One should be aware of the important aspects of drafting a contract. It doesn’t matter if you are a small business owner or a senior manager of a company. If you are aware of these aspects, you can enter into a contract that will be legally defensible in court as well as work in your best interest.

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When you look at the contract life cycle management, you will find that it is not just restricted to a contract between two parties. But it is extended to all the people who are related to the contract. So, you need to be aware of all the concerned people while drafting the contract. 

If you align the expectations and obligations of each party involved, you can ensure a healthy business relationship or transaction. On the other hand, if the contract is not clearly defined, it leaves a business vulnerable to disputes and misunderstandings. 

Steps in Drafting a Contract

When you begin with the drafting process, you will find that the specifics may vary from contract to contract. However, there are certain aspects that remain common for most of them.

Take a look at some of the main steps while drafting an effective contract:

  • Check if All Parties Can Participate In a Contract

Most contracts require that the concerned parties must be over the age of 18. And, in all the cases, it is crucial that the contracting parties should be judged mentally fit to sign a contract or it can be declared void. It includes them not being under the influence of alcohol or other drugs at the time of signing. Also, coercion and duress cannot be used to induce a contract signing.

  • Determining the Contract’s Terms

If the contracting parties are judged fit, the next step is to allow them to receive their desired end from the deal. However, it should all be done in good faith. It means that there should be no attempt at deception between them. Also, it is important the terms are expressed in written rather than oral form so that it becomes easier to enforce them.

  • Including a Confidentiality Clause

If the contract you are drafting involves trade secrets or other confidential information, you should include a confidentiality clause in the agreement. It will prevent either party from telling the world about important and private business information. And, if this provision is breached under any circumstances, you can build in a set amount of damages per breach to punish the responsible party.

  • Adding a Dispute Resolution Clause

Any effective contract should have a clause describing how a breach of contract is to be handled. It includes who will pay attorney fees, whether arbitration or litigation will be used, and what legal jurisdiction the breach will be resolved in during litigation.

  • Making Sure the Contract Adheres to the Appropriate Law

When defining the terms of the contract, you should ensure that they are established within the bounds of any applicable laws. It becomes even more important when the contracting parties are located in different states. In such cases, only one state’s laws should apply to the contract to avoid sticky legal wrangling later. If you specify where you will mediate, arbitrate, or bring legal actions under the contract, it will make it easy to handle any disputes. 

  • Including a Termination Clause

When drafting a contract, you need to specify the length of the contract. It should also include a list of actions that can bring about a premature termination of the contract. Some contracts typically have a provision that allows for prior notice (usually 30 days) to terminate the contract without cause.

  • Negotiating the Terms of the Contract

Negotiation is an important aspect of every contract. The other party may make a counteroffer and you can accept the counteroffer or counter it with another offer. These exchanges usually continue until a final offer that both parties agree upon has been negotiated.

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But, this process is not always easy. About 57% of people fail to accurately estimate how assertive they have been, and most of them only remember 50% of what the other party said. Thus, you should have a set of procedures or terms in place so that there is clarity during negotiations.

  • Signing the Contract

Once all the parties agree on a final offer, they will sign and date the contract. After this moment, the contract becomes legally binding. 

All the above steps may require sub-details to be considered to make the drafting of a contract effective. You can also consider including additional clauses depending on the business the contract pertains to.

Article posted in Personal Finance

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