Draft a Contract: 3 Tips & 5 Basic Components

What Does It Mean to Draft a Contract?

When you draft a contract, you write down the conditions and terms of an agreement. A contract is a legally binding agreement between parties. The document details rights and duties governing an agreement. Though you can create a contract through written or oral agreements, contract drafting typically refers to written contracts. Written contracts are generally preferred because they provide a clear record of the agreement and are easier to enforce in court. Parties may go through a few drafts and negotiate back and forth before finalizing a contract. The goal when drafting a contract is to create a document that is both legally binding and as close to all parties' desires as possible, ensuring that the document is concise and clear.

Contract Basics

Though the specifics of each individual contract will vary, when you draft a contract, it must contain a few key pieces of information to make it valid and legally binding. First, every contract must have capable parties as part of the agreement — someone who is mentally incapacitated or a minor cannot legally sign a valid contract. Then, the document itself must contain:

• Offer
• Acceptance
• Consideration
• Valid purposes

Mutual Assent

All contracts must include a valid offer and acceptance between the parties to be legally binding. For example, a car sale includes one party selling the car and the other party agreeing to buy it, and therefore has mutual assent.

Consideration

All contracts must include adequate consideration to be enforceable. In employment contracts, for instance, one party agrees to complete job duties while the other agrees to pay a determined amount.

Consideration is a bargained-for promise. Consideration is the exchange of something of value between the parties, which could include money, goods, services, or promises. The promise cannot be illegal, nor can it be something a party is legally obligated to do already. Examples of consideration include:

• Action
• Money
• Property, including intellectual property

Here is an article about intellectual property.

Legality

You also must consider legality when you draft a contract. Legality is whether a contract meets all jurisdictional requirements. Furthermore, both parties must be at the age of consent and agree to the terms freely. For instance, a provision of a contract may be legal in one state and not another. An example of this is non-compete clauses, which are honored in some states but not allowed in other states.

What Is a Draft Contract?

A draft contract is just an agreement that has not yet been finalized. The parties have not yet agreed on the exact terms and wording used in the draft.

How to Draft a Contract

Drafting an effective contract requires a multi-step process. Main steps include:

1. Determine if all parties can participate: All parties to an agreement must be considered capable for a contract to be valid. You cannot force someone to sign a contract using coercion or duress. In most situations, parties must be over the age of 18 to be able to participate in a contract. Contracting parties must always be mentally fit, including not being under the influence of alcohol or drugs when signing the contract.
2. Determine consideration: You must state the elements of consideration clearly for a contract to be effective. Remember, consideration is the exchange of something, for example, intellectual property, services, goods, or the promise of an exchange for compensation. A contract cannot exist without consideration.
3. Set the terms of the contract: A contract's terms should ensure that both parties can receive their desired result from the agreement. You should arrive at the terms in good faith, without attempting to use deception. It's best to express terms of a contract in written form instead of orally. Having a written record of a contract makes enforcing that contract much easier.
4. Decide if you want to use a confidentially clause: Confidentially agreements are useful if your contract involves trade secrets or any other confidential information. By including a confidentially clause, you can make sure sensitive information stays secure. Someone breaking the confidentially agreement will be considered in breach of contract. Here is an article about confidentiality agreements.
5. Include a dispute resolution clause: A dispute resolution clause details how the parties will deal with a breach of contract. This can include the party responsible for paying attorney fees and whether the parties will use arbitration or litigation. If the parties decide to use litigation, this clause should also include the legal jurisdiction in which the breach should be resolved. A dispute resolution clause can also state negotiation or mediation is required before heading to arbitration.
6. Include a termination of contract clause: Specify the length of a contract when drafting an agreement. Your contract should also state any actions either party can bring to cause early termination of a contract. In contracts involving ongoing services, you might also want to include a provision that allows for giving prior notice to terminate without cause. Thirty days prior notice is common. Some termination clauses also include negotiation, mediation, or arbitration before the clause can be enforced.
7. Ensure the contract follows all applicable laws: You need to be certain that you establish your contract within the bounds of all laws. If you don't, your contract will end up being unenforceable. You can include the jurisdiction your contract should be interpreted in to make this clear. For example, if both parties are in different states, the jurisdiction clause will specify which jurisdiction controls over the legal dispute.
8. Ensure the contract follows industry and other specific requirements: Many contracts also require additional clauses pertaining to the specific business or personal situations the contract covers.
9. Offer the contract for acceptance: After you draft a contract, you must offer it to the other party so they can consider it. The other party can accept the contract as it stands, proceeding to the final step of signing it. If they do not accept the contract, they can make a counteroffer instead.
10. Negotiate the contract's terms: If the other party makes a counteroffer to your initial contract draft, you can either accept that counteroffer or provide your own counteroffer in response. These exchanges of offers may occur back and forth repeatedly until both parties agree on everything. Remember to review the contract after each counteroffer so you are sure you understand all changes that have been made.
11. Sign the contract: Once both parties agree on the final offer, those parties must sign and date the document. The contract becomes legally binding only at that point. Both parties should obtain a copy of the contract to keep for their records.

Keep in mind that you must reserve the final page of the contract for signatures and dates whenever you draft a contract. A contract is not considered to be in effect unless both parties sign and date it. Further, both parties must understand all details contained in the contract before signing it. If a party does not understand any part of a contract, they should consult a lawyer before signing.

Contracts often include specific legal terms and conditions, so it is also important to include any applicable clauses and required wording. Other common terms and conditions include:

• Choice of law and forum selection
• Force majeure
• Indemnification
• Liquidated damages clauses
• Time is of the essence clauses
• Warranties

Why Should You Draft a Contract?

Even if you are making a simple agreement, it is usually in your best interest to create a written contract. Although an oral agreement is technically just as enforceable as a written contract, it is much more difficult (and thus costly) to prove that a verbal contract exists. A written agreement is therefore much less risky than a verbal agreement as it creates a document that clearly details both parties' obligations and rights should confusion or a disagreement arise.

Written contract requirements can vary depending on the state you reside or conduct business in, and different types of contracts also call for different requirements. Working with an experienced lawyer to draft a contract will help you ensure your contract includes all required clauses, terms, and details as required by your jurisdiction, business industry, and more.