This article is written by Surbhi Jindal, a law student at Dr B.R. Ambedkar National Law University, Sonipat, Haryana. Through this article, she attempts to discuss the nuances of drafting a contract exhaustively.
Many people think that drafting legal contracts is complicated. Moreover, it is often assumed that even when you have designed your contract correctly, your counterparts may not comply with the rules of the agreement. This guide will show that these assumptions are wrong. You can draft professional agreements independently if you follow this guide and develop some good negotiation skills. As long as you know what you want and understand the basic terms involved in drafting a contract, we will provide you with easy steps to take to make it happen!
This article attempts to address the process of drafting a contract, the essential points to keep in mind before agreeing, and the various do’s and don’ts of a contract. The article also discusses the rough sketch of the clauses that should be prepared. In the last part of this article, the author has stated how one can review the documents efficiently and effectively. Start with this easy guide to design professional contracts!
What is contract drafting
Contract drafting is the act of writing the terms and conditions of an agreement on a single piece of paper. It determines the future relationship of the parties. In the business world, contracts play a significant role in the organization’s success. They create a fundamental legal relationship between the parties.
A written contract can prove to be a boon for any organization because if any dispute arises, it will be easy for both parties to refer to a mutually decided agreement. If the matter goes to the court of law, it will act as evidence.
A contract, once drafted, affirmed, and signed by the parties, needs to be registered. It is essential for a contract to be written to avoid future hassles. The drafting of contracts is a very crucial task that needs to be error-free. One must always hire a professional to draft an agreement.
Things to keep in mind before entering into an agreement
Here are the top few things that would help a drafter to draft the best agreement:
- The person drafting or reviewing the contract must possess adequate knowledge about the agreement. The rights and duties of the parties should also be included in the contract. Furthermore, it is essential to note that these things must be written in a simple language so that the person reading it can understand the context.
- The terms and conditions of the contract must be capable of performing. The performance, clauses, and duration of a contract must be feasible. A few questions that determine the feasibility of a contract are whether parties to the contract can execute their rights and duties etc.
- While drafting, one must predict the various problems or disputes that may arise possibly out of contracts. If one possesses such a quality of predicting future situations, then the purpose of a particular contract is served. This is helpful in avoiding future disputes.
- The drafter/reviewer must try to avoid loopholes in the contract and make the contract as simple as possible. This step will be really beneficial in the long term as through this, you can avoid a lot of legal hassles. It will also help the parties to get a clear understanding about their rights and obligations.
- Apart from this, one should know how to deal with different clauses. A few of the provisions that should roughly revolve around your mind without looking into the main structure of a contract are as follows:
- Subject and its legal enforceability
The foremost thing while drafting a contract is to look for and understand the subject of the contract. The issue of the arrangement plays a vital role in determining what clauses are necessary to be added. E.g., suppose a contract is an employment contract. The clauses to be added are that it covers all the basic terms and conditions related to the relationship between an employer and employee.
Also, it is pertinent to note that the subject of the contract also determines the nature and legality of a contract. The reviewer must look at the issue of the agreement first. This is because as per Section 2 (h) of the Indian Contract Act, 1872, only the contracts enforceable by law are considered to be valid. If the subject of the contract is illegal, then there is no point in reviewing the whole document because it is void from the beginning (void-ab-initio).
A contract must include a terminology clause meaning terms used throughout the agreement must be stated with their meanings. This is done to avoid the problem of having the same word being interpreted in multiple ways. To avoid ambiguity, the terminology clause must be added. So, before starting to draft, you should ideally look for all the technical terms that should be included so that it becomes easier for people to understand. For example, the word ’employer’ and ’employee’ should be defined in clear terms.
Information of parties
The contract is made when two different entities/parties wish to enter into a business relationship. The parties are the essence of the contract. Therefore, the drafter must know adequate details about the parties. This information regarding parties to a contract must be added. The terms and conditions that the parties agree on, the kind of business they are involved in, the address of their organization, etc should be explicitly stated in the agreement.
Duration of the contract
The duration of the contract must be specified. A contract is always made for a definite period, no matter how long it is. But the time must be mentioned to decide when the legal relationship between the parties will exist. Sometimes, the duration of the contract depends upon the achievement of a specific goal too. A drafter must explicitly lay down when the contract between the parties comes to an end.
