Learning how to write a contract effectively can take years of study and practice. But if you want some quick tips to kick start your contract writing capabilities, this article is for you.
Author: Farrah Motley is a Solicitor of the Supreme Court of Queensland. Farrah is an expert in drafting and negotiating contracts. Over the last decade, Farrah has helped her clients with hundreds of contracts in a variety of different industries. In this article, Farrah deciphers how to write a contract.
Learning how to write a contract takes time and practice. In this article, I've outlined the top 10 things you need to do to write a contract that is enforceable and effective:
Choose the right contract format
Brainstorm the risks
Correctly identify the contracting parties
Understand the goals of each party
Outline the contract period
Define key terms
Numbering and organising clauses
Write clearly and concisely
Choose the right signing clause
Now let's look at each of these contract writing tips and break it down.
1. How to Write a Contract - Research
It's really important not only to understand the basic concepts of contract law, but also to understand the context and industry that's relevant to the contract you are looking to write. If you start cold, without doing any research, you may miss some of the nuances that would turn an average contract into an exceptional one.
So, before you put pen to paper, do some research. This might include:
researching legislation (both Commonwealth and State) that is relevant to the industry, goods, services or contracting parties (this is all available online, for free);
having a conversation with your colleagues or other businesses that operate in your space to learn from their mistakes, understand the broader context or understand the how the particular transaction works in practice (putting the contract to one side);
read some industry papers and articles; these can go a long way to understanding the key risks and opportunities relevant to the particular industry your contract operates within.
2. How to Write a Contract - Choose the Right Contract Format
Choosing the right contract format in the first place is vital to ensuring that your contract is not only enforceable, but that you are not reinventing the wheel.
Standard Form Contracts
There are "standard form" contracts out there (usually developed by industry bodies) which have, through a lot of consultation and consideration, developed a base set of terms and conditions. For a fee (usually around AUD$300), you can purchase the base terms and conditions. If you need to make some changes to the base terms and conditions, you can do this by drafting special conditions.
One thing I would say, however, is to try and avoid going against the "spirit" of a standard form contract. They are usually drafted to fairly balance risk between the contracting parties. I have seen many law firms grab hold of a standard form contract and amend it to such an extent that they may as well have written an entirely new contract. In my view, that is not how standard form contracts should be used and it erodes the balance the form sought to achieve in the first place.
If your business is dealing with individual consumers or small businesses and your contract is standard form in the sense that it is given on a "take it or leave it" basis; do not fall foul of the unfair contract terms laws. You can read about unfair contract terms here, but the key elements of a contract term being considered "unfair" is if it:
would cause a significant imbalance in the parties’ rights and obligations arising under the contract
is not reasonably necessary to protect the legitimate interests of the party that would benefit from the term, and
would cause detriment (financial or otherwise) to a consumer if it were to be applied or relied on.
Using a Deed Versus a Contract
I have written extensively on the difference between a deed and a contract (click here). When it comes to which form to use as the basis for the contract you are writing, here is the key point to remember; if one party is making a promise to the other, and there is nothing being given in exchange (i.e. no "consideration"), use a deed.
A master agreement is a contract agreed between two parties that sets out standard terms that apply to all the future transactions entered into between those parties. Master agreements can be particularly useful where your business is regularly entering into a contract with one party for the same kind of goods and/or services.
Master agreements avoid the need to sign a lengthy contract each time a party wants to purchase goods and/or services. The master agreement (which sets out all the terms and conditions) can be signed once and may be written so that is applies for, say, one year. Then, each time a party wants to buy goods and/or services, that party issues a purchase order, or an email, in a specified format.
3. How to Write a Contract - Brainstorm the Risks
A big part of how you can write an effective contract actually involves no writing at all; it requires thinking. Put your pen down and spend some time stepping through, in your head, the timelines of events from when the parties agree to something, to the preparation and delivery, and what might go wrong along the way. While your doing this, keep in mind what is important to each party.
If you've gone through this brainstorming process, the next step is to write it down. Don't start trying to jump straight into writing the terms and conditions. Instead, think of the basic guiding principles. This might look something like this:
The client is concerned about the tax status of the transaction;
My business wants to ensure it is easy to get additional payment if it provides extra goods and/or services;
My business wants to ensure it has the right to replicate the goods and/or services and sell them to other clients;
My business is concerned about the financial viability of the client;
The client wants to ensure that, if we cannot provide the goods and/or services, it can ensure continuity and can easily appoint someone else to continue; and
My client wants to ensure that there is someone of substance stood behind us (like an insurer or a parent company).
During this brainstorming phase (depending on how sophisticated the transaction is), you may even want to involve the client and discuss a terms sheet, which sets out the guiding principles of the agreement. You can read more about terms sheets here.
4. How to Write a Contract - Correctly Identify the Contracting Parties
If you do not correctly identify the parties to the contract, your contract may not be worth the piece of paper it is written on.
I see this happen all time. A great contract is written up, the transaction is accurately recorded - but - the wrong party is identified and therefore not binding on the correct parties. If you want to know why it is so important to correctly identify the parties to the contract, I suggest you read this, which describes the law of privity of contract.
When you are writing a contract, you must include the correct legal names of the parties to the contract. In the likely event you are contracting with a company or other business entity, you can do a quick search by either looking up their ABN details (and asking the client to confirm) or doing an ASIC search. You can verify that this is the correct entity by checking the entity name / ABN / ACN against the entity set out in a certificate of currency.
If the business is a company, identify it by its correct legal name - including "Pty Ltd", for example, and not by the names of the people who are signing the agreement on behalf of the business.
