The Art of Drafting a Simple Contract Agreement

An Introduction to Contract Agreements

Anytime a person, company or organization performs an action and expects a specific form of compensation in return, a contract agreement is being formed. These agreements are a normal part of everyday transactions that we use in our daily lives. Whether you’re paying a bill, signing a lease, establishing a checking account or performing a service for a customer, you’re entering into a contract agreement, whether you knew it or not.
While there are many different types of contract agreements, simple contract agreements encompass a large portion of contracts . But in order to understand them, we must look at what basic components simple contracts typically have:
Because simple contract agreements are informal, they are a bit less restrictive than other contracts. They do not need to be in writing nor do they need to be signed in order for them to be valid. As long as the basic components of a contract exist, it is considered a legal contract. This doesn’t mean that the other forms of contracts aren’t binding; rather, it clearly demonstrates why the three basic components of a contract are necessary for them to be considered legally binding.

Essential Components of a Simple Contract

A contract, whether course or simple, must contain certain elements in order to be considered valid. These elements include offer, acceptance, consideration, mutual assent and capacity. Any variation from these elements may render a contract unenforceable.
An offer is a declaration of intent to enter into a contract. In order to form a contract, an offer must be directed at a particular person and create a reasonable expectation in the offeree that the offer can only be accepted by that person. Offers can be made orally, in writing, by conduct, through a medium of exchange or via electronic communication. Advertising does not usually qualify as an offer unless it can be construed as an offer to a particular person. An offer can also be offered in jest and certain offers cannot be revoked once extended.
Acceptance occurs when the offeree indicates acceptance through an act, a promise, performance or word. There is no "silence" on the part of the offeree that constitutes acceptance. An effective acceptance must be unequivocal, express or implied, unconditional and communicated to the offeror.
Consideration is something of value that is exchanged by the parties. This can be in the form of money, property, services or goods. Something of value must be given up in order to make an agreement binding, otherwise there is no consideration. When the consideration amount is for a small, fixed or nominal amount, that does not invalidate the contract if the subject of the contract has some actual value.
Mutual assent occurs when both parties agree to the terms of the contract. An offer must be clear so the offeree understands what the agreement entails. An offer must be accepted in accordance with its terms, regardless of how the offer is communicated to the other party.
All parties involved in the transaction must have capacity in order for the contract to be valid. Generally, parties must be of sound mind and legal age to enter into an agreement. Under the law, it is presumed that individuals have legal capacity, unless proven otherwise.

How to Structure Your Contract

Once you’ve made the choice to write your own contract, or at least not pay a lawyer to draft it for you, you need to organize it in a way that the lay-person will understand. That means you need to structure your agreement around four basic areas:

General Contract Language: This is pretty much the same language used in any other contracts out there, such as the Indemnification Clause, the Termination Clause, etc.
Background: This is a special section that lays out the specific background of the parties and the situation they are trying to address with the agreement.
Agreement: This is the section that lays out all the specific requirements of each party, as well as any contingencies that must or must not be followed.
Signature Blocks: Finally, the signature blocks should be as simple as possible, without extraneous text to complete the transition from two separate people to one legal entity.

For example, consider the following contract, which most lawyers would likely find simple enough to write. The language is clear and direct. There is no unnecessary jargon or confusing syntax. And the various sections are laid out in a way that helps the reader easily identify what is being covered in various clauses. That makes it more likely that someone will actually read the entire contract and understand what is at stake:
THIS AGREEMENT is made as of the ____ day of September, 2007 between SMITH TRADING COMPANY (the "Company") and JONES (the "Owner"). The Owner and the Company are collectively known as the "Parties."
RECITALS
The Parties are jointly executing this agreement to set forth the Terms and Conditions under which the Company and the Owner intend to proceed on certain daytrading activities.
AGREEMENT
The Parties agree as follows:

1) DAYTRADING

The Owner wishes to engage in daytrading activities with the Company.

2) RISK

The Owner acknowledges that daytrading is an extremely high risk activity. Neither the Company nor its brokers assume any responsibility for losses incurred by the Owner when daytrading.

How to Write Effective Terms and Conditions

Good contracts are not written solely by lawyers; they include language that all of the parties can understand. I’ll refer to those agreements as "simple contracts" because the parties agree to the key points without ambiguity. In the last chapter of the book, I provided a lot of examples of questions to consider as you review your contracts, or draft new ones. This chapter will take it a step further and describe how to actually write clear terms and conditions. Writing precise terms and conditions is critical for avoiding ambiguity.
What do you normally find in terms and conditions? These terms and conditions typically include precise terms for payment and delivery of goods (or payments for services), the obligation of each party, and remedies if one party breaks the agreement.
Normally parties use a lot of words that are not strictly necessary to complete the objective mentioned above. Guess what? Without those words, the objective would be clearer. So let’s try a couple of examples.
Punitive clauses can be a problem with terms and conditions. Sometimes when you see an "obligation" and a "penalty" lumped together into a single sentence, and it may not be necessary to have a penalty. For example, If the dealer is late delivering the goods, the dealer will pay Buyer $1,000 per day until the goods are delivered. That may convey the information, but the penalizing should be part of the obligation. The better language would be: If the dealer fails to deliver the goods by the due date, Dealer will pay $1,000 per day until the goods are delivered.