Renewal of the contract
This clause is sometimes added in the clause of the duration of the contract. This is done to avoid the formation of the same arrangement again and again. If the agreement is of such a nature that its terms and conditions could not have been changed for an extended period, then a renewal clause can be inserted. While drafting a contract, this clause should be inserted only if the parties permit it. A drafter should never insert this clause by themselves.
The legality of consideration
A contract must stipulate the consideration that each party will perform on its part. Consideration is something given in exchange for the service or product. The nature of the consideration must be legal, and it should be provided through lawful means. A contract in which consideration is either wholly or partly illegal, will be considered as unlawful and void as under Section 23 of the Indian Contract Act, 1872. The drafter must consider the nature of the agreement and decide the legality of the contract.
Quality of goods and services
This clause is inserted to ensure that the purchaser and the seller respectively. They receive and sell the goods and services of their desired quality which is to be clearly stated in the contract. In case of any inadequacy, they can approach the court of law with enough evidence of the legal clause.
Return and refund
The clause of return and refund must be inserted in the contract to ensure if the party isn’t satisfied with the goods, they may return them and seek a refund. It should mention the policy of returning the goods and refunding the money. The parties contracting can inform the drafter about their return and refund policy to ensure that they meet on the same lines.
Dispute settlement and clause of jurisdiction
If a dispute arises, it should be mentioned what the process and mode of adjudicating the conflict is and where the jurisdiction would lie. Where would the parties seek remedy and get their grievance addressed? Now, this is to be decided at the convenience of the parties. It is generally preferred to have a specific method and jurisdiction of dispute.
Termination of contract
A clause must be there stating in what cases the contract will stand cancelled. This clause is declared to limit the control of the parties. If a party acts contrary to the agreement, the other party can ask for the termination of the contract. But this can only happen when the drafter drafts this clause into the contract and both parties have agreed to decide upon the terms of termination of a contract.
Rights and duties
The contract must contain the rights and duties of each party. The benefit of inserting this clause is that it governs the code of conduct between the parties.
The clauses mentioned above are just for reference but not limited to it. As per the suitability of a contract, the drafter can add the clause to avoid all future hassles. But, they should remember that the rights and duties inserted should not favour one party and against the other. They should be drafted, maintaining neutrality and balancing the rights and responsibilities of both parties.
So, these were some of the main parts that a contract drafter should glance at when the contract first comes for the task on the desk. Now, let us look in detail at the four main parts of the agreement and which clauses are added to the contract.
Four main parts of the contract
Drafting contracts is not an easy task. Though several templates are available on the internet, the biggest challenge that remains while reading, interpreting, and drafting is the absence of a structured method that suits your purpose. It is because the templates available on the internet are made according to the different laws and transactions.
Your transactions may undoubtedly differ from the existing ones. Instead of copy-pasting, you may end up inserting unnecessary clauses or may miss some critical clause that ought to be included. Therefore, you need to understand how to draft the contracts effectively.
In the above section of this article, we discussed certain things to keep in mind for drafting the clauses in a contract. You can use the above points for your reference while drafting a contract. That was just a basic idea on the drafting of clauses. In this section, we will discuss the clauses of a contract that appears in every arrangement unless contradictory.
Essentially, contracts are divided into four main groups and then further subdivided into various clauses. Here is how you can divide your agreement to make it look simpler.
The introductory clauses include the agreement’s title, essential line, name of the parties, definitions, interpretation, the preamble, and recital clauses. The critical points to remember while drafting these clauses are as follows:
It is essential to state the title of the agreement. It indicates the inherent nature of the agreement and leads the person who is reading to understand the overview of what they can expect in the report. For example, if the title of a contract is an employment agreement, it would indicate that the deal is essentially drafted to determine the terms and conditions between an employer and an employee.
The introductory line is one of the most important things to include as it indicates the date of execution and its effective date of placement. It is stated as, “This XYZ agreement is executed on ‘this’ date at ‘that’ place”.
Parties and description
This clause includes the name of parties and other details such as son of/daughter of, business entity number details, and further identifiable information through which parties can be ascertained. Besides this, it also mentions the registered address of the entity and a short abbreviation by which company/party will be referred to as. It is done so that the word used throughout the contract is shortened and used uniformly.
Preamble and recitals
A preamble is the introductory paragraph that usually talks about who are the parties to an agreement. The main purpose of including preamble and recitals in a contract are to answer five W’s: who, what, when, where and why.
Recitals are intended to provide a background of the parties, like how these both or multiple parties came into contact with each other and the situation before the parties entered the contract. It usually begins with ‘Whereas’ and then explains in detail about the parties.
