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A lot goes into drafting a commercial contract. This ranges from the various legal requirements of a contract to negotiating terms with the contracting party. Whilst drafting a contract can be a daunting task, it can be made a lot easier once you have a sound understanding of how contracts work more broadly. To assist, this article provides some insight into how to draft a legally effective contract.

What Is a Contract?

You may be unaware of the number of contracts you enter into daily. For example, you might form a simple contract when you buy milk from the general store, whereas you require a more complex contract for a company takeover.

Put simply, a contract is a legally binding agreement between two or more parties. A contract will detail the rights and obligations of each party in the agreement, either in writing or orally. 

As a legal tool, contracts are widely helpful, considering you can make different promises to different parties depending on your commercial arrangements. For example, under a contract, you might agree to perform certain tasks or agree to steer clear of doing certain things. But, ultimately, contracts vary in complexity, and the substance of a contract largely depends on what you and the contracting party negotiate and any other broader legal obligations. 

Contractual Duties vs Contractual Rights

When drafting a contract, you should understand both the contractual duties and contractual rights of each party. This is essential for understanding when a breach has occurred and thus whether any remedies are available. 

A contractual right will likely have a corresponding duty. For example, if you pay for building services, you have a contractual right to this service. Correspondingly, the builder is under a duty to fulfil their promise, i.e. build your home. 

You need to determine your rights and obligations once you enter into an agreement with another party. Often, the terms of the agreement can be unclear or vague if someone has poorly drafted the contract. Where contractual terms are sufficiently uncertain, your contract may be unenforceable. 

One particular area that can prove troublesome when drafting a contract is the termination provision. You should clearly state under what circumstances either party can terminate the contract. Normally, a well-drafted contract will contain termination procedures that either party must follow to ensure the contract meets its end. Without following the designated procedure, the opposing party may bring a claim of wrongful termination against you, which could result in you having to pay damages for any loss they incurred as a consequence of your wrongful termination. 

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Verbal Agreement vs Written Contract

When drafting a contract, we advise that you put everything in writing. Even though verbal agreements may still be enforceable, you can eliminate any doubt by putting all of your important agreements in writing. In addition, by putting your negotiated agreement in writing, it will be easier for both you and other contracting parties to understand the terms and conditions of the contract. 

Let’s say you discuss with a cleaner that you will pay them $200 a week to clean your house twice a week. Is GST included on top of that? Will you have to pay for the cleaning products? Will the cleaning include doing the laundry? These are essential considerations when drafting a contract and can only be clarified if the contract terms are in writing.

To avoid the awkward and uncomfortable situation of one party denying that a term was ever part of the agreement, you should formalise the contract in writing. This will save you both the time and effort to prove that both parties agreed to the term.

Using One Complete Document

Ideally, when you draft a contract, it is better to have the terms of the agreement in the same document. A haphazard approach to negotiating terms makes it more difficult to reconcile the completed contract and is more likely to result in confusion. This is sometimes the case when parties attempt to negotiate terms by sending emails back and forth. 

Instead, once the terms have been finalised, you should compile them into one complete document, whether by email or otherwise. This way, you can readily confirm the updated agreement and ensure that the final contract properly reflects what you and the other contracting party had discussed. 

Key Takeaways 

A contract is a legally binding agreement between two or more parties. When it comes to drafting the terms of a contract, you should:

  • clearly state the rights and obligations of each party that is privy to the contract;
  • ensure you put verbal agreements into writing; and 
  • compile the finalised terms of the contract into one document for clarity.

If you need help with drafting or reviewing the terms of your contract, LegalVision’s experienced contract lawyers can help. Call us on 1300 544 755 or complete the form on this page. 

If I electronically sign a document, is it legally binding?

An electronically signed document is generally legally binding. However, this rule can differ depending on the nature of the document you signed and what jurisdiction you are based in. 

What is a non-compete clause?

In the context of commercial employment, a non-compete clause can prevent one party from entering into a similar profession that would compete with their current employer. 

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