Beautiful Contracts: The Essential Elements of a Well-Drafted Agreement
I love writing contracts. Truly, I do. This isn't something that I find in common with a lot of people, but no matter--it's my thing. To me, drafting a contract is a form of art, beautiful, poetic art. A contract brings two parties together usually before there is a conflict, which is a great time to talk through expectations and put them all in writing.
Just like any other well-written document, a good contract has a beginning, a middle, and an end. It is clear and easy to read. Done properly, both the drafter and the parties of the contract should appreciate its beauty (okay, that might be a bit of a stretch, but at the very least there should be an appreciation of its clarity). To draft a piece of contract art, consider using the following elements:
The preamble to a contract names the parties. The parties generally are either business entities or individuals, although in some more complex legal arrangements, the parties can be parents and subsidiaries of entities. Here is an example of a well-drafted preamble:
This Franchise Agreement, dated May 16, 2018, is between Lemon Power, LLC, a Colorado Limited Liability Company (the "Franchisor"), and Maxine McDougal (the "Franchisee").
Notice that this preamble does not identify Maxine as "Maxine McDougal, an individual." I prefer to put an individual's address and state of residence in the notice section and under his or her signature line. Listing out that a person is a person in the preamble can be redundant and take away from the brevity of a well-drafted preamble.
2. Recitals or Background
This is where you typically see the archaic language of "Witnesseth That" before paragraphs that start with "Whereas." This archaic language is completely unnecessary, but all the background section should be doing is stating why the parties are entering into the agreement. That's it; nothing more, nothing less. The following is an example from a sample distribution agreement:
1. The Seller is in the business of manufacturing beverages and soft drinks (the “Goods”).
2. The Distributor is in the business of marketing and reselling beverages and soft drinks.
3. The Seller desires to sell the Goods to the Distributor and appoint the Distributor as a non-exclusive distributor under the terms and conditions of this Agreement.
4. The Distributor desires to purchase the Goods from Seller and resell the Goods in Denver, CO, subject to the terms and conditions of this Agreement.
This background simply tells the reader why the parties are entering into a contract. And as with any other contract element, it should be readable and without legalese.
3. Defined Terms
For contracts of any significant length, it is a good idea to use a Defined Terms section. As a general rule, if there are more than five descriptive, legal terms that will be used more than once in the contract, then it's best to have a separate Defined Terms section. Otherwise, those terms can be defined in context in the contract. As far as placement, I prefer to put defined terms at the beginning of a contract so that readers have an idea of the content before getting into the actual terms. It's also helpful to the reader so that she is not having to flip back to the end of the contract to understand what's going on.
Defined terms are used so that a word has one definition throughout and contract, which reduces any risk of ambiguity. If a term is used more than once it should be listed in a Defined Terms section.
One important thing to remember is that a defined term should never be part of another defined term's definition. For example:
"Fixture" means any tangible property that is physically fastened to or connected with the property located at 3300 E. 1st Ave., Denver, CO 80206 ("Property").
"Building" means the property located at 3300 E. 1st Ave., Denver, CO 80206.
"Fixture" means any tangible property that is physically fasted to or connected with the Building.
4. Action Items
This is the heart of the contract--the terms that the parties are actually agreeing upon. In legal terms, this is where the "bargained-for exchange" of terms comes into place. Essentially, who is responsible for doing what. The action section will also contain any terms related to payment.
5. Boilerplate Provisions
The boilerplate provisions of a contract are general terms that are a part of most contracts, such as waiver of a jury trial, mediation, choice of law, and the entirety of the agreement provisions. Just because these are boilerplate and general terms, does not mean that they should be difficult to understand--they are just as important as the action items and should not be skipped over.
Some examples of boilerplate provisions include: Waiver of Jury Trials, Choice of Law, Assignments, Notice, Severability, and Merger clauses.
The signature blocks at the end of a contract are there so that the parties can memorialize their intent to be bound. "Signing on the dotted line" means that you agree to the terms that are written in the contract. As with the other parts of a contract, the signature lines should be crisp and clear.
There are other elements that can be included in a contract, such as Exhibits and Endgame provisions, but these basic six elements are a good start for the novice drafter. If drafting a contract for your business is not something that sounds like fun to you, contact us. We love to draft beautiful contracts!