This is the ultimate guide to forming a legal contract in 2020. In this comprehensive guide I’ll cover:
- The definition, basics and types
- A stepwise process for making a contract
- Advanced drafting tips
- More information and tools
So if you’re looking to draft a contract, you will love this guide.
Let’s get started.
- Contracts 101: The Basics
- Step-by-Step Guide to Making a Contract
- Advanced Tips and Strategies
- Tools to make contracts
“A well-drafted contract is understandable by the employee who inherited it 5 years after it was struck and knew nothing of the initial negotiations.”
Houston Business Attorney
Contracts 101: The Basics
In this section, I’ll write about the basics of contracts and the elements that make up a legal agreement. I will explain what a contract is, its main elements and the different types that you might come across. People have written books, there are courses, even graduate degrees on contract law. So you need to understand that this is a broad subject but I will just give you a general overview of contracts.
What is a contract?
A contract is a legally binding agreement between two or more parties, where each party vows to accomplish something for the other in return for an advantage. It might be in a verbal or written format.
Contracts are part of our daily lives. From parking invoices to terms on websites to sales agreements, contracts are everywhere.
Elements of a Legal Contract
The following are some of the most important elements of a legal contract.
There must be a mutual understanding or agreement between the two parties. This agreement can be verbal or in a written form. This means that one party must have offered to do something in return for some benefit e.g. money. A signed contract shows that there is a mutual understanding among the parties.
Both parties involved agree to provide something of value in exchange for a benefit. For example, if a client asks a logo designer to design a logo in exchange for money, the contract agreement will state this consideration.
The parties involved should be legally competent. Minors and mentally impaired cannot form a contract.
All parties must come to an agreement at their own will. Contracts are voided if there is a mistake, or if one or more parties commit fraud.
A contract must have a legal purpose and cannot be used for illegal activities.
How do contracts help businesses and individuals?
Contracts help navigate the law which might seem complex sometimes. Limited understanding of contract law results in businesses falling foul of the law. ContractAwesome provides easy-to-use, free templates that are legally binding and will help you stay on the right side of the law.
Contracts mention the payment terms to protect both parties from future misunderstanding. A payment timeline helps in making sure that payments are processed at the right time.
Legal contracts help minimize disputes because they encourage both parties to deliver their side of the promised agreement. In case mediation fails, contracts help in debt recovery and support you in taking legal action. A legal framework helps you to manage your business and limit liability.
Intellectual Property Protection
Contract communicate how intellectual property is to be used. Protecting your business and its assets is extremely important.
There is an element of doubt in verbal agreements or emails. Contracts outline the operational and sale processes, thereby explaining how customer or client can use services. By putting legal documentation in place, you are showing clients that you care about them, as well as your business.
Types of Contracts
Although there are a lot of different types of contracts, I’m going to highlight nine important types. If I missed an important one, please let me know in the comment section below.
Fixed Price or Lump-Sum
A type of contract where the activities are regulated with a total fixed price agreement. It is important to note that if such a contract was signed, it would be challenging to obtain any credit back for an uncompleted job.
Time and Materials Contract
If the scope of the project is unclear, Time and Materials Contract can be used to specify a duration of the project with a contractor, which must be performed to reduce the risk to a minimum.
A unit price, also known as hourly rate contract is based on estimated quantities of items and unit prices.
A bilateral contract is an arrangement between two parties in which each side agrees to meet their side of the bargain.
In a unilateral contract, one party (called the “offeror”) requires performance from the other party rather than a promise. A unilateral contract is created by an offer that can only be accepted by performance.
Express, also known as Special contract, is a type of agreement whose terms the parties have explicitly set out in words, either in oral or written form.
Simple contracts are not signed as a deed and do not carry the signature of the parties or witnesses.
Contract Under Seal
A contract under seal is a formal agreement which has the seal of the signer attached. The seal is a certainty that the legal consequences are conceivable.
