A definitive guide on how to write a contract and what needs to be included in a valid contract
Can we all agree contracts are difficult to understand? I think we can also agree it’s even harder to understand how to write a contract that’s actually going to protect you and your business.
Well today we’re reviewing not only how to write a contract, but understanding what constitutes a valid contract.
But first and foremost, ALWAYS have a written contract. Legal agreements are one of the most important aspects of your business. Creating and reading contracts is a very important duty when you are a business owner. The more your business grows, you will be expanding your team and working with other companies or businesses. This means more contracts (e.g. employee contracts and collaboration agreements) to review. One bad contract can cause your business to come crumbling down.
And with that, the first thing to ask is what is a contract?
What is a contract?
A contract is a legally binging agreement where two parties agree to perform something for something (quid pro quo). When two parties enter into a contract, they have duties and responsibilities to the other party to do what was agreed upon.
What makes a contract valid?
There are three elements that form a contract: offer, acceptance, and consideration (payment).
Offer: If you create my website, I’ll pay you $1200.
Acceptance: “I accept this offer” or a downpayment of $50 implies acceptance of the contract.
Payment: You’ve paid $50 as a deposit or the full contract price of $1200 for the website.
However, a valid agreement can be void if the person signing is under age, under duress, or not of sound mind.
Standard clauses to include in your contract
1. The first standard contract clause you need is the parties involved.
Your agreement should identify both parties that are agreeing to enter the contract. This clause is one of the top priorities when you are creating your contract. The parties involved clause states the person who is legally bound to the contract, and who is obligated to perform. Depending on the other clauses of the contract, if either party breaches, then the party can sue the person who did not perform their obligation.
Example: This agreement is made on [insert date] (“Effective date”) between [insert Party 1] (“Buyer”) and [ insert Party 2](“Seller”).Your contract should identify both parties that are agreeing to enter the contract. This clause is one of the top priorities when you are creating your contract. Click To Tweet
2. Include what services you are providing or goods you’re selling.
Include this standard clause in your contract to describe the reason that you are entering the agreement. Be sure that you are specific about what you are selling and when you are selling it. If you are a service-based company, you will describe what services you are performing. Also add when you will perform these services. If you sell goods, describe the goods you are selling.
Example: [Insert company name] will provide business coaching to Client for 1 hour daily for the next 30 days. [Insert company name] and Client will discuss mindset, building content, marketing strategies, business system workflows, sales tactics, and email list building. Services will not include tax and legal discussions.
Example: Seller agrees to sell, transfer, and deliver to Buyer fifteen green planners for forty dollars each. Seller agrees to deliver the green planners on or before October 31, 2019.
3. How long does the contract last?
Does your agreement last until performance has ended or does it last a year. These are terms that you’ll need to be specific about as to not cause confusion amongst parties. If one party believes that the contract was supposed to last for 3 months and the other party was under the belief that it was supposed to last a year, then that’s an issue. And that issue could cause a lawsuit. Being clear at the beginning of your working relationship will avoid any sort of confusion.
4. How much are you getting paid?
This is a clause that should ALWAYS be in your contract because you want to get the service/good you are paying for. And most importantly, you want the other party to pay you for the service/good you are giving! Consideration is what each party is receiving in exchange for the performance of the service or delivery of the goods. Make sure that the consideration clause includes price, quantity, quality and time of performance.
Example: In consideration of One thousand five hundred dollars, Photographer agrees to perform the wedding photography on April 24, 2018 at the New York City Library.”
Example: Consultant agrees to provide services for one year to Client in exchange for a $500 monthly payment beginning January 1, 2018, and on the 1st of every month ending on December 1, 2018.
5. You need a Governing Law/Choice of Law clause.
Governing law is the state where the rules and laws apply to interpret the agreement. This will usually be in your home state. But if you have businesses in multiple states, use the state that has the most favorable laws.
Example: This Agreement shall be governed by, construed, and enforced in accordance with the laws of the State of [State].
Example: All of the rights and obligations of [company/party] and [other party] arising under or related to this agreement shall be governed by the laws of the State of [state].
6. Last but not least, include an Entire Agreement clause.
This clause states that the contract is complete and any prior contract is invalid. Place this at the end of your agreement. If there are multiple contracts or attachments part of the same transaction, include these documents in this clause.
Example: This Agreement represents the entire understanding between the parties and any prior understanding or representation of any kind preceding the date of this Agreement shall not be binding upon either party except to the extent incorporated in this Agreement.
Example: I have read this agreement in its entirety and I agree to and understand the terms and conditions set forth herein. Any prior understanding, representation, terms, or oral agreement of any kind preceding the date of this Agreement shall not be binding upon either party except to the extent incorporated in this Agreement. This agreement may not be amended or modified in any way without the prior written consent of [Party 1] and [Party 2].
Final thoughts on how to write a contract for your business
Now you have the framework on how to write a contract. Incorporating these standard clauses in your contract will provide protection to you and your business. Although the above clauses are important, depending on your industry, there are other clauses that you need to include in your contracts. Wilson Murphy Law drafts various contracts for the countless needs of your small business. If you need a specific contract or any other legal services, Wilson Murphy Law is at your fingertips.
If you need help drafting or reviewing a contract, Wilson Murphy law would be happy to help.