How To Create A Contract Between Two Parties

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Typically, making an agreement with someone – whether to buy something, provide a service, or enter into a partnership – is a positive moment for both parties. However, all the hope and optimism at the start of the relationship is no guarantee problems won't arise in the future. For this reason, it's important to get all the terms of your agreement in writing from the outset – both to minimize disagreements later on, and to provide methods for dealing with any issues that threaten your agreement. Moreover, your state's law requires certain types of agreements, such as some business partnership or sales of land, to be in writing. Depending on the type of agreement, you may be able to find forms or templates you can use as a guide. Generally, however, you don't need to use complicated or formal language to write a legally enforceable agreement between two parties.^[1]

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Provide full legal names and contact information for each party. To have a legally enforceable agreement, you must provide sufficient information that each party can be identified and located.
- If one or both of the parties is a business entity such as a corporation or limited liability company, the party signing the agreement should be identified as well as the company.
- Parties signing on behalf of a business should include their titles within the business. Typically only certain people can enter agreements that would bind the company as a whole. Who those people are will depend on the business's structure, its organizational agreement, and the laws in the state where it was formed.
- For example, if you own a restaurant and are writing an agreement with a general contractor to paint and lay flooring in the dining room, the written agreement may state under your name "Owner and General Manager, My Restaurant, LLC." This identifies you as someone capable of binding your company, whereas someone who worked for you as a dishwasher or a server would not have the authority to enter such an agreement on the restaurant's behalf.
- If you're going into partnership with the other person or creating a business together, you also should identify the name of the business and where it will be located.^[2]
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Define each party's role in the agreement. Once you've identified the role of each party up front, you can continue to refer to them by that role, rather than by name.
- This identifier becomes especially important if the duties and obligations of the agreement can be made transferable. For example, identifying one party as the "buyer" and the other as the "seller" means anyone in that party's business can fulfill the contract, rather than one individual personally.
- You may need a written agreement in a small business context or in your personal life. For example, you may hire someone to paint your house, in which case you are the "homeowner" in the agreement, while the other person is identified as the "painter" or "contractor." You don't necessarily need to use legal terms to identify the party's roles.^[3]
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Describe the purpose of the agreement. Begin by defining the reason the agreement exists. The clauses that follow provide the terms and conditions that limit the basic transaction, so that your agreement starts with the general, then moves to the specifics.
- This clause states the objectives each party seeks to achieve together, which serves as the basis for the agreement itself.
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List the dates the agreement is in effect. Most agreements don't continue on in perpetuity. Rather, they are set to expire after a definite period of time.
- If you want to include a method by which either party may terminate the agreement, you should include that term when you describe the agreement's duration. For example, you might write "This agreement begins on July 4, 2016 and ends on December 25, 2016. It may be terminated within that period by either party with 10 days written notice to the other party."
- The termination provision (which you also could consider an "escape clause") also should include details on how final compensation will be made or how items such as tools or building materials should be returned.^[4]
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Specify the performance to be made by each party. No matter what the agreement, each party has certain duties that must be performed to fulfill each side of the bargain.
- For example, if you hire a painter to paint your house, your written agreement would provide what parts of your house the painter agreed to paint. Painting your house is the painter's performance. In return, you agree to pay the painter a certain amount of money – that payment is your performance.
- When describing compensation, indicate whether you are paying a flat rate or an hourly rate. If you are paying an hourly rate, your budget may require you to include a maximum amount you're able to pay.^[5]
- If you've placed a ceiling on the maximum amount you can pay under the agreement, you should also consider requiring the other party to notify you in advance if he's approaching the maximum amount.
- For example, you might write "Homeowner agrees to pay Painter $25 an hour to paint the exterior of the house, but will pay no more than $500. Painter agrees to notify Homeowner in writing if labor costs for this project reach $400."
- Include any additional deadlines for stages of the project or partial payments or schedule of payments. For example, if you want to pay half of the agreed total up front and the rest at the end of the project, you should include that payment schedule with dates.^[6]
- If either party will be making a payment, the method of payment should be stated in the contract, as well as how that payment will be delivered.^[7] ^[8] For example, you may agree to write a check and mail it using certified mail.
- If you're writing a partnership agreement, the performance section may describe which aspects of your business operations each party will handle.^[9] For example, you might be in charge of daily operations and personnel, while the other party is in charge of the business's marketing, advertising, and social media.
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Include any additional expenses or conditions. If either of you anticipate circumstances that could delay or hinder performance, those circumstances should be addressed in the contract.
- For example, you may have an agreement with a general contractor to lay hardwood floors in your house. The written agreement should state who is responsible for buying the floor, and what happens if part of the floor is damaged.
- Generally include a breakdown of expenses and which party is responsible for them.^[10]
- In a partnership agreement, you also would want to indicate how the partnership's profits and losses will be divided between the two parties.^[11]
- If either party will gain access to confidential information or trade secrets through the operation of the agreement, you should consider including a confidentiality clause that describes how that knowledge and information will be handled both during and after the agreement's term.^[12]
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Provide for any other considerations. If there are any other legal issues, such as insurance or intellectual property rights, they should be addressed as part of the terms of your agreement.
- For example, if you are hiring a writer to create informational articles for your business's website, you should address the copyright status of those articles. Typically in that situation the articles created would be works for hire, with the rights owned entirely by your business.
