How To Draft A Legal Agreement Between Two Parties: Key Clauses

If you run a small business, you’ll probably enter into dozens (if not hundreds) of arrangements with other people and businesses over time. Some will be simple and low-risk. Others can affect your cashflow, your reputation, and your ability to deliver your product or service.

That’s where a well-drafted legal agreement between two parties can make a huge difference. It helps set expectations, reduces confusion, and gives you a clear pathway to resolve issues if things don’t go to plan.

In this guide, we’ll walk through how to draft a legal agreement between two parties in Australia, with a focus on the essential clauses that protect small businesses. We’ll keep it practical and explain the “why” behind each clause, so you can make smarter decisions when you’re putting an agreement together.

What Is A Legal Agreement Between Two Parties (And When Do You Need One)?

A legal agreement between two parties is a written document that records the rights and obligations each party agrees to. In plain terms, it answers:

• Who is doing what?
• When will it happen?
• How much will it cost?
• What happens if something goes wrong?

Not every business relationship needs a formal contract, but if you’re dealing with money, timelines, deliverables, confidential information, or anything that could cause a dispute, it’s usually worth putting something in writing.

Common Scenarios Where A Written Agreement Is Worth It

• Service arrangements (e.g. consulting, marketing, design, trades, IT services)
• Supply arrangements (e.g. buying inventory, manufacturing, wholesale)
• Partnership-style collaborations (where you’re sharing revenue, responsibilities, or resources)
• Freelancer or contractor engagements
• Customer projects with a defined scope and timeline
• Business-to-business deals where you are relying on the other party to perform

Even if you have a good relationship with the other party, a contract isn’t about distrust. It’s about clarity. A clear contract helps you avoid the “we thought you meant…” conversation later.

How To Draft A Legal Agreement Between Two Parties: A Practical Process

A good agreement isn’t just a collection of clauses. It’s a document that fits your deal, your business model, and the real-world risks you face.

Here’s a practical way to approach drafting.

1) Start With The Business Deal (Not The Legal Template)

Before you draft, write down the commercial points in plain English. For example:

• What are the deliverables (and what’s out of scope)?
• What is the price and payment schedule?
• When does the work start and finish?
• Who supplies materials, tools, access, data, or approvals?
• What assumptions are you relying on?

This becomes your “term sheet” for the agreement. If you can’t clearly explain the deal in a few bullet points, it’s usually a sign the contract will be unclear too.

2) Identify The Risks That Could Hurt Your Business

Small businesses often feel the impact of disputes more sharply than larger businesses. When you’re drafting, think about:

• What happens if they don’t pay on time?
• What happens if you can’t deliver on time (or they cause delays)?
• What happens if requirements change mid-project?
• What happens if confidential information leaks?
• What happens if the relationship ends early?

Your clauses should be designed to manage these risks, not just “sound legal”.

3) Make Sure The Parties Are Correctly Identified

This is an easy place to make an expensive mistake.

• If you’re a sole trader, use your full legal name and ABN.
• If you’re a company, use the exact company name and ACN (not just your trading name).
• If you’re contracting with another business, confirm who you’re really dealing with (company vs individual).

When the wrong entity signs (or the details are incorrect), it can create real headaches later - for example, delays and extra steps to recover a debt, questions about who is actually bound by the contract, or disputes about enforceability. Getting the party details right upfront helps avoid those issues.

4) Keep The Language Clear And Operational

A contract should read like a playbook. If you have to interpret what it means, it’s probably too vague.

Where possible:

• use defined terms (and keep definitions short)
• use clear timeframes (dates or measurable milestones)
• avoid “reasonable” unless you genuinely need flexibility
• spell out processes (how approvals work, how variations work, how disputes are handled)

If your business relies on repeatable sales, you might capture many of these rules in your Terms of Trade rather than reinventing the contract every time.

Essential Clauses To Include In A Legal Agreement Between Two Parties

Every contract is different, but there are clauses that come up again and again in small business agreements. If you miss them, you can end up with gaps that create uncertainty or weaken your position in a dispute.

1) Scope Of Work / Deliverables

This clause sets out what each party is actually agreeing to do. For service-based businesses, it usually covers:

• what services you will provide
• what is excluded (out of scope)
• deliverables and formats (e.g. reports, files, designs)
• milestones and timeframes
• dependencies (e.g. you need access, content, approvals)

For product-based businesses, it may cover product specifications, quantities, and quality standards.

