Contract drafting best practices
Want to write a contract? This guide discusses contract basics, along with notes on best practices for contract management.
What is a contract?
We often use contracts in our day-to-day lives and in business. A contract is an agreement between two parties that typically involves the transfer of services, goods or money or a future promise to do so. It’s essentially an agreement between two parties to fulfil a promise.
According to the Thomson Reuters Practical Law Guide, a legally binding contract should include an offer, an intent to create legal relations, acceptance and consideration.
So what are the common types of contracts we encounter?
Contracts are frequently used in business. There are many types of contracts, including standard contracts like non-disclosure agreements, fixed price contracts, cost-plus contracts, and unit price contracts.
Most businesses would have encountered, for example, a non-disclosure agreement, which is used to protect intellectual information and confidential information from competitors and a sales agreement which defines the sales requirements between a buyer and seller.
Most employees will have an employment contract that sets out what’s required of employees and their employer, as they are common simple agreements.
A fixed price contract establishes a complete price of a project or goods with a predetermined value, while a cost-plus contract is structured to reimburse the contractor for time and materials incurred fully. Another type of contract is a unit price contract which itemises work or services delivered into units.
Why are contracts important?
Creating a written contract is best because it ensures all parties are clear on their obligations and how to fulfill them. Using contract templates can be a really useful way to start drafting what you need. A template gives you a basic framework to complete and often contains boilerplate contract clauses that can be updated. DocuSign has created a template library for many commonly used contract forms to help speed up the sending process and reduce your risk of errors.
Using contract management software can help you to save time when drafting contracts.
What should be included in a contract?
- Identify key parties: Identify all parties involved in the agreement and ensure they have the capacity to understand the terms and conditions and the authority to sign off if working within an organisation. The parties are legal entities recognised by law, such as companies, limited liability partnerships and individuals at least 18 years of age.
- Contract components: Decide upon the type of contract you need and plan all of the components of your contract, such as the agreement terms and conditions.
- Introduction: Include basic information in your introduction, including the legal and/or business names of all the parties involved.
- Dates: Include the dates for the terms of the contract and, if required, dates of warranties or payment installments.
- Offer: Create a clear description of the goods, services, or money that is to be exchanged - the offer or promise of the agreement.
- Consideration: Create the terms of the agreement, which should include a clear description of the value each party will bring to the contract. This may include details such as how and when the services or goods will be delivered, andwill need to be agreed upon by all parties.
- Acceptance and signatures - there should be an area for all parties to clearly sign the contract to express their acceptance of the offer. Sometimes, your contract may have a couple of rounds of contract negotiation before all parties agree to sign. After the offer has been received, it can still be revoked, altered, or terminated at any time before acceptance.
- Contract execution: When your contract is drafted, you may wish to send it to legal experts for review, and then you can execute your contract by sending it to be signed and approved by all parties.
What are the common mistakes when it comes to contracts?
Contracts often include vague terms and conditions, which can be hard to enforce. This is where your contract can benefit from legal review.
Other problems occur when old contracts contain out-of-date legal clauses that haven’t been updated or renewed. Some specific elements of a contract make it legally binding, and it’s best to get a legal expert to review your agreement. However, legal teams and departments can create templates with pre-approved clauses to develop a smoother contract creation process.
What are the best practices for contracting?
Without a clear understanding of the contract management process, many businesses have trouble identifying areas in their internal processes that are ripe for improvement—where time can be saved and errors avoided. It’s a best practice to ensure that risks are managed effectively. For instance, contract lifecycle management (CLM) software can help you automate document generation and automatically pull in new information like names, addresses, product pricing or terms and conditions. It can also help during the approval routing and negotiation process to automatically route to all interested parties for review and revision. Modern CLM solutions have features like contract analytics and artificial intelligence (AI) to help instantly identify specific clauses and terms embedded in existing agreements' language.
DISCLAIMER: The information in this article is for general information purposes only and is not intended to serve as legal advice. Laws governing the subject matter may change quickly, so DocuSign cannot guarantee that all the information on this site is current or correct. Should you have specific legal questions about any of the information on this site, you should consult with a licensed attorney in your area.