What Mistakes to Watch For

Common mistakes to avoid when drafting a contract agreement include leaving out certain key clauses, which can lead to disputes down the line. From vague language to omitting crucial terms, there are often essentials overlooked in contracts that can end up being costly for your business.
For example, being unclear about the specific scope of work to be performed is common, and can lead to major problems. It’s important to be as thorough as possible with the terms and conditions of all work to be performed, outlining every little detail so both parties fully understand the expectations.
Falling into the trap of vague language is another mistake, and this may include things like describing deliverables ambiguously or using terms that can be interpreted in multiple ways. All agreements should be as transparent as possible, eliminating the possibility of different interpretations for any specific elements in the contract.
Many times, agreement parties determining certain contractual terms fail to address important contractual provisions such as timeframes for milestones and deliverables. It’s critical to be clear about timelines on projects – all parties involved should know when certain aspects are expected to be completed, as well as have a conceptual view of the overall project schedule.
Leaving out a termination clause is another common mistake made in contract agreements. A termination clause can give either side the ability to opt out of the agreement under certain circumstances , such as if strong enough justification can be provided. Without such a clause, it may be much more difficult to more forward with legal action against the other party in court if you determine that pursuing an amicable resolution is not viable.
Many people who draft contracts aren’t well versed in legal language and terminology and may simply leave out certain clauses or sections related to governing law and dispute resolution. It’s important to specify the governing law that will apply to the contract.
It’s also wise to include a dispute resolution clause. This clause should lay out the steps by which disputes are resolved, or, in the case of termination, how the process of shutting down the contract will proceed.
All agreements should also include a section that deals with liability and remedies for damages. For most contractual relationships, you and the other party may be legally liable for monetary damages that result from a breach of contract, whether this occurs on purpose or simply because of an oversight and misunderstanding. These damages fall into three categories: expectation damages, reliance damages and consequential damages. It’s important to lay out these potential damages and discuss the limits on each party’s liability.
These are just a few common mistakes that companies and individuals can make when it comes to contract agreements.

Making Your Contract Legally Enforceable

For a simple contract agreement to be legally enforceable, the parameters of the agreement must comply with the requisite laws of all parties’ relevant jurisdictions. Furthermore, the terms must be clear, mutual and wholly conscionable to comport with the requirements of a valid contract.
It’s not enough that the parties consent – for a simple contract agreement to be legally binding, it must be properly executed. In most jurisdictions, even oral agreements are binding, provided they are clear, conscionable and have been fulfilled within the statute of limitations (generally 3-10 years). Nonetheless, where the statute of frauds applies, an oral agreement must be verified in writing by the parties or signed by the party against whom the agreement is being enforced (if not a party to the agreement). As a best practice, each party should always sign a simple contract agreement.
If a simple contract agreement is executed on behalf of a business, authorization must be secured to execute the agreement and for each party to bind the business to the agreement. To satisfy the requirements of the statute of frauds, a written verification of the agreement should also be secured for each party.
For a simple contract agreement to be legally binding all parties must witness the execution of the agreement (notary public may be required in some jurisdictions). Each party must also retain a copy of the executed written document, along with the original receipt. Where the terms of a simple contract include the delivery of an asset, receipt of delivery should be acknowledged by the parties, and copy receipts should be retained along with the written agreement.

Finalizing and Ending Your Contract

The typical process for review and proofreading of a contract begins with the drafter, who must naturally check his document for errors, problematic clauses and missed issues. If the drafter is the named client (and not an attorney), the client should have an attorney review as well. When the drafter is the client’s attorney or the client can afford to have an attorney review the draft, both the attorney draftsperson and attorney reviewer must do their own proofread and review of the document, separately. Sometimes the drafter and reviewer can be the same person. In that case, the drafter should set it up as a review process, which may be two or even three rounds of review and may include the client.
In either case, however, the drafter and reviewer will likely have a list of issues to discuss. A final list should be generated and provided to the drafter. The drafter should then provide a final redline version back to the reviewer, one more redline back to the drafter and then a final clean version back to the reviewer and the client. When there are multiple rounds of review, all redlines and clean drafts should be maintained in order.
If the drafter is the attorney, the drafter and reviewer process may not be needed, but it could be appropriate in some cases. For example , if the attorney is a solo practitioner and the contract is the firm’s first contract, it may be wise to have a "second set of eyes." The second set could be another attorney in the same firm or an attorney not associated with the firm.
Finally, when the drafter is an attorney, the client is likely to also want the contract reviewed by outside counsel, so that additional review process must also be set up. For the review to happen in a timely fashion, the client should provide its comments reasonably promptly to avoid delaying the finalization process. All reviewed edited versions of the contract should be returned to the attorney, who will likely prepare the final version to be executed by both parties.
When it is time to get the contract signed under the laws of most states, the contract must be printed and signed. The signers and witnesses (if any) should return to the prior step. It is a best practice to ensure signers and witnesses are all present at the same time. This is often easier on a remote call (teleconference or videoconference) and is typically what happens when a contract is signed over a video messaging service like Zoom. If email or standard mail are used, having witnesses is likely not an option at all.