The clearer your scope is, the easier it is to manage “scope creep” (where the other party keeps requesting extra work without extra payment).

2) Fees, Payment Terms, And Invoicing

Cashflow is everything for small businesses, so your payment clause deserves real attention.

Consider including:

• price structure (fixed fee, hourly rate, milestone payments, deposit)
• when invoices are issued
• payment due dates
• late payment consequences (interest, recovery costs, suspension of services)
• whether GST is included or additional

If you’re providing services, a tailored Service Agreement can help you clearly align payment stages with delivery milestones, which is often where disputes start.

3) Term, Start Date, And Renewal

This clause answers: how long does the agreement run?

• Start date: when obligations begin (signing date vs commencement date)
• Term: fixed term (e.g. 6 months) or ongoing
• Renewal: automatic renewal, renewal by agreement, or no renewal

Clear timing clauses reduce confusion around when work begins, when payments are due, and whether the arrangement continues after completion.

4) Confidentiality

If you’re sharing business information (pricing, strategy, processes, customer lists, product plans), a confidentiality clause helps reduce the risk of misuse or disclosure.

A good confidentiality clause usually covers:

• what information is confidential
• what information is not confidential (e.g. already public)
• how the receiving party must protect it
• how long confidentiality obligations last (often continuing after termination)

If confidentiality is central to the relationship (for example, you’re sharing an idea, formula, or product roadmap), you may also use a standalone Non-Disclosure Agreement before you share anything sensitive.

5) Intellectual Property (IP) Ownership And Licensing

This is one of the most commonly misunderstood parts of a legal agreement between two parties, especially in creative and digital work.

You need to be clear about:

• who owns pre-existing IP (what each party already brings)
• who owns new IP created under the agreement
• whether the customer gets an assignment (ownership transfer) or a licence (permission to use)
• any restrictions (territory, duration, purpose)

For example, if you’re a designer, developer, or marketing agency, you might want to retain ownership of your templates or tools while licensing them to the client for their internal use.

6) Warranties And Promises (What Each Party Is Representing)

Warranties are promises in the agreement. They can be useful, but they can also create risk if they’re too broad.

Small business agreements often include warranties like:

• each party has authority to enter the agreement
• services will be provided with due care and skill
• products will meet agreed specifications
• each party will comply with applicable laws

If you sell goods or services to customers, remember you also have obligations under the Australian Consumer Law (ACL). It’s important your contract aligns with the ACL and doesn’t try to exclude non-excludable consumer guarantees. (This is particularly relevant when you draft clauses about refunds, replacements, and liability.)

7) Limitation Of Liability

A limitation of liability clause sets boundaries on what you’re responsible for if something goes wrong.

This can include:

• caps on liability (e.g. fees paid in the last 3 months)
• exclusions (e.g. indirect or consequential loss)
• carve-outs (e.g. fraud, wilful misconduct, IP infringement, confidentiality breaches)

These clauses need to be drafted carefully. If they’re too aggressive or unclear, they may not work the way you expect, and they can create issues with consumer law in certain contexts.

If you want to understand how these clauses usually work in Australia, this guide on limitation of liability clauses is a helpful starting point.

8) Termination (Including Termination For Convenience)

A termination clause sets out how the agreement can end, and what happens when it does.

Most small business contracts include termination rights such as:

• termination for breach (e.g. non-payment, failure to deliver)
• termination for convenience (ending without breach, often with notice)
• termination for insolvency (if a party becomes insolvent)

Don’t forget the practical consequences:

• what fees are payable up to termination
• whether deposits are refundable
• how work-in-progress is handled
• return or destruction of confidential information
• handover obligations (if needed)

Good termination clauses reduce the “messy breakup” problem where both sides disagree on what’s owed, what must be handed over, and what happens next.

9) Dispute Resolution

Disputes are easier to resolve when the contract has a process everyone agreed to upfront.

A typical dispute resolution clause might include:

• good faith negotiation between nominated representatives
• mediation (before court proceedings)
• requirements to keep performing obligations (where reasonable) during the dispute

This can save you time and money, particularly when you’re dealing with a commercial disagreement that doesn’t need to end up in court.

10) Governing Law And Jurisdiction

This clause sets out which state or territory’s laws apply (e.g. New South Wales or Victoria) and where disputes will be handled.

If you operate across Australia or deal with interstate customers and suppliers, this clause helps reduce uncertainty about where legal proceedings might take place.

Common Mistakes Small Businesses Make When Drafting Agreements

Many disputes don’t happen because someone is acting maliciously. They happen because the agreement didn’t reflect what was actually intended, or it left out key processes.

