How to Write a Contract And Avoid Common Mistakes
Writing a business contract is a crucial task as it forms a base on which the relationship between the companies and business partners is established. It contains all the important parts that are used to shape a business relationship. It defines the scale and limits of the steps and actions supposed to be taken to proceed with the business venture and transactions.
What is a contract?
A business agreement or a contract specifies the terms of the business between two parties. It clearly explains about the products or the services that will be exchanged and helps prepare sales and service proposal. It also states the time duration of the partnership.
The terms and other details mentioned in contracts can work as a mean to prevent the disputes. However, in the event of any dispute, they will also play an important role in defining the remedies and solutions.
You will need an effective contract as part of your job or when you are going into business with a company or a partner. And therefore, to help you with this, we have prepared this article which will give you some useful tips on how to write a contract agreement.
These will help you form the contract details and avoid mistakes. By following them, you will be able to write an effective business contract. Thus, it will protect you as well as your business from the contractual or legal issues and disputes.
Details to be included in a business contract
Before you start writing a contract, you need to have the below-mentioned details ready. They are important information to be included in a contract.
- Name of the parties involved
- Products and services to be exchanged
- Amount and schedule of the payment
- Actions to be taken in the event of a non-compliance of the terms by any of the parties involved
- Contract start date and end date
In the next sections, you will know how to make a contract, what to include in the contract and how to finalize it.
What to consider before starting a contract
There are several considerations to be taken care before writing a contract to make it a sustainable and win-win situation. They are as below.
The ability of the parties to participate in a contract
It is important that all the parties are legally able and can understand the terms and other aspects of the contract. They should be clearly knowing what they are going to sign and understand its results. Never sign a contract unless you clearly understand every part of it and their consequenses.
Who can enter a contract
Before concluding an agreement, make sure that all the participants can legally do so. Individuals entering into a contract must be:
- 18 years old or older
- If not, their parent or guardian should sign a contract instead of them
- Be capable of understanding the contract
- Be sober and mentally healthy
The consideration of the contract
There has to be an exchange between the contracting parties, be it products or services. Most often, there is an exachange of products or services for another value – money. This is called consideration and a contract can not take place without it. In any contract, one party will be giving something valuable to the other party in exchange for some other valuable thing or the money.
The purpose of the contract
The purpose of the contract should be clear as there can be no contract without it. The exchange of the goods or the services against the money or something valuable is the purpose and it should be clearly specified. An illegal purpose can’t form a legal and binding contract.
The terms of the contract
In order to bind all the parties, there should be a set of terms. An ideal business contract will include the ideas and needs of all the parties. Without meeting the needs of all involved participants, a contract cannot be complete and should be updated.
When to use a contract?
As per the general definition explained in the first section of this article, a contract is a base of the relationship between the parties doing business with each other. Without it, there can not be a business relationship. It clarifies the legal boundaries and liabilities of all the involved parties.
A legal contract saves you from confusions and unclear decisions and helps you during disputes. In short, a business agreement or contract is a legal protection for you and your business. It can protect you from the loss in case a party fails in providing the consideration in exchange or maintaining the confidentiality.
When the individuals know each other well and perform some routine operations, they might not need a contract. However, businesses and individuals generally enter into a contract in below situations.
- Starting a partnership or a joint venture
- Hiring a contractor or supplier
- Hiring an employee
- Buying or selling goods or services
- Starting a long-term project
- Taking up a government work or dealing with a government agency
There can be many other reasons to enter into a contract. But those who are involved should clearly understand and seriously consider the terms, considerations and all other details of the contract before signing it.
How to write a contract – basic rules
This section defines the steps to write a contract. Following them will help you avoid potential mistakes or missing items when you get your contract in a write up form.
Write the basic information
As a starting point, your contract document should have the date at the top of the page. After that, there should be the mention of the names of both parties. This part is generally written in the following manner:
This contract is between [name of the party] and [name of the party].
It should also include the name, designation and the business name in case a party is an individual and signing on behalf of a business.
Specify the items to be exchanged
Specify what will be exchanged during the contract period in a simple and easy manner that can be understood by the average person. Make sure to be as clear as possible but in a concise language.
Consider below points for this section.
Payment: Mention the means of payment, amount to be paid and due dates of the parts or the final due date for the full payment.
Item Description: Describe the item in terms of size, color, make, model, weight, material, date of delivery and other important details. If the item in the contract is a property, mention the location and other important legal details. If the services is a consideration, you should describe its details.
Service description: In the contracts for services, you will need to include the name of the person or the department who will be rendering the service, for whom and where it will be rendered, and how long it will take.
