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How to Draft a Contract: Fueling Collaborative Work

Agile Contract Management Risk & Compliance

It’s no exaggeration to say that contracts have been around for thousands of years. The oldest example of a written contract that scholars know of dates back to 2,300 BC. 

But even then, historians are aware that numerous types of contracts were around during the time of Mesopotamia (approximately 10,000 BC): sales agreements, purchase agreements, labor contracts, divorce agreements, powers of attorneys, and more.

In fact, if not for contracts, we might still be preserving knowledge not with words and characters, but with cave paintings. This might be a bit of an exaggeration, but contracts did help bring about the creation of writing systems. 

So while verbal agreements have existed since the first time two humans exchanged goods or services, most businesses nowadays put their contracts in writing. That way, when something breaks, both parties can turn to the written contract for guidance on what recourse is available.

But before you can execute and enforce a contract, you should know how to draft a contract.

What Is a Contract?

In the simplest of words, a contract is just a promise that is enforceable by law. The promise can be made verbally or in writing, and it requires two or more parties to agree to the conditions of the promise. Typically, one party makes an offer while the other accepts the offer.

If one party fails to uphold their side of the agreement, the other party has the right to seek some form of remedy or compensation.

Contract examples

There are many types of contracts and agreements that fulfill different or specific purposes. Some of the most common ones are:

  • Fixed-price contracts
  • Cost-reimbursement contracts
  • Time and materials contracts
  • Unit price contracts
  • Unilateral contracts
  • Bilateral contracts

Naturally, these are just a few of the more common types of contracts you might encounter in business or daily life. There are many more, but each one is specific and has its own use cases.

Before you decide on which contract you need, you should consider several important questions:

  • What’s the goal of the contract/agreement?
  • How will the contract benefit me?
  • Do they have the capacity and competency to accomplish what I ask of them? Do they have a history of legal troubles?
  • How urgently must the contract be fulfilled? How long will it take for the contract to be fulfilled?
  • Do I need to sign any preliminary agreements (such as an NDA) prior to signing a contract?
  • Is my goal complex? And if so, do I need to use multiple types of contracts?

Once you know the type of contract you need, you can work on drafting all the standard, essential elements of the contract.

Standard Elements of a Contract

Without contracts, companies won’t be able to carry out their day-to-day business. But in order for a contract to be considered valid and legally binding, it must contain seven distinct elements: Legality, Capacity, Offer, Consideration, Intention, Certainty, and Acceptance.

Legality

Legality establishes which set of laws and regulations will apply to a contract. In the United States, Legality will specify a specific state. Since laws vary from state to state, this means careful consideration should be given to selecting the state.

For example, if you sign an employment contract under Washington state law, you won’t be subject to state income tax (although there is a “Business & Occupation tax”). But if you sign under South Carolina law, you are required to pay an income tax depending on your salary level.

Legality can be broken into two parts: governing law and jurisdiction. Governing law specifies which set of laws will be used to settle any disputes, while jurisdiction indicates where a dispute should be resolved should a lawsuit occur.

You may run into the scenario where a contract specifies that any lawsuits must be filed in Texas yet lawsuits should be reviewed under the laws of Delaware.

Once you leave the United States, Legality will typically indicate a specific country. If two parties are in the same country, Legality is generally determined to be the country they’re in. 

And just like interstate contracts in the United States, for international contracts, it’s up to the parties to decide the governing law and jurisdiction. Depending on the circumstances, both parties may choose a third country. 

The choice of Legality will affect how contracts are executed and how disagreements are mediated. For example, some countries permit e-signatures while others don’t. There are even situations where a country may generally accept electronic contract signing except in certain cases like signing a Last Will and Testament or a divorce agreement.

Capacity

Contracts must be between two parties who have the “capacity” to enter into a legally binding agreement. Common capacity rules set requirements for age, consciousness, language, duress, undue influence, and others.

The specific capacity rules in play are determined by the location of Legality.