All the typical terms that you think either have a broader ambit or are intended to be used for a specific purpose should be defined explicitly in the contract. This clause has a unique characteristic of interpretation where the meaning of a term, if specified in a definition clause, has the same performance throughout the contract. The terms should be capitalized wherever they are used in the agreement.
An operative clause is essentially drafted to show the commercial intent of both the parties. This intent is expressed through the clauses. These clauses must consider the ‘give and take’ that is happening through the contract.
It is one of the most important clauses to be included, i.e., from which date would the contract be effective and bind the parties to perform their part of obligations. Not the only date, the contract can be effective when some condition precedent to the agreement is fulfilled.
Obligation and consideration clause
The statement regarding the respective obligations of both parties and the consideration must be taken care of while drafting a contract. Parties should be made aware of their duties in writing to avoid confusion in the future. Besides the obligation clause, the consideration clause, i.e., what parties will receive in return for their performance, must also be mentioned.
The duration of the contract must be specified in the agreement. Suppose, a contract entered into by the parties is intended to bind them in performing duties for five years, then that should be explicitly stated to avoid ambiguity in the future.
This clause is necessary because it clearly states the circumstances under which an agreement can be terminated. This operative clause should be entered into the contract diligently, as gaps in it can lead to a dispute in the future. Also, one should remember that nothing should be inserted that is in favour of only one party.
This clause seeks to pen down the duties and rights of the parties. In case of a breach, the non-defaulting party will be free from performing their part of the obligation and has the right to sue the defaulting party or to terminate the contract.
Representation and warranties
This clause lists down the representations and warranties that the parties make. The clause is inserted so that in the future, in the case of any misrepresentation, the suffering party can sue the other side on account of such misrepresentations made. For example, in the contract, it has been stated that the X product has a warranty of 3 years. But later on, the company refused. In such a case, if it is written in a contract, the party can show the evidence and take the matter in their favour.
After the operative clauses, the boilerplate provisions are to be drafted in a contract. Boilerplate clauses are considered the standard provisions that are penned down to focus on the contingency of the contract. In such clauses, the solution to the inevitable events is provided. Here are some of the provisions that are inserted under this heading:
While this clause may seem very uncommon because everyone may know the law by seeing the title, it is essential to write all the rules that govern the particular contract. This clause becomes one of the most critical clauses in international agreements.
Indemnification means to protect someone from the losses that are either caused by themselves or the third party. So, while drafting a contract, this clause is inserted to decide the scope of indemnification by the party. It is inserted to determine to what extent the indemnifier will be liable to indemnify the indemnity holder.
As the name of the clause indicates, in this clause, the method of adjudicating the fights or disputes under the contract will be decided. Mostly, the parties adopt alternative dispute resolution methods such as negotiation, consulting, mediation, and arbitration. It is essential to mention this clause for speedy justice to the dispute.
There are many other boilerplate clauses such as a waiver, assignment clause, amendment clause, etc. The clauses are to be inserted as per the suitability of the subject matter of every contract. Now, let us come to the last part of the contract, i.e., its execution.
Executing the contract
Once the contract is drafted, the next part is the execution of the contract. The parties need to confirm the execution by signing of the contract. The signature on the agreement shows the willingness of both parties to enter into the contract. This clause intends to cover the understanding formed between the parties.
Now, there are certain do’s and don’ts while drafting a contract that one should never forget. These are explained as follows:
Things to do while drafting contracts
- Contract draft must answer all the five W’s- Who, What, Why, When, and Where. The questions formed from these five W’s are:
- Who are the parties to contract?
- What is the contract for?
- Why do parties want to enter such a Contract?
- When is the contract formed, and when will it come into force?
- Where is the agreement to be enforced?
- The language of the agreement must be straightforward. One should avoid the use of legal jargon. In other words, the use of complicated language must be avoided.
- Punctuation marks, words like ‘and,’ ‘or,’ should be used with utmost care as they can change the whole meaning.
- Always begin with the recital clause.
- Try to use active voice throughout your contract.
- Numbers should be written both in ‘Alphabets’ as well as ‘Numerals.’
- All the technical terms must be clearly defined.
- A copy of the drafted contract must be retained in the office for future record.
- Always assume yourself as a party to the agreement to identify errors, if any, quickly.
- Notarization must be included if it is required by law.
- Avoid ambiguity and vagueness in contracts.
- Proofread the document twice.
