How to Draw Up a Business Contract in 7 Steps

As a small business owner, it is important to use business contracts to formalize relationships with those you work with – including suppliers, employees and clients. A contract is a legally enforceable agreement between 2+ parties that specify each party’s rights, obligations, and duties.

Well-written contracts state exactly what each party will provide, when and how payments will be made, what happens if a dispute arises, how the business relationship can be ended, and several other details.

Conversely, weak contracts often are ambiguous and contain unfair provisions, resulting in misunderstandings and even expensive breach of contract lawsuits that could destroy your successful company.

So: how can you ensure that the contracts you sign with your business partners are watertight to shield everyone involved from legal disputes?

The best approach is to have an expert contract attorney examine or draft your contracts, like many successful entrepreneurs do. Yes, hiring an attorney will be an added expense, but it’s one that could save you thousands of dollars in legal fees or damages if things go drastically wrong down the road.

If you decide to take on the challenge of drafting a business contract independently, there are some critical steps you should follow to create a well-rounded agreement that won’t expose your business to disagreements and legal battles.

7 Steps to Draft a Business Contract That Protects Your Interests

• Decide on the Type of Contract You Need

There are many different types of business contracts, but the most popular ones are service agreements, which regulate your enterprise’s dealings with contractors and other third-party actors; non-disclosure agreements (NDAs), typically signed to prevent sensitive information about an organization from being disclosed to competitors without permission; and sales agreements, which facilitate the buying and selling of goods and services. 

While the wording of the various contracts can vary significantly, they all share certain traits, such as the need for basic information about the parties involved to be included in the agreement.

You don’t have to draft a contract from scratch once you’ve determined what kind you need. There are plenty of business contract templates available online that you may download and customize to fit your use case.

• Identify All Parties Involved

Your business contract must have accurate details for all parties signing it for the agreement to be valid and upheld in court.

While drafting your business contract, provide each party’s full legal name, physical address, contact information and role, ensuring they’re appropriately designated as either persons or business entities.

This action clarifies who is in charge of carrying out what contract obligations and against whom you have legal recourse if the contract terms are not met.

• Give Specifics on What Each Party Expects From the Other

A major cause of contract breaches is a lack of clarity in expectations, which results in divergent views on what each party must deliver.

To prevent this, you must draft your contracts precisely, defining deliverables, quality standards, and what each party will offer or do. You should also include timelines and, if applicable, the location of service delivery.

Here is a good example of clearly described work expectations:

“DigitalTech Solutions will set up and install Windows 11 on 25 desktop PCs for Axe Financial Services at their headquarters in San Diego, California. The installation will happen between 8:00 a.m. and 5:00 p.m. on December 15 and 16. Software upgrades, network integration, and data transfer from outdated devices will all be part of each setup. To acquaint employees with the new systems, DigitalTech Solutions will also conduct a one-hour training session on December 17.”

A bad example of a contract work description would be:

“DigitalTech Solutions will set up computers for Axe Financial Services in mid-December.“

Consider talking to each party who will sign the agreement during this step of contract drafting to get their needs, wishes, terms, etc., so you can include them in the document.

• Set Out Payment Details

Schedules for invoicing and payments are unquestionably a vital part of any contract.

Therefore, the full contract value, payment schedule (e.g., upfront deposit, milestone payments), who should be paid and the payment methods (credit, cash, check), late payment penalties or interest charges on past-due amounts, and the circumstances under which payment can be withheld should all be explicitly stated when you draft your business contract.

Be as detailed as possible to ensure that all parties are fully conscious of financial commitments and the consequences of delays, as money is a common subject of contract disputes.

• Include Conflict Resolution Procedures

It is good practice to have a dispute resolution clause in business contracts that stipulates steps that must be taken if disagreements occur before any legal action can be started.

An example of such a clause is:

“All parties agree to first attempt to resolve any differences relating to this contract through good-faith negotiations within 7 days of the date of written notification. The parties will proceed to mediation if these attempts are unsuccessful in reaching a consensus.”

By establishing a structure for conflict resolution, you can steer clear of drawn-out and expensive litigation.

• Express How Sensitive Information Should Be Handled

When you begin a new business partnership, the people you’ll be working with might have access to and knowledge of your client’s list, intellectual property, pricing model, company practices, and other valuable information that give you a competitive edge.

If you don’t want them to share this information, you can also include a confidentiality clause in the contract that prohibits the parties from disclosing any business information you would prefer to keep confidential or using it to launch a rival company.

• Add Contract Termination Terms

A business contract can be terminated due to several reasons, among them when one party isn’t consistently carrying out their end of the bargain or when the contract has outlived its usefulness and you no longer require it.

To avoid sudden terminations, you should include in your business contract the conditions under which a party may cancel the agreement without facing legal repercussions.

Additionally, if everything turns out well, you may wish to extend the contract. So, it makes sense to spell out the process for contract renewal if both sides want it.

If you follow the above seven steps you’ll end up with a simple contract. 

While you may be tempted to follow some basic best practices like this – along with using an AI content creation tool ChatGPT, for example – at Gallagher Krich, we also advise for new California business owners in many, if not most scenarios to speak with a skilled contract lawyer before getting all parties to sign the agreement you draft. This will help ensure that the contract is sound legally and that relevant clauses are included to effectively protect you from potential legal problems.

Build Your Business on Rock-Solid Agreements with Gallagher Krich, APC

Are you ready to draft business contracts that preserve your legal rights, reduce the possibility of lawsuits, and avoid misunderstandings?

Our team of lawyers, with over thirty years of experience in business law, are here to guide you in creating bulletproof agreements, whether they’re employment, non-disclosure, contractor, or any other type of contract.

Working with one of Gallagher Krich, APC attorneys who specialize in contract drafting, review, and negotiation – rather than drafting the agreements yourself or using free online contract templates – will help you better understand how the agreements you sign affect your business, mitigate the risk of disputes, and take control of how a potential dispute is resolved. 

Please fill out our online form or give us a call at 858-250-0978 to schedule a free first consultation with a contract attorney at Gallagher Krich, APC.

We’re happy to explain how we can assist you in creating comprehensive, legally sound agreements that shield you and your company from costly legal issues from the start!