In cases when contracts are signed by individuals representing companies, each signatory must show they have the authority to sign. For instance, when the Washington Commanders football team is sold, it’s extremely unlikely that the ballboy or groundskeeper will sign the contract that executes the sale. 

While Capacity is largely a formality, if an individual signs without sufficient capacity, it can invalidate the agreement.

Offer

As mentioned earlier, a contract is a promise between two parties. Looking closer, contracts occur because one party wants something that the other party has.

However, for a contract to take effect (and not just be charity or a donation), there must be an exchange of value. This could be money, property, assets, or a service.

When drafting a contract offer, you should answer these questions:

  • What is being exchanged?
  • How is the exchange being made?
  • When is the exchange being made?
  • What is the cost of the exchange?
  • Who is responsible for making the exchange?
  • What happens if someone doesn’t fulfill their obligations?

Offers should address these questions. If they aren’t, there’s a possibility that an action is not legally enforceable, or you may be committed to something you didn’t want. Most courts won’t allow you to get out of a legally binding action if your sole defense is “It wasn’t my intent.”

The British bank Barclays learned this lesson the hard way in 2008. They were forced to buy 179 more contracts than they intended because someone “hid” the cells containing the unwanted contracts instead of deleting them. When the spreadsheet was reformatted as a PDF, the hidden cells were accidentally included in the purchase agreement. While Barclays tried to get out of the purchase, they were ultimately forced to buy them and take the loss.

Consideration

Consideration is satisfied when it's clear to all who read the contract what each party gets from the agreement. Benefits can be money, services, assets, property, or anything else that can be legally given and received.

Consideration doesn’t need to be financial. If Person A teaches Spanish to Person B, and Person B provides personal fitness training classes to Person A, then Consideration is met.

Without consideration, a contract is deemed “voluntary”, and parties have limited to no right to legal action if an obligation isn’t upheld.

Intention / Mutuality

The easiest way to satisfy the Intention or Mutuality requirement is to put the contract in writing or record a verbal agreement. The main purpose of Intention is to prove that all parties wish to do business with each other.

Certainty

Contracts must state the terms and conditions of the agreement, as well as the parties involved. Naming parties also ensures that contracts can only be enforced by or against those mentioned.

Within the agreement, Certainty can be improved by:

  • Adding descriptions of the goods or services
  • Stating which terms and conditions are essential or option
  • Including identifying details (date of birth, tax ID, passport number, etc)

Acceptance

Most commonly, contracts satisfy the Acceptance requirement by having parties add their signatures. For verbal agreements, Acceptance can be demonstrated when one or more of the parties fulfill their contract obligations.

How to Create a Contract

Once a contract has all the essential elements, the next step is to put pen to paper and start writing it up.

Not only will contract authoring consume a good deal of time, it will also require plenty of wordsmithing. 

If a contract agreement is vague and difficult to understand, people will feel reluctant to sign and commit themselves to the terms and conditions. As a result, contract processes are brought to a standstill. Keeping in mind how essential contracts are to enabling a company to conduct business, stalled contracting could have dire consequences for the company.

To remove friction from contracting and smooth over bumps, contract language should be written as clear and unambiguous as possible.

Here are a few more ways to speed up the contract drafting process:

  • Consider the audience – Legalese is considered very reader-unfriendly. Not everyone comes to the bargaining table with a J.D. in hand, ready to debate legal semantics. By making language simpler and more readable, it makes it easier for parties to come to an agreement. You can even use legal tech tools like GPT-3 Simplify to quickly translate difficult terms into easier words.
  • Hash out your strategy – Chances are high that your counterparties won’t agree to all contract terms the first time they read it. If you want to finalize a contract faster, you should review your history of contracting, identify sticking points, and determine what you’re willing to concede, as well as what you won’t give up under any circumstances.
  • Create a contract playbook – A contract playbook breaks down the core elements of your company’s contracts. This can include contracts for specific situations, definitions of essential legal terms, critical clauses, fallback clauses (i.e. alternative clauses that your company is willing to accept), reasons for walking away, outlines of signing and approval processes, and guidelines for negotiating. 
  • Develop a clause library – If you’ve reviewed your negotiation history and found any sticking points, another step you take is to draft alternative clauses and craft a usable clause library (or clause playbook). You’ll be ready to quickly swap out clauses depending on what occurs during negotiations. ContractWorks’ Clause Creator leverages GPT-3 so you can draft backup clauses in seconds.
  • Standardize language and documents – By standardizing language, you eliminate the hassle of comparing contracts to see which documents contained which definitions. Instead, you can be confident that language will be unified and consistent throughout all contracts. The true, hidden value of standardization can then be unlocked with our next point…
  • Create contract templates – Manually writing out each contract and clause can be time-demanding and energy-intensive. Consider the case of an NDA. Many of the sections and paragraphs in an NDA don’t change much, if at all. Consequently, if you were to write out every NDA from scratch, you’re essentially reinventing the wheel every time you draft a contract. Since NDAs don’t vary much, they’re ideal candidates for contract automation. The same goes for other high-volume contracts (or any contracts you standardized) like DPAs, PoAs, and employment agreements.
  • Set up contract automation – Mistakes frequently occur during contracting processes. Some may be innocuous, while others can have disastrous consequences. Automation helps avoid several errors and issues that can occur from using outdated templates, copy-pasting information between documents, and forwarding files to the wrong people. Aside from reducing the chance of problems, it improves the efficiency and transparency of contracting workflows.

But before you start reshuffling processes and reforming contracting, take some time to craft a change management strategy that ensures your team will buy in to your vision for contracting.

Contract Templates

The goal of standardizing language and documents is to create a contract template that can be used to simplify the contracting process. 

Standardization is best used for situations when you frequently send the same document multiple times over some period or when you send the same document to multiple people. Some common use cases for contract templates include:

  • NDAs
  • DPAs
  • PoAs
  • Sales contracts
  • Statements of work
  • Contract forms
  • Purchase orders
  • Purchase agreements
  • Employment contracts
  • Employment offers

Admittedly, you can create a template for any type of contract. The implication of a template is that you expect you’ll need such a contract on more than one occasion. Otherwise, creating a template is an inefficient use of time.

How to create a contract template

The first thing to do when creating a template is to create a standardized version of a contract that unifies all terms, conditions, and clauses. This will serve as the core of the template.

Once you have a complete, fully standardized contract, you should identify any information that can be considered a variable. This is typically personal details about the signing parties (e.g. name, salary, position), as well as dates and locations.

After you’ve identified all variables, you have two options:

  1. You can use the names of specific people, which you’ll then change when drafting future contracts.
  2. You can delete all personal details and dates, then insert placeholders like {first name}, {last name}, {company name}, {position}, and {date}. The placeholder will then be filled in with the relevant information during the drafting process.

Both options are reasonable if you’re manually creating a contract template. However, if you have plans to automate the template, you’ll need to create placeholder fields anyways, so you might as well go with the second option.

Alternatively, if you opt for an end-to-end CLM system to solve your contract drafting needs, companies like ContractWorks will handle all the automation for you at no extra cost.

An end-to-end contract lifecycle management solution like ContractWorks contract management will also allow you to take full advantage of your clause library and speed up drafting and negotiations. Not only will it organize all your alternative clauses, but you’ll be able to swap clauses depending on the conditions.

For instance, you can swap clauses regarding contract duration, governing laws, and the types of organizations you’re working within clicks.

Collaborative drafting and redlining

Companies overwhelmingly use Microsoft Word for their contract drafting and redlining (Google Docs comes in second). Although there’s nothing wrong with Word, it was designed as an all-purpose tool, not as a specialized contract creator.

Contracts are frequently created in Word by copying and pasting from existing Word documents or other files. This usually leads to non-standardized terms, potential misunderstandings, typos, out-of-place sections, and a whole lot of headaches.

Version control can turn into a nightmare, and there can be ambiguities in comment approvals.

A dedicated contract editor is more suited to keeping you in control of contract drafting. It will also provide a single source of truth for redlines and comments.

