration. Note that this declaration does not obligate the purchaser to pay the purchase price. To create an obligation, a covenant should be used.
Covenant — A covenant obligates a party to do, or refrain from doing something. A covenant is an agreement signaled by the use of “shall,” “must,” “will,” or another similar term. For example, “the buyer shall pay the purchase price.” A best practice is to use “shall,” as it unambiguously signals an obligation as opposed to conditions.
Representations — This is a statement of fact or present intention. A representation is influential in bringing parties together for the agreement.
Warranty — A warranty signifies a promise that a fact is true. Unlike representations, warranties can extend into the future. Together, a warranty and a representation can create liability on the part of the party making these statements if a fact is not as represented and warranted.
Discretionary Authority — This gives the party discretion to do or refrain from doing something, but does not obligate the party to do anything. This is signaled by the use of “may.”
Condition — A condition is a duty that the parties are required to perform under the contract. Conditions are of two varieties: express, which is set out in the party’s agreement, and implied conditions, which are read into the agreement by the court. Conditions never appear in isolation and are always attached to an obligation. The language signaling a condition can vary from contract to contract. Failure of a condition does not in and of itself create liability or a right to damages. Conditions are never breached. Conditions may trigger an obligation, but they do not create obligations. Conditions are signaled by the terms “if,” “provided that,” “in the event of,” etc.
Drafting a Contract – Main Steps
Navigating the contract drafting process can be a complex task, requiring attention to detail and a thorough understanding of the parties needs. To simplify this process, we’ve outlined the main steps involved in drafting a contract:
1. Identify the Parties: Clearly define the individuals, businesses, or organizations entering into the contract. This includes specifying their legal names, addresses, and relevant contact information. For example, “ABC Corporation, a Delaware corporation with its principal place of business at 123 Main Street.”
2. Determine the Purpose: Establish the primary objective of the contract, which will serve as the foundation for all subsequent terms and conditions. For instance, a software development agreement might state, “The purpose of this agreement is to outline the terms under which the Developer will create a custom software application for the Client.”
3. Set Forth the Terms and Conditions: Detail the specific obligations, responsibilities, and expectations of each party. This may include payment terms, deadlines, performance standards, and other essential contract elements. Using our software development example, you might specify, “The Developer will complete the software application by December 31st, 2022, and the Client will pay a total fee of $50,000 over four installments.”
4. Include Warranties and Representations: These are statements made by the parties asserting the truthfulness of certain facts, such as a seller’s claim that they have the legal right to sell a product. Warranties and representations can provide a basis for legal recourse if a party’s claims prove to be false.
5. Address Potential Risks and Liabilities: Identify possible issues that could arise during the course of the contract and establish how the parties will handle them. This may involve including indemnification clauses, limitations of liability, and dispute resolution procedures.
6. Specify Termination Conditions: Clearly define the circumstances under which the agreement may be terminated by either party, such as a breach of contract or the completion of the agreed-upon services. Additionally, outline any notice requirements and potential penalties for early termination.
7. Incorporate Applicable Laws and Jurisdiction: Specify the governing law that will apply to the interpretation and enforcement of the contract, as well as the jurisdiction in which any legal disputes will be resolved.
8. Review and Revise: Once the initial draft is complete, carefully review the document for accuracy, clarity, and consistency. Make any necessary revisions to ensure that the agreement accurately reflects the parties’ intentions and complies with applicable laws and regulations.
9. Obtain Signatures: After finalizing the contract, have all parties sign and date the document to signify their agreement to its terms. Using electronic signatures can streamline this step, making it faster and more efficient.
By following these steps, you will be well-equipped to draft a comprehensive and legally sound agreement that addresses the needs of all parties involved. Now, let’s move on to the contract drafting best practices.
Drafting a Contract – Best Practices
To ensure a successful contract drafting process, it’s essential to follow best practices that promote clarity, efficiency, and legal compliance. Below, we’ve outlined a numbered list of best practices for drafting contracts:
1. Choose Plain Language: Write contracts using clear, concise language that is easily understood by all parties involved. Avoid overly technical jargon and complex sentence structures, and use common terms to express legal concepts, ensuring wide audience comprehension.
2. Be Specific and Detailed: Clearly define the rights, obligations, and expectations of each party by providing specific details, examples, and deadlines. This minimizes ambiguity and helps prevent potential disputes down the line. For instance, specify payment terms, milestones, and deliverables in a service agreement.
3. Leverage Contract Management Software: Utilize contract management software like Concord to streamline the drafting process, collaborate with team members, redline documents, and securely store signed agreements.
4. Use Contract Templates: Utilize contract templates provided by CLM tools to save time, maintain consistency, and ensure that your contracts adhere to industry standards. Templates can be customized to suit your specific needs and can serve as a starting point for drafting various types of agreements.
5. Use a clause library: Utilize a clause library in CLM software to quickly assemble agreements with the most up-to-date and legally compliant clauses. This allows you to easily find and insert clauses into your documents without having to research them yourself, saving you time.
6. Consult With Legal Professionals: Whenever possible, consult with legal professionals when drafting agreements to ensure that all provisions are valid and legally enforceable. This is especially important for complex agreements, such as those involving intellectual property rights or mergers and acquisitions.
By following these best practices, you can create well-crafted documents that effectively address the needs of all parties to a contract, while also minimizing potential legal risks and fostering successful business relationships.
Drafting contracts is an essential component of the contract management process. By following our tips and best practices you can create legally sound agreements that protect your interests while fostering successful relationships between yourself and other stakeholders. Ultimately, taking the time to draft effective agreements will help ensure a smooth relationship between both parties in the future.