- The definitions should be exhaustive.
Things not to do while drafting contracts
- Never use long sentences. A contract should always contain crisp and short sentences.
- You should never assume that the definition of a particular term has the same meaning throughout the contract.
- Everything should not be verbal. This is because in absence of any written statement, the rights and intentions of parties will not be clearly documented. As a result, the relationship between parties may get sour.
- Don’t act yourself. Everything should be done following the terms finalized by parties.
- Never read the agreement hurriedly and hastily. It can bring more harm than good.
- One should always avoid the use of unnecessary abbreviations.
How to review contracts
Till now, we have got to know how a contract is to be drafted diligently. However, drafting is only one step. The last and the most crucial step is to review the agreement efficiently so that the errors and mistakes that might have been made in the contract while drafting can be avoided.
How tiresome a task can it be to review the contract after drafting, especially if it’s the same thing that you have been preparing for such a long time? Whenever you are examining any piece of content written by you, hardly any mistake will be spotted. This is because our mind gets adapted to the same content’s structure. And that’s why it is always suggested that someone review your contract to highlight the mistakes.
How to review a contract efficiently and effectively? Is there any shortcut? Well, there are no shortcuts to good things. But yes, there are ways to make your reviewing work easier. Let us understand it in detail with the help of a principle called three-level reading.
In the first-level of reading, the contract has to be reviewed by the reviewer by looking at a few aspects while answering some basic questions in the contract that will be discussed in the latter part of this section. As soon as you skim through questions, you will get to know whether your contract is adequately drafted or not. So what are these questions? Let us understand them.
- What is the subject matter of the contract or transaction?
- Who are the parties entering into the contract or transaction?
- What and How the roles, responsibilities, and obligations of the contract or parties are performed?
- What are the considerations and the payment mechanics involved in the contract or transaction?
- On which date or day will the contract become effective?
- What would be the duration of the contract, and how will it be terminated?
The primary purpose of the first-level reading is to get the gist of the contract and understand the broad nature of the transaction that revolves around the agreement.
Second level reading
Now, after you have done the first-level reading and understand the broad nature of the transaction, it’s time to do a second-level reading of the contract. So, what has to be looked for in the second level of reading? Here are some pointers presented below to help you with the same:
- Highlighting the most relevant and essential clauses such as renewal, assignment, liabilities, termination, etc. After doing this, you should note those clauses that are very much specific to your client’s interests.
- Vague, subjective, and ambiguous clauses should be removed from the contract. This is because of the troubles they are going to create in the parties’ business relationship. These have to be either deleted or edited to make them more comprehensive and avoid ambiguity.
- Look for the termination and breach provisions, dispute resolution provisions, and various other contract provisions highlighted above.
- The clauses such as representations, warranties, conditions, precedents, and covenants should be the special care of.
The primary purpose of this second-level reading is to understand the contract comprehensively and get an idea about what is happening in the agreement in the real sense.
Here we come to the third and the last stage of reviewing the contracts efficiently and effectively. This level requires the application of your mind. In this step, your thinking power and reasonableness would matter a lot since you add your perspective.
- Assessing the risks and eventualities that have not been provided for.
- Look for the danger signals for your client in the contract.
- Assessing the connected contractual obligations that the drafter may have missed and are very important for the contract.
- Looking for the definition clause and finding out whether any technical terms have been left unexpressed and are essential to be described in the contract.
So, follow this principle of three-level reading, and you are ready to draft your contract efficiently.
Contract drafting is a skill that every lawyer must possess. It is often a misconception that only people of a particular field like litigation should have such talent, which is unnecessary. But it is not valid. Researching and drafting are the most critical skill sets in one’s life. You should know how to draft thoughts, words, and ideas efficiently so that even a layman can understand.
People hire professionals to draft contracts because they know they can prepare their words simply and effectively. A person from any field can understand the intricacies of a contract. Using complicated and fancy words is of no use if one has to search the meaning every time to understand the terms and conditions of the agreement.
A famous saying for life: ‘Honesty is the best policy.’ Similarly, ‘Simplicity is the best policy to be kept in mind while drafting‘.
- http://www.legalserviceindia.com/legal/article-3044-basics-to-contract-drafting-and-contract-review.html#:~:text=Drafting%20of%20a%20contract%20is,party%2Fparties%20to%20the%20contract.&text=To%20put%20it%20 simply%2C%20 contract,are%20inscribed%20in%20the%20 contract
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