There are a couple of key features that separate a contract editor from Microsoft Word when it comes to contract drafting:

  • Enables real-time, side-by-side collaborative contract management with teammates and third parties.
  • Possesses a built-in clause library containing all your clauses (i.e. your clause playbook) and can swap clauses at the click of a button.
  • Provides a digital paper trail of all contract edits, comments, and approvals, allowing you to see who made certain changes and who approved specific redlines.
  • Supports full version control so that you can compare versions side by side, roll back changes, and automatically notify parties about new versions.

A top-notch contract editor like Collaborative Editor also allows you to meet your counterparties halfway by enabling the importing and exporting of documents while preserving all complex formatting, tables, graphs, and multi-level lists. 

How to Draft Contracts in ContractWorks

Drafting contracts in ContractWorks is a simple and straightforward process. Its simplicity drives faster document generation, as well as operational efficiency.

  • From the main dashboard, select the template you need. The contract drafting wizard will then walk you through a series of simple questions to answer. Your responses will be used to automatically fill in the placeholders with the details you provided. 
  • To the right of the questions and answers field, a document preview will be displayed and updated in real time. If you see something’s wrong and you want to change an answer you provided, you can go back at any time, make the changes needed, and return to the question you were on.
  • Data auto-fill allows you to avoid having to copy-paste the same details in multiple fields. Thanks to placeholders, you need only fill in a specific detail just once and the system will apply it to all documents within a project.  
  • You can then forward the contract draft to any email address, such as your own, a counterparty’s, or a colleague’s.
  • If there’s any information missing, you can send simple questions and input fields via email to the parties you need further details from. Their answers will be automatically collected and inserted into the draft.
  • Lastly, you can save all data contained in the contract in just one click. The data will be stored in the system and kept for future drafting of contracts.

The contract drafting wizard simplifies the generation of legal documents so that Legal can delegate simple contracting and allow non-legal teams like sales or HR to take control of their own contracting matters.

Benefits of Contract Drafting Automation

Contract automation has the power to speed up contracting workflows by 80% while cutting average drafting time to five minutes for documents as short as a one-pager to as long as a 100-page agreement.

This is achieved by creating a contract template and having Legal review and approve it. Since the majority of clauses don’t change from contract to contract, Legal won’t need to spend hours reviewing agreements. Contracts will be error-free, and all Legal will need to do is a cursory glance at contract-specific information before approving and sending it forward.

Notifications and alerts will automatically let you know if someone leaves a comment that needs attention, if Legal completes their document review, and if your contract draft is finalized.

Contract automation can also simplify data insertion, so long as you’ve worked with a counterparty at least once. Assuming your company has a contract repository and your counterparty’s data was already saved there, the system will pull data from the repository and fill it in across all relevant documents.

To top it off, if you have a CRM or eBilling software, you can integrate it with your drafting engine. You can then initiate drafting from the external software and automatically pull data into your contracts without leaving room for mistakes.

How to tell if document automation will help your business

There are several indicators that can suggest whether or not contract drafting automation will improve your contracting workflows. Some common signs are:

  • Your company’s legal team requires too much time to prepare contracts.
  • Your company’s legal team is involved in preparing and reviewing simple contracts like NDAs and DPAs.
  • Your company’s legal team consistently takes longer than a day to review legal documents.
  • Your company’s legal documents are frequently signed with errors in the text.
  • Your company has too many versions of the same legal document floating around.
  • Your company has a challenging time finding the right contract template.

Generally speaking, if any one of these signs exists within your company, then document automation can help you. But if your contracting workflows are plagued by more than one of these indicators, the effect of document automation will prove to be more apparent. It will even unlock your legal team’s untapped value and empower them to pivot from “doing” to “leading”.

Wrapping Up

Contract drafting doesn’t need to be a Herculean task. By creating, standardizing, and automating contract templates, you’ll simultaneously eliminate many of the errors and consistencies that exist across your company’s contracts while making drafting 80% shorter, scoring a fast ROI, and adding to the company’s bottom line. 

Book a demo or claim your free trial to see how ContractWorks can power your contract drafting. 

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