- Some activities, such as construction projects, may require either or both parties to carry higher levels of insurance. Check your state's law before you finalize your agreement to make sure you've accounted for any required insurance. Decide with the other party who is responsible for paying the premiums while the agreement is in effect.
- You may want to require the other party to maintain liability insurance to cover injuries or property damage that may occur in connection with the agreement. If you do, include specifics such as the coverage dates, limits, and licensing requirements.
- Although you may be writing the entire agreement yourself, it should be based on discussions you've had with the other party regarding the terms of your agreement. If something comes up while you're drafting your agreement that you haven't discussed, get in touch with the other party to discuss how you'll handle that issue rather than attempting to impose a term unilaterally.^[13]
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1
Describe what constitutes breach for either party. Generally, if one party fails to perform as described in the contract, that would be considered breach.
- To legally constitute breach, however, the failure must either be complete, or relate to a term at the heart of the agreement.^[14] For example, if the house painter agreed to have your house painted in one week, but it actually took him nine days to complete the job, that wouldn't necessarily rise to the level of a material breach because he actually did perform, and the delay wasn't substantial – if the delay didn't really effect you in any way. However, if you needed the house painting completed by the date in the contract because you had photographers coming over to make pictures of the house for a magazine feature, you might have damages as a result of the painter's delay.^[15]
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Provide exceptions where failures will be excused. In some situations, typically those that are unanticipated and not within the control of the party, a failure to perform is understandable and shouldn't count against that party.
- This clause frequently is referred to as a "force majeure" clause – French for "superior force." If certain unforeseeable and generally uncontrollable events, such as a hurricane or a forest fire, occur, both parties are relieved of their duties under the contract. Essentially, everything between them goes back to the way it was before the agreement.^[16]
3
Include remedies for breach of contract. In the event a dispute arises, the agreement should specify the type of damages for which the aggrieved party can sue the other and how those damages should be calculated.
- Attorney's fees and court costs should be included in the amount the breaching party must pay. Otherwise you could end up spending quite a bit of money to litigate the dispute.^[17]
- In situations where the subject matter of the agreement is something rare or unique, you might consider requiring specific performance. This remedy essentially allows the court to order the person to perform for you as they would have under the contract, because monetary damages would be insufficient to put you in as good a position as you would have been had the person never breached the contract. An example of this might be an agreement to have a famous artist paint your portrait.^[18]
- If particular monetary damages would be difficult to prove, a liquidated damages clause allows you to recover an amount of money both parties have already agreed upon. The amount of liquidated damages should, however, be a reasonable estimate of what the actual damages would be.^[19]
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Decide which law applies and how disputes will be resolved. Including which state's laws govern your contract in the event of a breach allows you to research the law ahead of time and may provide more certainty in the outcome of a lawsuit.
- This is especially important if you and the other party live in different states. Otherwise, in the event of a dispute the courts will have to determine which state's law applies.^[20]
- You might also want to include a clause requiring the use of alternate dispute resolution such as mediation or arbitration to attempt to resolve the dispute before suing in court. Litigation often can be expensive, time-consuming, and stressful. Mediation is a less adversarial approach that often can help you preserve your relationship with the other party.^[21]
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1
Read the agreement carefully. Once you've completed your draft, both you and the other party should read it and make sure you both understand the terms in the same way.
- If any misunderstandings or disagreements arise as to the wording of the document, you can resolve those issues before you sign the document.
- Discuss any awkward or unclear clauses and make adjustments to the agreement as necessary before you sign it.
2
Consider having an attorney review your contract. Even though you and the other party have an agreement that expresses your understanding of the relationship, an attorney can let you know if your agreement complies with applicable law and would be legally enforceable.^[22]
- An attorney also can provide you with an understanding of how your clauses would be interpreted by a judge, and whether you've missed any key points that should be addressed. It may be that words you wrote with one intent would be read another way by a judge.
3
Sign the agreement. Generally, both parties must sign the agreement for it to be legally valid.
- Once each of you have signed and dated the document, it becomes legally binding on both of you as of the effective date of the agreement.^[23]
- You may wish to sign the document before a notary public. A notary will certify the identification of each person signing and serve as a witness to the signing.^[24]
- The primary reason for signing your agreement in front of a notary is to deter fraud, because the notary independently verifies that each person signing is who they say they are and is legally capable of entering into an agreement.^[25] ^[26]
- Some states require notaries or other witnesses for certain types of contracts to be valid. This is most often the case if your agreement involves the transfer of real property. For example, Florida state law requires a deed signing either to have two witnesses or to be notarized before the transfer is acknowledged as legally binding.^[27]
4
Make copies of the agreement. Both you and the other party should have at least one copy of the final, signed agreement for your records.
- If you plan on filing or recording the document, you'll need additional copies as required by that government department. You also might consider placing copies of the document in a safe place such as a safe deposit box in a bank.
5
File or record the original document. State law requires some agreements to be filed or recorded with a government agency to be legally recognized.
- For example, if your agreement involves a sale, transfer, or mortgage on real property, it must be recorded with the county recorder's office in the county where the property is located.^[28]
- States may require other documents such as sales of property be recorded to satisfy Uniform Commercial Code requirements.^[29]
- If you're agreement is a general partnership agreement, you should check with your Secretary of State office to find out whether you are required to file the agreement. In most states, filing a general partnership agreement is optional, but it could be of benefit to you to file the agreement and register with the state.
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