Contract – What Is a Good Contract?

This article will provide a general introduction to contracts along with simple advice for a good contract. The article contains information about formal requirements, the level of detail and the language within a contract.

A contract is a written agreement about a given circumstance between two or more parties. Those can be companies as well as individuals, as long as the partners have legal capacity. The aim of contracts is to avoid conflicts and to determine the legal relationship in case of a violation or dispute.

The most basic aspect about a contract is the existence of a legal rule (a promise). A legal rule consists of a legal fact and a sanction that can be set up in this way: If x, then y. The contract only has significance once it establishes legal obligations for the parties. For example, there is no meaning in describing a resignation if there are no obligations associated with the resignation – e.g. the reason or a deadline.

There are no requirements per se with regard to the level of detail of such an obligation. The contract is valid even with only vague outlines of obligations. As long as the contract can be used to determine a legal position, it is valid. If it is described in a vague or flexible manner, background rights and case law are used for reference.

If it is to be decided whether a contract is necessary, one should look at costs and benefits. It is a waste of resources if the contract holds no value. At the same time, the level of detail is often dependent on the amount of risk associated with the agreement, what value the agreement holds and how many parties are involved. If the agreement has no value or risk associated with it, it can be advantageous to just enter into a gentleman’s agreement.

What are the formal requirements for a contract?

As long as a contract defines a legal rule, there are no formal requirements. 

Certain contract types are regulated by laws, though. For example, leases have to comply with rental laws in order to be legal. An oral agreement is no less legally binding than a written one. But a written contract makes it easier to prove if the agreement is being observed. Therefore, it should be as precisely worded as possible. This is true both for employment contracts, non-disclosure agreements and something completely different.

A contract is a message that has to be worded in a clear and communicable manner. It is supposed to be an expression of the agreement reached between two parties as a result of their negotiations. See below for more details on the linguistic requirements to a contract.

The level of detail in a contract can be hard to decide. In the legal system of common law (as applied in the USA) it is custom to write long and very detailed contracts. In a civil law-system like in Denmark contracts tend to be shorter. Longer contracts can be advantageous, but they are no guarantee against disagreements and it is often possible to get lost in them. Moreover, they require legal assistance which is not always appropriate.

When determining the level of detail, it should be kept in mind that no contract is perfect. There is always a chance for unexpected problems to occur. A high level of detail minimizes the risk of accidental misinterpretation but there is no reason to drop an otherwise beneficial agreement due to trifles. Agreements should be made for circumstances that have a high likelihood of being realized. Additionally, one should also describe those circumstances that would be fatal, should they occur. Generally, one should be more precise, the more parties are involved. Especially, if these come from different cultural backgrounds.

A contract should at least contain a date and a signature. It can be an oral statement, a handwritten or digital signature. To begin with, a contract can not be entered into passively. This means that one has to actively agree in order to be bound by contract. One can also not enter into a contract involuntarily. In some cases, it can also play a role whether one party has significantly more power than the other. It is important to have a certain balance and for the mutual requirements to be reasonable.

The contract’s goal should be stated in order to be taken into consideration, should disagreements occur that would require legal interpretation. One can also elect to state how a contract is to be interpreted. This can be done with an annex to the contract. Keep in mind though that the annex has to be described in the agreement and be attached as an immediate extension of the main agreement. The contract should also contain a description of what is supposed to happen in case of a breach of contractual obligations. Are eventual disputes to be settled through arbitration or in a regular court of law? Is it desired to include a paragraph on jurisdiction that defines how to settle the dispute?

All parties should receive a signed copy of the contract. The benefit of using a digital cloud-solution like Contractbook is that all parties have equal access to the contract. This prevents fraud as soon as it is entered into. You can find a lot of good templates for contracts in our template universe.

How to word a legally binding contract?

Lawyers sometimes have an unfortunate disposition to write long and convoluted sentences. There can be good reason for it but more often it is an indicator for bad work on the side of the lawyer. A contract has to be understandable for all parties and it should not be necessary to contact a lawyer in order to comprehend one’s contracts. Generally, the contract should be precise, clear and stringent. Law has traditionally been associated with legalese - a very stiff and formal style. The trend is moving in a different direction though, since more and more value is placed on law being accessible to all. It is therefore important to keep one’s recipient and target audience in mind. Hence, one should avoid abbreviations and technical terms as well as long, superfluous expressions. Write grammatically correct, using active sentences that clearly show who is committing to what.

A contract - in most cases - consists of two overarching points: Main terms describing elementary information such as cost, amount, quality and duration. Details designating agreements with regard to breaches of contract, conflict solutions etc.

By dividing the contract into clearly divided sections and paragraphs with descriptions of e.g. duration, liability and exemptions, it is guaranteed that the contract is clear and understandable. As a starting point, every section should describe one legal rule. All sections should be preceded by a heading that makes it more understandable. Be careful with using the heading “other provisions” to summarize stipulations that do not fit elsewhere. They should be described separately, especially if they are essential or burdensome. Thus, one should also avoid the use of footnotes or “small print”, since this could cast doubt on the agreement’s validity.

The contract’s sentences should be short and precise. They should - as a main guideline - only contain one legal rule. If there are separate conditions, e.g. exemptions, these should be mentioned separately but immediately following the legal rule. One can either use dependent clauses for that or entirely separate sentences. The most important thing is to keep everything connected: “A is obligated to X. This does not apply if Y.” or “A is obligated to X, except if Y”.

When you put a sentence into a contract you should avoid using the passive voice and imprecise pronouns (unless the person that will enter into the contract is unknown at that moment). It should be possible to identify the subject in a sentence to determine who it is that is committing. Be careful with words like “the”, “it”, “this” and “that”. Instead, describe what “it” is to ensure clarity. Avoid expressions like “It can be assumed that…” for the same reason. What is “it” referring to in this case?

Sometimes, one can use passive clauses such as “the grass may not be stepped on” because it is obvious who is being addressed. Other times, it is not as obvious. Therefore, for the sake of clarity, one can just as well write “The parties involved in the agreement may not step on the grass.”

The valid and invalid contract

One can not undo a contract unless it contains a right of cancellation (e.g. “lawyer’s reservations”) or both parties agree to a termination. By signing a contract, you acknowledge its content. But there are ways in which contracts can be declared invalid.

  • A contract is not valid if it violates local legislation or common decency. It may neither be illegal nor indecent.
  • If the contract is established based on falsehoods, manipulation, fraud, threats or coercion, it is invalid.
  • You may not obscure important terms, e.g. by putting them in small print in the middle of a very long document. Especially important terms need to be included early and separately in the contract. This way, all parties are made aware of their presence.
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