8 Steps to Creating a Contract

A contract is a legally binding agreement between two parties. Its purpose is to outline the responsibilities and obligations of each party. A contract is utilized in various legal situations including real estate transactions, employment agreements and business deals. Creating a contract requires several necessary elements. Each step involved in creating a contract ensures the rights of all parties are protected.

The first step in creating a contract is to have intent. Intent is the desire between two or more parties to enter into an agreement with one another. For example, two friends who intend on going into business with each other sign a partnership agreement to legalize the business relationship.

Read More: How to Write a Simple Binding Contract

Once two parties set the intention to enter into a contract, one party must make an offer to the other to perform a duty or provide a service. For instance, a buyer makes an offer to a seller to purchase a home. It is important to note that although one party makes an offer, a contract cannot exist until the other party accepts the offer.

When an offer is made, it does not extend indefinitely. When creating a contract, the offering party must stipulate how long the offer will remain valid and how long the other party has to accept the offer.

To create a contract, the document or agreement must describe the obligations of each party. In other words, the contract must define the duties one party is obligated to perform and how long he has to perform them.

Representations must exist in a valid contract. A representation is a statement of truth regarding the subject matter of the contract. For example, an individual selling a vehicle to another party “represents” that he is the rightful owner and has the legal authority to sell the vehicle to the buyer.

Consideration must exist to create a contract. Consideration is what one party receives from the other party once the obligations of the contract are fulfilled. Consideration can be in the form of money, products, services, expertise or anything that is considered of value.

If disputes arise between the parties, the contract should include how each party will resolve the dispute. Many contracts include an arbitration clause which stipulates that each party must utilize arbitration, instead of litigation, to settle a dispute.

The final and perhaps most important step in creating a contract is acceptance. A contract is only valid if the accepting party agrees to its provisions. A party can accept a contract verbally or in writing depending on the nature of the contract. If entering into an oral contract, each party must verbally agree to the terms for a legally binding contract to exist. With a written contract, each party must sign a document to ensure acceptance of the terms.