Here are some common mistakes we see small businesses make when drafting a legal agreement between two parties.

Using A Template That Doesn’t Match The Deal

Templates can be a helpful starting point, but they often:

• don’t reflect your actual scope, pricing, and delivery process
• include clauses you don’t understand (or can’t comply with)
• miss industry-specific risks

Even worse, a template might create a false sense of security.

Leaving Scope And Variations Too Vague

If your contract doesn’t explain how changes are handled, you can end up doing extra work for free or dealing with disputes over whether something was included.

A strong “variations” process should cover:

• how a change request is made
• how you quote additional fees and time
• when the variation becomes binding (usually in writing)

Not Aligning The Contract With How You Actually Operate

Your agreement should reflect how you deliver work day-to-day. If your contract says you’ll deliver weekly reports, but you never do, you’re creating unnecessary breach risk.

Contracts work best when they match your real processes (or the processes you’re willing to adopt).

Forgetting Privacy And Data Handling Where It Matters

If your agreement involves collecting, storing, or sharing personal information (customer data, employee data, end-user details), make sure your privacy obligations are addressed.

Depending on the arrangement, you may also need a Privacy Policy, and in some cases specific clauses covering things like permitted data uses, security standards, breach notification, and whether a third party is handling information on your behalf. This article is general information only and doesn’t take into account your specific data flows or compliance obligations.

Not Getting The Signing Details Right

Even a great agreement can be hard to enforce if it wasn’t properly executed.

Common issues include:

• someone signing who doesn’t have authority
• signing under the wrong legal entity name
• missing witness requirements (only relevant for certain documents and signing methods, depending on the jurisdiction and document type)
• confusion about whether a scanned or e-signed copy is acceptable (often it is for standard commercial contracts, but there are exceptions)

If you’re unsure about execution requirements, it’s worth understanding what generally makes a contract enforceable, including the basics of what makes a contract legally binding.

Which Type Of Agreement Should You Use For Your Business?

One reason drafting can feel overwhelming is that “legal agreement between two parties” is a broad concept. The right document depends on the relationship.

Here are a few common options small businesses use.

Service Agreement (B2B Or B2C)

If you provide services (agency work, consulting, trades, IT, coaching, creative services), a service agreement usually forms the backbone of the relationship. It covers scope, fees, timeline, IP, liability, and termination.

Many businesses also use website-based terms (particularly for repeat or lower-value engagements), depending on how customers engage you.

Supply Agreement

If you’re buying or selling goods, a supply agreement can cover ordering processes, lead times, delivery terms, product quality, returns, and what happens if there are shortages or delays.

Contractor Agreement

If you’re engaging contractors, it’s important the agreement clearly sets out:

• the services to be provided
• payment terms
• IP ownership
• confidentiality
• the nature of the relationship (contractor vs employee)

Misclassifying workers can create legal and tax risks, so it’s worth getting this part right.

Employment Contract (If You’re Hiring Staff)

If you’re hiring employees, you should have a proper employment contract in place that reflects the role, pay, and conditions, and aligns with applicable awards and the Fair Work Act.

For many small businesses, using an Employment Contract is a key part of reducing disputes and setting expectations from day one.

Shareholders Agreement (If You’re Going Into Business Together)

If you’re starting or running a company with someone else, a shareholders agreement can help set clear rules around:

• decision-making
• profit distribution
• what happens if someone wants to leave
• how disputes between owners are handled

This is especially important when relationships are strong early on (because it’s much harder to negotiate once there’s conflict). A tailored Shareholders Agreement can help you document these rules clearly.

Key Takeaways

• A well-drafted legal agreement between two parties helps set clear expectations and reduces the risk of disputes that can drain time and cashflow.
• Start by writing down the commercial deal in plain English, then build legal clauses around the real risks in your business relationship.
• Essential clauses often include scope of work, fees and payment terms, term and renewal, confidentiality, IP ownership, limitation of liability, termination, dispute resolution, and governing law.
• Avoid common mistakes like using an irrelevant template, leaving scope vague, forgetting privacy and data obligations, or signing under the wrong legal entity.
• Choosing the right agreement type matters (service agreement, supply agreement, contractor agreement, employment contract, or shareholders agreement) because different relationships create different risks.

This article provides general information only and doesn’t take into account your specific business, industry, or circumstances. It isn’t legal advice. If you’d like advice or help drafting or reviewing an agreement for your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.