How to Draft a Contract: Complete Legal Writing Guide 2025

How to Write a Contract: From Initial Notes to a Legally Enforceable Draft

In 1996, a 21-year-old business student named John Leonard saw what looked like a once-in-a-lifetime opportunity in a Pepsi commercial: a teenager casually landing a Harrier fighter jet at school, redeemable for “7,000,000 Pepsi Points.” Leonard took it seriously. He bought Pepsi to collect the required points, but quickly realized it would take drinking 190 cans a day for 100 years to reach 7 million points. Then he discovered that Pepsi allowed customers to purchase additional points for 10¢ each. He calculated that for $700,008.50, he could claim a military aircraft valued at roughly $30–$38 million in 1996, equivalent to over $70 million in today’s dollars. He raised the funds from investors and mailed a formal order to PepsiCo for the jet. Pepsi called it a joke. Leonard called it a contract. In 1999, Judge Kimba Wood ruled that “no reasonable person” would interpret the advertisement as a genuine offer. But here’s what that case teaches us about contracts: words have consequences, and context matters.

What seems obvious to you might look entirely different for someone else, especially someone with different motivations reading your contract years later.

This isn’t just about compelling promotional campaigns. Every day, businesses draft contracts assuming their intent is crystal clear. They’re often wrong. When you put words on paper and both parties sign, you’re creating legal obligations that will be interpreted by people who weren’t in the room, don’t understand your business, and might have every reason to find meanings you never intended.

That’s why learning to draft contracts properly is critical if you run a business.

Understanding What Makes Contracts Enforceable

Most people think a contract is just an agreement between two parties. That’s like saying a car is just four wheels and an engine. Technically true, but missing everything that makes it work.

Real contracts have five essential parts. Miss any one of them, and you don’t have an enforceable agreement.

Offer and acceptance. Someone has to make a clear proposal, and someone else has to accept it without changing the terms. Sounds simple until you realize how often people negotiate back and forth, adding conditions and modifications until nobody can tell what was agreed to.

Consideration. Both sides need to give something of value. Money, services, promises—it doesn’t matter what, as long as there’s an exchange. “I’ll pay you nothing and you’ll do this work” isn’t a contract.

Capacity and authority. The people signing need to have the legal right to make these commitments. Contracts can easily fall apart because someone signed for a company but didn’t have the authority to bind that organization. Make sure you always verify signing authority.

Legal purpose. You can’t contract to do something illegal. This becomes more complicated when dealing with regulated industries, where rules vary by jurisdiction. Keep in mind that what’s legal in one place might be illegal in another. For example, cannabis businesses are legal under California state law, but remain federally illegal. A contract to distribute CBD products might be perfectly valid within California, but could violate federal law if the goods cross state lines. In these cases, a contract may be enforceable under state law but void or problematic under federal scrutiny.

Writing requirements. Not every contract needs to be written, but most business agreements should be in writing. Some contracts—real estate, agreements taking longer than a year, goods over specific dollar amounts—must be written under the Statute of Frauds. The Statute of Frauds is a legal doctrine requiring certain types of contracts, such as those involving real estate, long-term obligations, or high-value goods, to be in writing to be enforceable. When in doubt, write it down.

The PepsiCo case failed on multiple fronts. The court found that there was no serious offer, no reasonable acceptance, and the alleged contract couldn’t satisfy the Statute of Frauds anyway. Triple failure.

Quick Reference: Pitfalls That Can Jeopardize Contracts

• Undefined terms like “timely,” “reasonable,” or “industry standard” without specific measurement criteria
• Oral side agreements that aren’t in the written contract may not be enforceable
• Outdated templates with wrong legal requirements, contact information, or business processes
• Authority problems when signers don’t actually have the power to bind their organizations
• Missing jurisdiction clauses, especially for contracts involving parties in different states or countries
• Weak termination procedures that don’t specify notice requirements, final payments, or confidential information handling

Getting the Parties Right From Day One

This may seem basic, but you’d be amazed at how many contracts contain incorrect names, unclear authority, or vague entity identification. When you get this wrong, you can end up in expensive legal disputes about who actually owes what to whom.

Use complete legal names. “ABC Company” might sound fine, but if the actual legal entity is “ABC Company, LLC” or “ABC Company, Inc.,” your contract might be in jeopardy. Check incorporation documents. Verify the exact legal name.

For individuals, use full legal names and current addresses: no nicknames, no abbreviations, no “DBA” names unless you also include the legal name. In sensitive or high-value contracts, especially those that cross borders or involve industries such as finance or real estate, consider collecting identification details, such as passport or driver’s license numbers, to reduce ambiguity.

