Guide to Contract Drafting Basics and Best Practices

Drafting Basics: Organizational Parts and Contractual Concepts

The first stage of the contract lifecycle is the drafting stage. Contract drafting is one of the most crucial parts of the contract management lifecycle because it provides the foundation upon which the rest of the contract is built. Clarity and precision in contract drafting are essential for making sure that both parties needs are met. Additionally, having a well-written contract during every business deal can help provide a strong layer of legal protection. Here are some of the main aspects that should be included in all drafts, as well as key best practices for drafting a contract.

Organizational Parts

Like most legal documents, all contracts follow a basic format, called contract parts. The style, length, and details vary widely by industry and complexity of the transaction. However, every contract contains at least some of the common contract parts:

The Contract Frame—The formal language at the beginning and the signatures at the end.
The Definitions Section—The definitions used in the contract.
The Business Section—Setting out the party’s rights and responsibilities.
The Termination Section—Deals with the end of the contractual relationship.
The General Provisions Section—Sometimes called the boilerplate, this section contains statements of policy which govern the contract.

Contractual Concepts

Contractual concepts, unlike contract parts, consist of the operative language in the contract. These are the words that create contractual rights and obligations and are the basis for contractual liability or authority. They also set out policies for regulating the contractual relationship.

An easy way to think about the contractual concepts is to associate them with verbs. Just as every sentence must have a verb, every sentence in a contract contains at least one of these concepts. These are:

Declarations—These set the policy for the contractual relationship and can be used to define terms. They do not create any obligation or liability. Declarations are signaled by the present tense of the verb. “The purchase price is $25,000” is an example of a declaration. Note that this declaration does not obligate the purchaser to pay the purchase price. To create an obligation, a covenant should be used.

Covenant—A covenant obligates a party to do, or refrain from doing something. A covenant is an agreement signaled by the use of “shall,” “must,” “will,” or another similar term. For example, “the buyer shall pay the purchase price.” Best practice is to use “shall,” as it unambiguously signals an obligation as opposed to conditions.

Representations—This is a statement of fact or present intention. A representation is influential in bringing parties together for the agreement.

Warranty—A warranty signifies a promise that a fact is true. Unlike representations, warranties can extend into the future. Together, a warranty and a representation can create liability on the part of the party making these statements if a fact is not as represented and warranted.

Discretionary Authority—This gives the party discretion to do or refrain from doing something, but does not obligate the party to do anything. This is signaled by the use of “may.”

Condition—A condition is a duty that the parties are required to perform under the contract. Conditions are of two varieties: express, which is set out in the party’s agreement, and implied conditions, which are read into the agreement by the court. Conditions never appear in isolation and are always attached to an obligation. The language signaling a condition can vary from contract to contract. Failure of a condition does not in and of itself create liability or a right to damages. Conditions are never breached. Conditions may trigger an obligation, but they do not create obligations. Conditions are signaled by the terms “if,” “provided that,” “in the event of,” etc.

Contract Drafting Best Practices

A contract success platform is ideal for facilitating the drafting of contracts to streamline processes, increase automation, and reduce costs. There are three essential options for drafting a contract on a good contract management platform:

Importing a Word or PDF document—Documents can be imported and developed within a platform. Platforms should have an option to import a document, and from there, should have OCR capabilities so this contract is as easily readable and searchable as other documents.

Creating a contract from scratch—Basic word processing and editing tools should be nativly built so users can create a contract draft directly within the platform. Creating these documents from scratch is good for the first version of a contract, but the real strength of a platform lies in the ability to use and reuse templates.

Using contract templates—There should be no limit to the number of templates a user can have. Templates ensure all employees are using the same version of a contract by automatically updating any changes made to every user who is using that template. This ensures consistency while reducing errors and the time spent creating duplicates of similar documents.

All-In-One Contract Management Platform

By having the contract drafting phase of the contract lifecycle contained within a single location, there is no need for importing, exporting, emailing, or formatting later on. The contract is kept in the platform through the execution, management, and renewal stages. Along with the contracts themselves, a contract lifecycle managment platform should store all contextual actions such as the contract audit trail, discussions, and versions. All these tools are designed to streamline and simplify processes to help forge strong and lasting contractual relationships.