10 essentials of a rock solid contract
Knowing how to draft a contract is one of the basics that every entrepreneur should know. Think of it as a risk mitigation strategy.
Need a building or a land for lease? Hiring an employee? Renting a house or a car? Need to loan money? What do all these tasks have in common? A contract to be signed which may turn messy with legal complications if not drafted properly. Hiring a lawyer to draft a contract might burn a large hole in your pocket. So what are the things you don’t want to miss in a contract?
1. The Parties
An essential element of the contract is contracting parties. Details of the parties in the contract such as full name and address should always be mentioned. In Nepal, the details of the parties that go back three generation along with address and citizenship numbers of the parties are required. In case of companies, provide the name, address and registration number of the company.
2. Clear Drafting
Language by nature can be quite ambiguous. The key to all great contracts is clarity and having expressed the reality of the commercial deal and risk allocation on paper. Be specific and avoid using jargon or words with multiple meanings. Define the terms that you use in the contract to avoid misunderstandings.
3. Subject matter
Always include detailed information about the subject matter – the goods or the services that the contracting parties provide or receive – for entering the contract. Specify the quality of goods, brand names, and specifications of the goods. Specify the standard of service being provided. Mention when these goods or services will be provided, and compensation for delay in providing such goods or services.
4. Monetary details
Mentioning all essential monetary details is important. Always include the price for services clearly, specify any discounts, and which party will pay taxes. Specify when payments are to be made, whether or not advance payment is expected and if there might be any changes to this arrangement.
5. Term and conditions
If it is a long term contract, for instance in cases of employment, distribution, agency, lease, and joint ventures, specify the date or the time from which the contract come into force and the period of time or validity of the contract should also be mentioned.
6. Termination and renewal
Include the conditions on which contract might be terminated and how the contract can be renewed after the termination date.
One of the main reason we draft contracts is to ensure that all parties comply with set conditions. If one of the parties does not comply, the innocent party has the right to apply to court for compensation and other remedies. Specify any such remedies that are deal-specific, for instance, return of advance payment, compensation of fixed sum of money or returning the sold goods.
8. Dispute Resolution
A well written contract decreases the chances of any potential dispute significantly, but does not eliminate it. Specify how parties wish to resolve a conflict if one arises. Popular methods of dispute resolution are court litigation, arbitration or mediation. Arbitration is better for complex or international deals and matters requiring privacy. If arbitration or mediation clauses are not mentioned, then the disputes will be resolved by the District Court.
9. Signing and Witnesses
Lastly, don’t forget to sign on the dotted line. All parties should sign every sheet of the contract. If a company is party to a contract, ensure there is a company stamp too. Remember to put at least two people with full name and address as witnesses for each party in the contract and include their signature in the contract.
10. Consult a Lawyer
Still not sure about the contract? Consult a legal advisor. After all, precaution is always better than a cure.