How to Create a Contract
A contract is an agreement between two or more entities (individuals, companies, organizations or government agencies) to do, or to abstain from doing, a particular action in exchange for money or something else of value. Contracts can be verbal or written, but are generally written using formal or informal terms. The terms of a contract define the who, what, where, when and how of the agreement, and they describe the promises that each party is bound to in the contract. The following steps provide you with the basic structure of a standard contract.
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Instructions
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1
Identify the parties to the contract. Identify whether the parties are persons or legally incorporated entities. List legal name, nickname, address and type of entity (LLC, corporation, nonprofit and so forth).
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Use recitals for the background of the contract and the purpose for entering into an agreement. These are "whereas" clauses that come before the body of the contract and are useful for bringing the reader up to speed on the background and purpose of the agreement. Address any key assumptions about the agreement using recitals.
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Identify the goods or services to be the subject of the contract. Indicate any exclusions from a product line, if a product is the agreed-upon subject. Set minimum orders. List amount of inventory and any spare parts to be carried by a distributor, if applicable. Consider a noncompete clause that requires a reseller, if applicable, to refrain from carrying competitive products.
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List the obligations of each party to the contract. Indicate what each party is required to do as a result of the contract, and the date it is to be done. Identify which party will be responsible for delivery of goods or services, if applicable.
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Create the terms of the contract that establish time. Include the duration of the overall contract (for example, a one-time situation or a designated time period). Indicate whether the contract can be renewed or extended.
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Set the price terms. List the price for each good or service where applicable, and do so with strong and stable currency (if contracting outside the U.S.). Define whether prices are project fees, fixed prices or derived from a formula. Indicate whether prices will include tax or have a tax subsequently placed upon the total amount due. Guarantee prices for a period of time if such prices of the goods or services are subject to change.
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Set the payment terms clearly. Establish how payment for the goods or services is to be made (amount due in full, installments and so forth). Specify a deadline for payment and if any penalties will be incurred for late payment. Consider charging interest when a credit line is used or payment is made in installments, but ensure that terms for such interest are clearly defined in the contract.
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Define conditions of liability and where it is limited. Consider no liability if excess payment is received. Consider under what circumstances a party is liable, such as breach of the contract or negligent performance. Include the conditions under which the contract can be terminated as well.
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Tips & Warnings
Legal review is highly recommended when creating a contract. Attorneys can be expensive, but paralegals can be just as helpful. Paralegals can provide guidance when negotiating and drafting your contract, and they are usually familiar with the different components that should be provided in a contract.
Consider a provision in the contract for resolving disputes, such as which country's or state's law should apply, and which country's or state's courts would have jurisdiction. Such a provision will help to prevent inflexibility and disastrous deadlocks when disagreement arises.
Consider a "force majeure" clause. This excuses nonperformance due to factors beyond the control of either parties.
Do not title your contract anything other than "contract." If left untitled, or if similar words are used, like "proposal," a judge may decide against some of the provisions you thought you were protected with. If you want a legally binding contract, call it a "contract."
Do not use long sentences or creative wording. Clarity and unambiguity are essential to a contract, and will assist in avoiding potential misinterpretations and disagreements.
Avoid using bad nicknames that can cause confusion or be prone to typos in the document. For example, instead of "lessor" and "lessee," use "landlord" and "tenant."
