How to Draft a Commercial Contract Law

Written by david carnes
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How to Draft a Commercial Contract Law
Contracts clarify terms of the deal. (contract 20309 image by pablo from Fotolia.com)

The main purpose of drafting a good commercial contract is to clarify the terms of the deal to keep the parties out of court, rather than to win an expensive courtroom battle. Nevertheless, contract negotiation and performance are always conducted "in the shadow of the law," meaning that the legal background influences how parties approach the contract. Care must be taken when drafting a commercial contract, because every sentence has legal consequences.

Skill level:
Easy

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Things you need

  • Sample commercial contract

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Instructions

  1. 1

    Create a preamble in which you identify the parties to the contract by legal names and addresses. A common mistake is to identify an individual as a party to the contract when the company that the individual represents is the real party. If this happens, the person who signed the contract may become legally liable to perform the contract, while the company will not be bound. You should also briefly state the purpose of the contract ("the purchase and sale of 450 tractors", for example) and state that the parties have agreed to enter into the contract. Courts will use the purpose clause as a guide to interpreting the rest of the contract.

  2. 2

    Identify the goods or services that are the subject of the contract in Section 1. In the case of goods, you should be as specific as possible--include catalogue or model numbers, for example. If many types of goods are being purchased, you can list them in an appendix, and refer to the appendix in Section 1. Contracts are legally required to list the products being sold--if they are no listed clearly enough, a court may void the contract.

  3. 3

    State the price for each items, the currency of payment, payment due dates and the means of payment in Section 2. You should be specific about the means of payment--in the case of a bank transfer, for example, list the account details. In the case of a sale of goods, a price must be stated in order to the contract to be enforced.

  4. 4

    Insert a section detailing the seller's representations and warranties. Representations are statements as to the existing quality or nature of the products, and warranties are guarantees that the products will perform up to a certain standard. Be sure to include terms on refunds and exchanges. Don't worry if you have difficulty classifying a given statement as a "representation" or a "warranty"--this can be ambiguous sometimes. In the event of a lawsuit, the seller can be held liable if a representation turns out to be untrue or if he fails to honour a warranty.

  5. 5

    Draft a disclaimer section in which the seller limits its liability for defective products. The seller will probably want to disclaim liability for "consequential damages." For example, if the seller's widget malfunctions causing the buyer's factory to shut down for a week, the seller would not want to be held responsible for the buyer's lost sales. Certain legal warranties are considered "implied", meaning that courts will enforce them even if they are not mentioned in he contract (the "implied warranty of merchantability", for example). If the seller wishes to disclaim such warranties, the disclaimer must be clearly stated and printed in bold type or all capital letters.

  6. 6

    Add standard contract "boilerplate" provisions such a dispute resolution, governing law, jurisdiction, and non-assignability (See Resources). Many of these provisions have specific legal purposes. If the buyer is in New York and the seller is in California, for example, a jurisdiction law clause that specifies the courts of California will prevent the buyer from suing the seller in New York.

Tips and warnings

  • The lower the economic value of your deal, the less sense it makes to hire a lawyer to draft your contract from scratch. If the total value is small, it might make more sense to draft it yourself and have a lawyer spend a half an hour reviewing it.
  • Never copy a sample commercial contract without modifying to fit the circumstances of your particular transaction.

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