How to draft a contract?

Contracts are an interesting and intriguing subject. Person who is keen to discover the depth of contracts has so much to learn and explore. Drafting a contract is one of beautiful trait of contract management.

Drafting a contract is like drafting an art. Artist needs a vision to create an art – A drafting person will need legal/business acumen to draft a contract.

First important thing in drafting of a contract is clarity of thought on subject matter and legal/business nuances. If clarity of thought is missing then drafting person mind will be full of chaos what to draft and where to start.

Prior to start with drafting a contract – Drafting person must read and understand all legal and business documents associated with transaction to have full clarity.

If drafting person has any queries about any document then drafting person should check with apt person for clarity.

Drafting person should not have any hesitation/ignorance in asking the company/client any query or additional information as hesitation/ignorance may result in loss of access to information which may be vital to business.

A contract which did not cover legal/business aspects of transaction in detail will never accord right protection to client and will put the legal/business interest of client/company in jeopardy.

To make certain all legal/business objectives of client/company are properly covered in contract – Drafting person has to do extensive review of entire document set related to transaction and should discuss with all stakeholders in detail about rights, obligations and potential economic risks/liabilities associated with transaction.

This exercise will certainly give clarity of thought to drafting person in relation to following aspects:

·         What are legal/business objectives to be covered in the contract?

·         How to accord right protection to rights of client/company?

·         What will be scope of indemnity?

·         What are roles and responsibilities of parties?

·         How to address potential risks/liabilities in contract?

·         How to develop a mechanism to amicable resolve any conflict of interest amid parties?

·         How to accommodate concerns of counter party?

·         What is term of contract and are termination rights of parties and effect of termination?

·         How to protect intellectual property rights of client/company?

·         What are assignment rights/restrictions?

·         How to preserve the confidentiality of client/company information?

·         What will be pricing and payment terms?

·         What are representations and warranties to be covered?

·         What will be remedies available to client/company in case of material breach of contract?

·         What is governing law of contract? etc.,

Structure of Contract:

1)  Title of contract: Title of contract should have connection with the subject matter of contract. Assume that the subject matter of contract is licensing of software then the Title should be ‘Software Licensing Agreement’.

2)  Preamble of Contract: It will reflect the information of parties (names, addresses, place of residence and company incorporated ID) and contract effective date.

3)  Recitals: This part of contract will contain description of parties’ their line of business and details about intended transaction/business association.

4)  Body of contract: It will be a combination of different clauses based on subject matter. List of major provisions will be covered in this article.

·      Relationship of parties: This provision will define relationship amid the parties in relation to subject matter of contract.

·      Duties and responsibilities of party: Depending upon the type of transaction this provision will list out roles and responsibilities of parties.

·      Term and termination: This provision will define the contract term (fixed/perpetual term), termination rights (termination with cause or for convenience) and effect of termination (post termination obligations/implications).

·      Representations and warranties: This provision will list out representations and warranties given by one party to another party to induce a party to enter into contract and an assurance of guarantee.

·      Limitation of Liability: This provision will establish monetary threshold limiting the financial liability of breaching party for damage suffered by non-breaching party. It further contains indirect damages disclaimer to the affect disclaiming liability of a party for indirect/consequential damages. Gist of exceptions (matters of unlimited liability) will also form part of LOL clause.

·      Indemnity: This provision will deal with indemnity obligation of a party to indemnify other party upon occurrence of certain events. It will establish indemnity procedure to be followed by parties in relation to indemnity claims. Certain prospects (No waiver of indemnity claim and No indemnity claim settlement without prior consent of parties) will also be covered under indemnity.

·      Confidential Information: This provision will deal with confidentiality aspects such as confidential information definition and its exceptions, disclosure and usage of confidential information, protection period of confidential information (survival of confidentiality obligations) and permitted closure (disclosure of confidential information by operation of law).

·      Assignment clause: This provision will deal with assignment rights of a party and also with authority of a party to restrict other party assignment right.

·      Governing law and jurisdiction: Governing law is the law pursuant to which contractual disputes under the agreement will be settled. Jurisdiction means place wherein the courts are located will have authority to adjudicate the disputes.

