In the business world, contracts are something you are bound to run into sooner rather than later. Even though you might be inclined to follow your gut feeling and rely on a verbal agreement, you will have a hard time proving anything in court if something wrong transpires.
This is why it’s important to get your business agreements in writing. A written contract is a way to protect your interest and avoid potential breaches of the agreement.
While they do seem daunting at first, contracts aren’t as complicated as you might think. The best ones are expressed in clear language, without any sort of unnecessary legalese.
With that in mind, check out some of the basic rules of contract drafting:
If you want your contract to be legally binding, there has to be an offer proposed by one participant to the other party. For both parties to have an understanding of the expectations of the offer, it needs to be clearly expressed.
A basic example would be a scenario in which a business needs their company’s logo printed on 500 t-shirts. A t-shirt company offers to deliver 500 items in a single specified color for $1200. This constitutes a clearly expressed offer as it also includes the price and other important details.
Since a contract exists to ensure a particular series of events occurs as planned and protect your interests in case these events don’t happen, always make sure that the language used in the agreement is clear and to the point.
Avoid the use of legal jargon and figurative words. Every part of your contract should be easily understood by an average person. Clarity and comprehension should always be a priority.
Once the party that has received the offer has agreed to these conditions, the offer has been accepted.
When it comes to contracts, you can never be too specific, and that’s why a good practice would be also to clearly state the start and end dates of the contract. But we also suggest considering adding a ‘’time is of the essence’’ provision to your contracts as a way to protect yourself from possible breaches. Most importantly, the material breach.
For instance, the company from our example might add a date by which they demand the t-shirts be delivered. At the same time, the seller might also state the time they expect to receive the payment, before or after the contract is complete. If any party fails to deliver on their agreed-upon terms, the contract is considered to be breached.
Since the contract now has an added layer of complexity (which will only grow down the line), you should look into AI contract review software to make contract review easier. This software scans your documents and automatically highlights their key elements, speeding up the time it takes to review or edit relevant information.
Consideration must also be provided for the contract to be valid. In the most simple terms, consideration is the benefit that parties expect to get out of a contract. In most cases, it’s a promise to perform a certain action and a promise to pay for the completion of the said action.
Here is where the obligations of the parties are defined, so let’s delve further into specifics of how terms of the contract should be worded to avoid the chance of breaches and disputes occurring.
Earlier, we stressed the importance of clarity and simplicity, but it’s also crucial to consider the specific clauses to address the possibilities of the terms being exploited.
For instance, in the t-shirt scenario, the clause in the contract might state;
‘’Seller must refund to the Buyer the price of every item not up to standard’’
The problem is that there are no details of what the quality standards are and who determines if the items are satisfactory. This issue can be addressed by rephrasing the clause as:
‘’Seller must refund to the Buyer the price of every item not up to standard. The buyer in its sole discretion must inspect and determine the quality of the product.’’
This clause is also a great example of effective language. There are no complicated legal terms, it’s consistent and easy to understand while also using binding language that leaves no room for misinterpretation.
For a contract to be valid, all participants must be competent. Competent parties are those who have the ability to comprehend that they are entering a contract and have an understanding of the nature of the legal agreement itself.
In other words, it means that the person entering a contract is an adult, has the competency to knowingly enter a written agreement, and understands that it’s enforceable by law.
If any party lacks the capacity to sign a contract, the contract is considered voided and the party that lacks competency doesn’t need to fulfill its obligations. It’s also important to remember that a party entering a contract is not considered competent if they are under the influence of any substances at the time of the signing of the contract.
Another important rule to follow in drafting contracts is the legal intent. It can be defined as an intention for an agreement to have legal effect.
When it comes to commercial arrangements, there is always a presumption that both parties are willingly intending to start legal relations. In our earlier fictional scenario, there is an automatic presumption that both parties do intend for their agreement to be legally binding.
It’s also important to note that the contracts, to be valid, need to adhere to the laws of the state in which they exist. A contract in which the parties agree to vandalize parked cars, for instance, can’t have legal intent since the contract itself is illegal.
Details and simplicity are key
While drafting a contract, correctly identifying its main elements will ensure you don’t make mistakes or create legal loopholes for the other party.
An agreement should be written in simple, effective language while clearly defining the obligations of each party. Straightforward terms will ensure things go as planned. Ultimately, this will help you avoid costly disputes in the future.
Hopefully, knowing these rules will make you feel safer the next time you draft a contract and put down your signature on a document.