How to Properly Draft a Contract to Avoid Future Disputes

The main foundation of any business relationship is the contract. The contract could be between any person or business entities which have a common economic or social interest. To maintain a professional relationship, it is necessary to have a well-documented contract that mentions the terms to reduce the probability of conflict or dispute between the parties. In this blog, basic factors which should be present in the contract are briefly discussed.

1. Purpose and Scope of the contract

The first step in formulating a contract is to make sure that the clear purpose and scope are mentioned. The scope and purpose are present in the Background section of the contract. This is an overview that discusses the reason behind the formation of the contract. The second most important thing is the context, it provides clarity to the agreement and could be used to resolve the conflict. The correct and clear use of language is very important in the contract. It advised that words such as “services as needed” or “ongoing support” should be avoided as they could create confusion during disputes. Instead, it should mention what service or product would be provided and in which condition.
The role of each party should be clearly defined in the contract and what are the responsibility of each party. This could help to identify the responsible person for the wrongdoing.

2. Identification of Parties

It’s mandatory in a contract to identify each party with its full legal name and registered address. A registration number should be included if the entity is registered.

3. Detailed Information

A well-documented contract should include the role of each member, the deadline for each project, and payment terms. The essential component to be included in a contract is the deadline for each task. The payment amount, currency, and mode of payment should also be clearly defined in the contract.

4. Resolution Clauss

A document contract should contain a separate clause that defines how disagreement could be resolved between parties. The most common method of resolution of disputes is negotiation. In this method both parties try to reach on some middle grounds to solve problems. Another method is mediation in which a third party enters into the negotiation which is respected by both parties and it tries to resolve the dispute. Arbitration is also a method for resolving disputes in which a negotiator present a decision. Another method is litigation in which both parties take the dispute to the court.

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5. Non-Disclosure Terms

If the contract involves sensitive information a non-disclosure clause could be added to protect the leak of the information. Such contracts are created for trade secrets, intellectual property, or consumer data. In non-disclosure terms, it’s important to mention what type of confidential information is, whether it’s tangible or non-tangible information etc. The duration of confidentiality should also be mentioned and in which condition either party could breach the confidential contract.

6. Liability Clause

The liability clause is the maximum damage one party can recover from the other party. This clause could protect parties from unforeseen issues. In business, two kinds of damages are common direct and indirect. The liability clause should mention that liability only covers direct
damages, not indirect damages that are formed due to consequences. The liability clause creates a maximum loss cap that one party has to bear in case of loss. The exclusion term should also be included in the liability clause which mentions items or damages that are not included in the contract.

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