In addition to the correct entity name, all written contracts should include some basic information about your business and the other party to the contract, for instance:
Australian business number (ABN) - You will need to register for an ABN for certain tax purposes, such as GST and pay as you go (PAYG) withholding and you should include the ABNs of both parties.
Australian Company Number (ACN) - Companies incorporated under the Corporations Act 2001 (Cth) are assigned an ACN. It is a legal requirement for Australian companies to include their ACN (if different to the last 9 digits of the company's ABN) on all contracts entered into by the company.
Statement about your status as a contractor - If the contract is for a genuine contracting relationship not an employee relationship, the contract should identify your business as a contractor. This may not be relevant for all transactions, but it may be considered relevant by a court if your status as an employee or contractor is in question. It shows what was intended when the contract was signed and can be indicative (but not conclusive) that the transaction was not sham contracting.
Signatures of the signor and any witnesses - Both you and the other party must sign the contract for it to be valid. If the contract is a deed, you must follow the rules regarding signing of deeds, or risk the deed being unenforceable as a deed (and possibly as a contract). You can also read this article, which describes the signing requirements for a deed.
5. How to Write a Contract - Understand the Goals of Each Party
This step is related to step 3 - brainstorming the risks.
Sometimes during contract negotiations, a party may get hung up on a particular clause for no apparent reason. If you can understand the underlying motives of a party and the outcome they are seeking to achieve, then either:
you may be able to suggest an alternative which satisfies both parties, without getting hung up on the exact wording; and
you may identify a significant misunderstanding or misalignment between the parties.
Contracts do not fall over because lawyers could not agree on the precise wording of a clause; they fall over because the commercial basis on which the parties thought they were contracting was proven to be false.
Writing the contract is the easy part; the foundations on which the contract is written is the difficult part.
6. How to Write a Contract - Outline the Contract Period
Contracts cannot go on forever. If you do not specify a period the contract is going to apply for, it may not be enforceable.
This doesn't necessarily mean specifying dates in the contract. You could align the contract period to the time it takes to provide the goods and/or services. However, in the case of a master agreement, it is generally advisable to outline specific dates and give the parties an option to extend the master agreement.
7. How to Write a Contract - Define Key Terms
I recently wrote about how to read a contract, and when it comes to writing a contract - some of the same rules apply.
The defined term should align to the way it is used in the relevant clause: The rules of contract interpretation mean that the meaning of the term (as you have defined it in the contract) prevails over the plain and ordinary meaning of that term. When you define a term, be concise and informative.
Do not include obligations, conditions or warranties in a definition: If you use a definition to add additional rights and obligations, you may create ambiguity if the defined term conflict with the way it is used in the relevant clause. Keep it simple. Define the term; but do no more than that.
Define a term precisely and narrowly and read it in the context of each instance you use it: If you have used a defined term in multiple different clauses, there is a risk that you have not appropriately captured the context in the definition, or it may be incorrectly used in the operative clause. To avoid contextual issues, narrowly define the term in the definition and add context in the operative clause if you need to.
A definition may include a defined term that is defined elsewhere: Like operative clauses, definitions can make reference to other defined terms by using the capitalised word. Nothing more needs to be done; you don't need to identify where the other defined term is located.
Do not use the phrase "for the avoidance of doubt": This indicates that there is doubt and that the term has been poorly defined in the first place. The parameters of the definition should be clearly described; you can add to the precision by adding "includes" and "excludes".
Consider what you don't know: We can only define terms by what we know, but - as the saying goes - we don't know what we don't know. What if, for example, half way through the contract term, an important piece of legislation is significantly amended. If you've made reference to a piece of legislation in your definitions, without specifying somewhere in the contract that the definition should be read in the context of legislation as replaced or amended from time to time; you may run into issues.
8. How to Write a Contract - Numbering and organising clauses
It's true; lots of people don't read contracts. However, assume that the contract will become a central focus of a litigated dispute. Your focus should be to aid the reader and make it as easy as possible to read the contract.
This can be done by formatting the contract appropriately (bolded headings, for example, using an effective clause numbering system and organising the clauses in a common sense fashion.
Depending on the type of contract and who is writing the contract, the contract may be structured as follows:
description of the parties, their ABN/ACN and address;
recitals which describe the background to the agreement (why has the contract come about?);
signing clause; and
schedules (for example, scope of goods/services and fee).
9. How to Write a Contract - Write Clearly and Concisely
Writing a clear and concise contract takes practice.
After you have had a first pass at writing the contract, step back and consider whether:
you can say the same thing by using less words;
if you had never seen the contract before, would you be able to fully understand the agreement reached, by reference only to the contract; and
you should ask someone else to read the contract (as the writer, you may have tunnel vision).
10. How to Write a Contract - Choose the Right Signing Clause
If the party your business is contracting with is a company, I recommend using a signature clause which requires signing in accordance with the Corporations Act 2001 (Cth). This means that you can rely on the indoor management rule, and you do not have to check if the person signing actually has authority.
Should I Seek Legal Advice Before Writing a Contract?
The short answer is this; it's best to have a contract drafted by a lawyer who is trained and experienced. Contract lawyers spend years studying, reading and writing contracts and can write them effectively, efficiently and ensure that they are enforceable.
Contracts can be deceptively complex and for any kind of transaction, they are essential for your business
If your business needs legal advice - contact Prosper Law today!
Author: Farrah Motley | Legal Principal
PROSPER LAW - A Law Firm for Businesses
M: 0422 721 121