For businesses, include complete entity information, including the full legal name, state of incorporation, and Employer Identification Number (EIN). This eliminates confusion when multiple entities have similar names.

When someone signs on behalf of a business, specify their title and confirm their authority. Include language like “duly authorized to execute this agreement on behalf of [Company Name].” This creates a presumption that they had the authority to bind the organization. For significant agreements, consider requiring supporting documentation, such as board authorizations or corporate resolutions.

International contracts require extra attention. Companies often have subsidiaries or branches in multiple countries. Ensure you’re contracting with the entity that can perform and be held accountable. Verify registration numbers, tax identification numbers, and other jurisdiction-specific identifiers.

Consider guarantees when dealing with new companies, subsidiaries, or entities that lack established credit. You may need the parent company to support the subsidiary’s obligations.

Defining Scope and Deliverables

Here’s where most contracts live or die: defining exactly what each party will do. Vague language often creates disputes, while specific language helps prevent them.

For complex work, separate your master agreement from detailed deliverables. Use the main contract for general terms—payment, confidentiality, and dispute resolution. Attach a Statement of Work (SOW) that spells out specific tasks, timelines, and acceptance criteria.

Why split them? Because you can update SOWs as projects evolve while keeping the stable legal framework of the master contract. If you’re doing multiple phases or ongoing work, use separate SOWs for each phase. Smart companies do this to avoid renegotiating entire agreements every time the scope changes.

Now, let’s address the issue of vague language. Stop using terms like “reasonable efforts” unless you define what reasonable means. “Industry standard” means nothing unless you specify which industry and which standards. “As soon as possible” isn’t a deadline—it’s an excuse waiting to happen.

Here’s what works: instead of “reasonable quality,” specify “meets ISO 9001 standards” or “passes client’s standard acceptance testing protocol.” Instead of “timely delivery,” write “delivered to the shipping dock at 123 Main Street by 5:00 PM EST on March 15, 2024.”

Define completion and acceptance with surgical precision. Who decides if work meets specifications? What’s the process if it doesn’t? How do you handle change requests? What constitutes “substantial completion” versus final completion? These details prevent most performance disputes before they start.

Payment terms need more precision than most people realize. Not just the amount, but also when it’s due, how it’s paid, what happens with late payments, and whether there are conditions that must be met first. Include who pays taxes, shipping, or other fees. Specify invoice requirements and define what constitutes proper notice of payment issues.

Think of scope definition like GPS coordinates. “Meet me downtown” gets you lost. “Meet me at 40.7128° N, 74.0060° W” gets you to the right corner in Manhattan. Your contract language should be that specific.

Risk Allocation In the Contract Drafting Process

Effective contract drafting involves considering potential pitfalls and determining who is responsible for what. This isn’t pessimism—it’s preparation.

Termination clauses protect both parties. How much notice is required for ending early? What justifies immediate termination? How are final payments handled? What happens to confidential information and company property after the contract ends?

Intellectual property needs explicit attention. Who owns the work created during the contract? What about improvements to existing IP? Can either party use the other’s name or logo? IP disputes are expensive and time-consuming, so clarity upfront saves money later.

Include communication procedures for addressing problems before they escalate into legal disputes. Specify how parties will notify each other of issues, who has the authority to make decisions, and what steps are required before claiming breach. Many conflicts stem from misunderstandings rather than genuine disagreements.

Force majeure and modification procedures enable contracts to remain flexible in the event of changing circumstances. Recent global events have proven the importance of this. Define what events excuse performance and how parties will handle unexpected situations.

Indemnification and liability limitations need careful balance. You want protection without making the contract commercially unreasonable. Who’s responsible if third parties get hurt? How do you limit exposure to damages that could exceed the contract’s value?

Dispute Resolution for Legally Binding Agreements

The dispute resolution clause might be the most essential part of your contract that you hope never to use. But when relationships break down, this section determines whether you resolve things quickly or spend years in expensive litigation.

Start with structured communication requirements. Written notice of issues, specific response timeframes, and mandatory direct negotiation between designated people before any formal process. Effective communication can often resolve many problems without the need for lawyers.

Mediation works well as a middle step. A neutral third party helps you work toward resolution, but can’t impose decisions. It’s usually faster and cheaper than litigation or arbitration, and it preserves business relationships better.

Arbitration can be faster and more private than court, but it limits your appeal options. If you include arbitration, specify the rules, the process for selecting arbitrators, and the location of proceedings. Decide whether you want binding arbitration or prefer keeping the right to go to court.