·      Pricing and Payment terms: This provision will deal with product/service pricing, payment term (time duration to clear payment dues), mode of payment, valid currency for payment, interest for default in payments, invoicing process and dispute resolution process for resolving disputes in relation to payment/invoicing.

·      Ownership: Ownership is a vital clause to acknowledge the ownership rights (including Intellectual Property Rights) of a party in relation to a product/service and to ensure counterparty will not possess any ownership rights in such product/service except the utility rights granted in relation a product/service.

·      Force Majeure: Force Majeure is a vital clause to claim immunity from contract performance as a party will be unable to perform its obligations due to occurrence of certain uncontrolled or unforeseeable event. Inclusion of a defined list of Force Majeure events will be beneficial approach to establish clear claim on basis of Force Majeure event.

·      Acceptance: This is vital provision in service agreements. This provision will provide the buyer of product/service with an opportunity to test functionality of product/service within a defined acceptance period and will obligate supplier to rectify any defect in product/service to satisfaction of buyer. Implications of non-acceptance of product/service or non-compliance of product/service with agreed specifications are also part of acceptance provision.

·      Audit provision: Audit provision will be vital to inspect/check the usage of product/service (licensed/sold). This will define scope and frequency of audit, audit process, penalties for excess usage of product/service and audit conditions.

·      Publicity: This provision will deal with usage of a party/customer name in publicity related activities with or without consent of such party.

·      Waiver: This provision will expressly acknowledge that failure to exercise a right will not result in waiver of such right or waiver of a right does not result in waiver of any other right/obligation of a party.

·      Severability: This provision will ensure that declaration of a specific clause as invalid or unlawful will not affect the validity and enforceability of rest of contract.

·      Entire Agreement: This provision will expressly reflect the fact that this Agreement will be entire agreement amid the parties in relation to a specific subject matter.

5. Signature Block: This will reflect the signature of the parties to the contract,

Few tips to learn contract drafting:

Step 1: Develop keen interest in contract drafting

·        Fundamental step is to develop a passion and keen interest for contract drafting. Without interest in contract drafting no person will never be an expert in contract drafting.

Step 2: Communication skills

·      For beginners’ good communication skills (oral/written) is a must for learning contract drafting. 

·      Prime focus should be on improving legal writing and drafting skills.

Step 3: Clauses

·      Prior to start with contract drafting beginners should learn vital nuances of various contractual clauses.

·      A contract is nothing but combination of different segment of clauses.

·      Each contractual clause will be unique in its own way. First list out different types of clauses. Then start doing legal research on clause by clause to learn vital nuances of each contractual clause.

·      Learning clause by clause will simplify learning process and make understanding easy for beginners.

·      Lack of knowledge on vital contractual terms and conditions will reflect in preparation of a poor draft.

·      Once you are well equipped with knowledge of different types of clauses then you will be able to make start with contract drafting.

Step 4: Review different contracts

·      To review different types of contracts drafting person should be well equipped with contractual patterns of different clauses.

·      Drafting person should develop a habit of reviewing different types of contract to get a good idea about contract structure and alignment of different types of clauses.

·      In process of reviewing contract, pick one segment of contract and review 3 to 5 different modules of same segment and do the comparative analysis. This exercise will enable drafting person to learn art of drafting a clause/contract in different modes.

·      Assume that you picked up Non-Disclosure Agreement for review. Then collect different types of NDAs and try to do comparative analysis of these NDAs with one another. It will certainly assist drafting person to understand the basic format and clauses of NDA.

·      Repeat the same exercise with different types of contracts to learn formats and clauses alignment in different types of contracts. 

·      This exercise has to be performed to the point you are confident of your ability to draft a contract.

·      Start your review exercise with simple contracts and stretch it to complex and complicated contracts in course of time.

Step 5: Start drafting sample contracts and get your work product checked

·      Once you are confident of your ability to draft a contract on your own then start drafting some sample templates of certain categories of contracts of your choice.

·      After preparing sample templates make sure you get them checked with senior professional.

·      Ask senior professional to review your sample drafts and provide feedback. Based on the feedback, try to integrate senior feedback into future assignments.

·      Draft as many contracts as you can and get them checked with senior professional this is the best way to master the art of contract drafting. 

· Finally always use simple language to draft contract to enable reader to easily understand the essence of contract