An aleatory contract is a type of agreement where an uncertain event determines the execution or performance of the contract. Most insurance policies are aleatory.
Step-by-Step Guide to Making a Contract
Here are the steps you can follow while drafting your contract. These steps include valuable suggestions that will help you protect your rights.
A contract is formed between two or more parties who are willing to enter into an agreement. For instance, two co-workers who want to start a new startup of their own. Contracts help put legal bounds to business relationships. You should also make sure all parties are legally able to participate. The contract will not be valid unless everyone entering into the agreement is fully able to understand what they are signing.
Once the intent is set, one party has to make an offer to another party for providing services. Although one party makes an offer, a contract cannot exist until the other party accepts the offer. Before you execute a final contract, both parties should have a clear understanding of what the contract will stipulate. A legal agreement that does not befit the needs of both parties will have to be altered.
The timeframe of an offer
Usually, the timeframe for the offer is mentioned as part of the offer. An offer does not remain open indefinitely.
To create a contract, the document or agreement must describe the obligations or duties that each party has to perform and a corresponding timeframe. Obligations of the buyer also include the payment terms.
Consideration is what one party receives from the other party once the obligations of the contract are fulfilled. This can be in the form of money, products, services, expertise or anything that is considered of value. Consideration is an essential element of a legal agreement. In short, consideration is considered to be something done in return for something (quid pro quo).
An arbitration clause defines how parties resolve disputes. For example, an arbitration clause might stipulate that each party must utilize arbitration, instead of litigation, to settle a dispute.
The final and the most important step in making a contract is Acceptance. A contract is only valid if the accepting party agrees to its terms. A party can accept verbally or in writing depending on the nature of the agreement. If entering into an oral contract, each party must verbally agree to the terms. With a written contract, each party must sign a document to ensure acceptance of the terms.
Advanced Tips and Strategies
There are some expert strategies that you can apply while drafting contracts. Legal contracts define the rights and obligations of both parties. Obligations of payments and performance, terms and termination provisions and additional supplements need to be part of commercial agreements. Here are some advanced tips and strategies for making a contract:
Clear and Concise Language
- Do not use confusing language. Write to-the-point.
- Get rid of unnecessary clauses and provisions.
- Do not allow clauses that have more than one reasonable interpretation.
- Long documents result in inconsistencies and error. Be clear and concise.
- Measure the bias. Do not draft one-sided contracts which can be rejected by one of the parties.
- You don’t need to reinvent the wheel. ContractAwesome provides free templates that are written by professionals.
- You can also find standard clauses online and use them.
Be Detailed and Complete
The contract you draft should clearly state:
- Obligations of both parties
- Consequences of not fulfilling obligations
- Termination of contracts and what happens afterwards
- Dispute resolution
- Intellectual property rights
Establish the Lifecycle
- Make use of an online contract management solution to keep an eye on the entire lifecycle of your contracts.
- Cloud-based contract lifecycle management (CLM) solutions help you keep your contracts digital and manage them online.
- Note down the key data from contracts and obligations. This will help you once the contract is executed.
- Once the contract is executed, you should keep an eye on the obligations and the overall progress.
- CLM platforms provide an easy to use way of post-execution analysis.
Tools for Making Contracts
You can use off-the-shelf tools to draft contracts easily. There are tons of free templates available online which a standardized and professional. While writing contracts, you don’t want to make mistakes that would result in problems later. Here are some tools that would help you create, manage and ship contracts.
ContractAwesome features tools that would help you to not only write contracts but also analyze them like a legal professional. Moreover, if you are drafting contracts for, let’s say, 100+ employees, ContractAwesome makes it easier to compose and ship contracts in bulk.
ContractAwesome offers a free e-signature tool which you can use to sign your agreements and manage them completely online.
Once the legal agreement is signed and executed, you can keep tabs on the obligations and get automated reminders using the ContractAwesome platform. This is a feature that comes with ContractAwesome’s free Basic plan.