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State the confidentiality clause
If the consideration in exchange is an intellectual property or contains a business secret, you should consider the confidentiality clause. You may not want the other party to share the information with others not involved in the contract. This is because it may affect the business and profit if revealed to other non-participants of the agreement.
The confidentiality clause is like non-disclosure agreement and is used when you want to protect a business secret or any other confidential information that can affect your business operations and revenue. You can see the sample on the links given at the end of this article.
You may also prevent the other party from providing the products or services in consideration during the contract period to ensure the ethical behavior and protection of your properties. This is useful when there is a possibility that your competitor may use the services from the same provider and the provider may use your assets in rendering the service to them.
Include the terms for dispute resolution
You should specify the steps and terms to be followed if a dispute occurs or any of the parties breaches the contract. Specify who will be bearing the fees and cost of the attorney and the court. Also, specify the state and the district where the dispute will be settled.
Generally, when a dispute arises, the parties hire the lawyers at their own cost. But the winner party can ask the losing party to pay the cost incurred. This should be clearly mentioned in the contract terms, i.e. The winning party is allowed to collect the cost and attorney fees, incurred in order to enforce the agreement, from the other party.
The parties can also agree on the terms to use an Alternative Dispute Resolution (ADR) by adding a clause in the contract. This is a simpler, faster and more convenient method of resolving a dispute than a litigation. This is particularly useful when the parties involved don’t want to get their reputation harmed by going for a public litigation. There are three types of ADR i.e. arbitration, mediation, and negotiation.
Add the clause that describes the termination of the agreements
This section states the time duration of the business contract. The end date of the contract can be based on the contract type. I.e. if the contract is a one-time exchange of services, you can state that the contract will be terminated once the transaction is complete. If the contract is for an ongoing service or project, you may mention the terms applicable to the parties to terminate it.
The termination terms should be clearly written. It should clearly state what should not be done or which action will be considered a clear breach of the contract. This will help the parties decide if the contract can be terminated or not if they find any such non-conformity with the terms. There should also be a clear mention of the notice period before the contract ends, i.e. one month, two weeks etc.
The contract can also be terminated by mutual agreement when no term violation has taken place. This is possible when the all the services are rendered with acceptable performance and results and nothing is left to be done further. When a stipulated transaction or the exchange of considerations are complete, the contract can be automatically terminated.
Keep the space for the signature of the parties and the dates
At the end of the contract, keep enough space or a reserved page where the involving parties can sign and date the contract.
Apart from above points, you also need to make sure that the contract is in accordance with the law applicable in the location where both the parties are residing. The laws are different in different states and countries. So you have to make sure that the terms are written in a way that can be enforced effectively in respective places.
Once you are done with the contract format and write up, you should hire a lawyer to review it. This is to ensure that your contract and all its terms and provisions are written properly and in accordance with the applicable law. The lawyer can help update the clause to make it effective and suggest the ways to reduce and recover the losses in case of the breach.
Finalize the contract
Once the contract document is ready, you can send it to the other party. Mostly, if everything is already discussed verbally, the other party will sign and send back soon and will enter into a binding contract. However, they will examine and finalize the terms, clauses, and provisions of the contract to ensure that they suit their needs and expectations.
You should mention the deadline by which the other party should accept and sign or should reject the contract and respond. If the date is not stipulated, the other party may take a reasonable time to examine and respond.
Offers and counteroffers
They may also send it back with a counteroffer, and in that case, you have to carefully analyze it. You have to decide if the counteroffer is acceptable or not. If it is acceptable, you will need to make appropriate changes to the contract to match the new offer. It may happen that you have to review the contract multiple times as sometimes parties make offers and counteroffers several times until they reach an acceptable set of offers and terms.
Negotiate to reach a mutually beneficial agreement
You will need to negotiate until you get it to the acceptable level. Ideally, the contract should have a win-win situation, so the offers you send should be mutually beneficial. The same thing should be applicable to the offers the other party send to you.
Know your liabilities and legal remedies of disputes
Make sure that you are satisfied with all the terms and nothing is added without your knowledge. You have to ensure that the contract doesn’t end up with a loss for you or your business. So carefully read through the contract before finally signing it when there are several changes from both the parties. Once the contract is signed, you are legally required to follow the rules of the contract.
Both the parties have legal rights to use the solutions according to the terms in case of the breach of the contract. They can use the legal procedure or the ADR type mentioned in the contract.
You can always revoke the offer if the contract is not accepted and signed by both the parties yet. Once it is accepted, you and the other party are bound by the agreement.
Contract template and example
Please see the links given below for the contracts examples and templates.