For international contracts, jurisdiction and governing law become crucial. Which country’s courts have authority? Which nation’s laws apply? These choices affect everything from available remedies to procedural requirements.

Include attorney fee provisions. Some jurisdictions require each party to pay their costs, regardless of who wins. Others let the winning party recover fees from the loser. You can specify how costs get allocated, which affects incentives to pursue or defend claims.

Using Contract Management Software Responsibly

Modern contract software can streamline the drafting process while maintaining quality. The key is using technology to enhance, not replace, good judgment.

Template libraries (like ours) and pre-approved clauses streamline the drafting process while ensuring consistency. Build a repository of language that’s been reviewed by counsel and tested in practice. This lets you draft efficiently while reducing risk.

But templates require customization. Don’t just fill in blanks and assume you’re protected. Review each clause to ensure it aligns with your specific situation. Remove provisions that don’t apply. Add language that addresses your specific concerns. Templates are starting points, not endpoints.

Electronic signatures have become standard, but make sure your platform maintains proper audit logs. Legal validity depends on proving who signed what and when, particularly in cases where disputes arise.

Consider integration with your other business systems. Can your contract management platform integrate with accounting, project management, or CRM systems? Integration reduces manual work and improves visibility into contract performance.

Knowing When to Involve a Law Firm

Professional review remains valuable for essential agreements. The question isn’t whether you need legal advice—it’s when and how to get it effectively.

For routine contracts that use proven templates, you may choose to proceed without attorney review. But bring in counsel for significant agreements, new types of arrangements, or contracts involving IP rights, regulated industries, international components, or unusual risk allocation.

When working with lawyers, provide context about your business objectives, risk tolerance, and industry practices. Lawyers can draft technically correct language that misses your business needs if they don’t understand what you’re trying to accomplish.

Develop internal review procedures for contracts that don’t need outside counsel. Have someone other than the drafter review for clarity, completeness, and consistency. Create checklists covering essential elements and common problems. Build in review time rather than rushing to execute under deadline pressure.

Learning from Real Contract Failures

Understanding how contracts fail helps you draft better ones. Most disputes stem from ambiguous language that seemed clear during drafting but becomes problematic when relationships sour.

Consider the federal government contract case, Appeal of Kiewit Phelps, involving drywall installation specifications. The contract required “Level 4” finish in “all remaining locations, unless noted otherwise.” For fourteen months, everyone was happy with Level 4 in visible areas and Level 1 in hidden spaces above ceilings. Then a new inspector demanded Level 4 everywhere, including areas no one would ever see.

The court had to interpret a single sentence: “All remaining locations, unless noted otherwise,” should be completed with a Level 4 finish. The contractor won, but only after expensive litigation. The drafters probably never imagined “all locations” would include hidden areas, but that’s precisely what happened.

Or consider URE Energy Ltd v. Notting Hill Genesis from 2024. An energy supplier continued performing for six months after an event that triggered their termination rights. They successfully argued they hadn’t waived that right because they didn’t know they had it. The contract language was so complex that it obscured the supplier’s rights.

These cases demonstrate how unclear language harms everyone by rendering rights and obligations incomprehensible until expensive legal proceedings clarify the situation.

The legal principle of contra proferentem makes this worse—ambiguous language gets interpreted against whoever drafted it. Courts apply this regularly in insurance, employment, and vendor disputes. If you write unclear language that harms the other party, that’s on you.

While you are drafting, keep the mindset that someone who disagrees with you will be reading every word, because they will.

Writing Legally Binding Contracts

The most effective contracts anticipate problems and provide clear procedures for handling them. This doesn’t mean being negative about business relationships—it means being realistic about the fact that circumstances change, people misunderstand each other, and businesses face unexpected challenges.

Contract drafting is about creating the foundation for successful business relationships. When contracts are clear, comprehensive, and fair, they prevent misunderstandings and give both parties confidence to focus on performance rather than worrying about legal exposure.

Remember the PepsiCo lesson: intent isn’t enough when contracts end up in court. Build in procedures for modification and review. Keep records of how your contracts perform in practice. Use that feedback to improve your templates and processes over time.

The investment you make in thoughtful contract drafting pays dividends throughout your business relationships. Clear agreements prevent expensive disputes, enable better performance management, and create legal certainty that lets businesses take appropriate risks and pursue opportunities with confidence.

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This blog post is for informational purposes only and is not legal advice. Please consult a qualified attorney for your specific situation.