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A Guide to Drafting Contracts
In the business world, it is common practice for corporate entities to execute written contracts with other parties to regulate their business relationships. Such other parties include their customers, suppliers, contractors, business partners, employees and investors. A key reason for having written contracts is for parties to document the legal agreement between (or amongst) themselves to mitigate the risk of future disputes. Thus, it is essential for corporate entities to have the capability to prepare well-drafted contracts, whether by doing it in-house or by engaging external counsel to assist them with this. Whilst it is best practice to instruct a qualified lawyer (or at least a legally-trained individual) to prepare these contracts, some corporate entities may choose not to do so for a variety of reasons. In this regard, the objective of this article is to highlight the key principles of drafting contracts, in the hope that corporate entities will gain a stronger grasp of the basics of contract drafting and be empowered to independently prepare these contracts.
2. Key Principles of Contract Drafting
(a) Draft in plain English and use short sentences
The drafter should always prioritise using plain English rather than legalese where possible. This is so that the contract can be easily understood by the reader, be it a judge, parties to the contract, or any other third parties. If a sentence appears to be difficult for the reader to follow because of its length, consider breaking it up into two or more sentences. This practice would also reduce the likelihood of ambiguity of each sentence, and thereby mitigate the risk of misinterpretation and future dispute.
(b) Define the contracting parties and provide the context of the contract
At the start of each contract, it is good practice to identify the parties involved in the agreement. The drafter should include comprehensive details about each party, including their full legal names, identification numbers (whether corporate or individual), addresses, and contact information. The drafter should also provide a brief background as to the purpose of the contract to provide it with a context – this is usually set out in the “recitals” section of the contract.
(c) Provide precise descriptions of the rights and obligations of each party
The drafter should articulate the purpose and the scope of the agreement in clear and concise language. The rights, obligations, and responsibilities of each party should also be succinctly set out. As contracts mostly obligate parties to act in a certain manner, the drafter should draft the relevant clauses in an active (rather than passive) voice. A well-drafted agreement reduces ambiguity and minimizes the risk of disputes.
A good guiding principle is to always draft with the mentality that the contract will one day come before a judge, who should have no doubt about what the relevant clauses intend to convey. A drafter should set out to draft every sentence of the contract with such precision so that there is only one possible interpretation of it (i.e. the interpretation which the drafter intends).
(d) Use formatting and numbering to your advantage
By making use of headers, formatting and numbering intelligently, the drafter can add clarity to a contract. For example, a contract can be broken down into sections, each dealing with a different aspect. Headers can be given to each section to assist the reader in understanding what each part of the contract is meant to cover. Sections can be further split up into sub-sections, and headers can also be provided for these, if helpful. Do double-check that the headings given are appropriate and accurately describe the contents of the entire section or subsection.
(e) Consider whether to include “confidentiality” and “non-disclosure” clauses
If the situation allows, the drafter should include provisions regarding confidentiality and non-disclosure. It is imperative to clearly outline the information which is considered confidential, and the scope of obligations of the parties to maintain confidentiality.
(f) Consider whether the use of a “force majeure” clause is appropriate
Where appropriate, the drafter should include a “force majeure” clause to address unforeseen circumstances which may affect the performance of the agreement. The manner that the COVID-19 pandemic caused confusion in the business world as to whether contracts should or are capable of being performed demonstrates the importance of having a clear definition of what constitutes a force majeure event, and the consequences of such an event on the agreement.
(g) Include a “governing law” and “jurisdiction” clause
The drafter should specify the governing law which will apply to the agreement and the jurisdiction where disputes will be resolved. Having these provisions in a contract will provide clarity on the legal framework governing the agreement, which would be useful in the event of a legal dispute.
(h) Provide clear dispute resolution mechanisms
The drafter should establish appropriate mechanism(s) for resolving disputes, such as mediation, arbitration or litigation. As far as possible, define the procedures and rules to be followed so as to streamline the process of dispute resolution.
(i) Review and revise for consistency, clarity and completeness
Before marking the agreement as the final version for parties to execute, the contracting parties are responsible for conducting a thorough review of the contract. Parties should double-check the agreement for consistency, clarity, and completeness, and ensure that all relevant details are included. The paramount objective of this review should be to ensure that the agreement aligns with the intentions of the contracting parties.
While this guide provides a broad overview of the key principles in drafting legal contracts, corporate entities should also be congnisant of the possibility that certain agreements may be more complex to draft in-house. With a foundational grasp of the abovementioned key drafting principles, corporate clients can navigate the drafting of simpler agreements confidently and mitigate potential legal risks. Nonetheless, when corporate entities find themselves having to draft specialised, intricate or high-stakes contracts, seeking professional legal advice would be the preferred course of action.
The author, Waltson Tan, is a corporate lawyer based in Singapore. He is qualified as an advocate and solicitor in Singapore and has more than seven years of post-qualification experience.
Waltson focuses his practice on mergers and acquisitions, private equity, joint ventures, investment funds and other general corporate and commercial transactions. He has also represented and advised numerous leading multinational organisations on a broad spectrum of corporate, regulatory, cross-border restructuring and employment matters.
Prior to joining the firm, Waltson practised at some of the top law firms in Singapore and thereafter, at a leading international law firm, which was the second largest law firm in the United States and one of the ten largest in the world.
Waltson also advises clients on a monthly and yearly retainer basis, where he provides dedicated services to each client in relation to the issues which clients face, including general corporate and employment related matters.
If you require further information and/or expert guidance on the above or any other area of law, you may wish to contact Waltson, whose details are as follows:
Director +65 8079 0028 firstname.lastname@example.org
101A Upper Cross Street #13-11, People’s Park Centre Singapore 058358