Five Situations You Should Be Using a Contract (and How to Make One)

If you stop to think about it, society is pretty fragile. A lot of it’s just agreements between total strangers to do certain things in certain ways all the way down, and if enough people stopped honoring those agreements, everything would collapse pretty fast. Most of those agreements are unwritten and unspoken—like not playing the bongos at 3 a.m. while your neighbors are sleeping—but many are enshrined in a written contract. And we should all be using contracts more in our lives, because they remove uncertainty.

A contract is just a legally binding agreement between two or more parties that sets out the terms of an agreement. You don’t need to be a lawyer (or hire a lawyer) to write one, and they can protect you and the other party in a variety of ways. Any time you enter into an agreement that involves money or property, you should have at least a simple contract in place to make sure things go smoothly—because if they don’t and you need to take someone to court (even small claims court), having a contract will significantly strengthen your position and improve the odds of things going your way.

Contract basics

First, you have to know a few basic things about writing a contract. You don’t need fancy language, formatting, or specific legal terms in there, but the contract does have to include a few basics to be considered legally enforceable:

Consideration. There has to be an exchange of value, like when you pay someone to perform a service for you.

Clear acceptance. What’s being offered (e.g., a fee and a service) has to be very clear, as does the other party’s acceptance of the terms.

Legality. A contract that has illegal terms can’t be enforced, so forget about legally binding someone to commit crimes for your benefit.

Capability. Both parties in the contract have to be competent, of legal adult age, and capable of understanding what they’re agreeing to.

Mutuality. Everyone has to agree that they are, in fact, entering into a contract and agree to be bound by its provisions. In other words, you can’t trick someone into signing a contract.

Contracts don’t have to be lengthy, but they do have to be clear—any confusing wording or imprecise terminology may come back to haunt you. There are a lot of free downloadable contract templates out there, however, which you can either use as-is or alter to your needs. And if you have any doubts about your ability to craft a contract, you can always pay a lawyer to either write one for you or review one you’ve created yourself.

So, you can write a simple contract for just about anything. When should you?

When it makes sense to use a contract

Roommates

If you’re taking on a roommate—especially if it’s an informal arrangement in a property you own—you should consider preparing a contract that spells out how the arrangement will work. As anyone who has ever had a roommate will tell you, getting the rent or mortgage split out of them is just one battle. There’s kicking in for shared utility bills, discovering that your new roommate considers washing dishes to be an extremely optional activity, and waking up one day to find out your roommate has taken in a roommate of their own to split their half of the rent. This applies to both randos you lure to your home via an advertisement and friends, family, or even a partner, because defining financial responsibilities is a lot healthier than simmering in resentment towards people you love.

A contract can spell all of this out—how the money, chores, and lifestyle considerations will be handled. Plus, a contract can avoid awkward conversations by spelling out who gets the bigger bedroom, whether or not pets are allowed, and how you’ll handle it if your roommate needs to move out before the end of the agreement. The chances you will need to legally enforce a contract like this are relatively small (there are a lot of better options for handling bad roommates), but if things really degenerate and your roommate owes you a lot of back rent or causes other problems, having something in writing will be very helpful.

Loans

It’s always kind of awkward when a friend or relative asks for a loan. If you’re willing to help someone out with a personal loan, you should definitely have a loan contract created. For one thing, people sometimes have very short memories when it comes to their emphatic pledges to pay a loan back. For another, money has a way of distorting our memory and perception of events, so a contract can make the terms of the loan very clear.

Again, this doesn’t have to be complicated. A loan contract should state who the borrower and lender are, how much is being loaned, interest charged (if any), and the repayment terms, including a deadline for completely paying back the loan. Crucially, it should also include a provision for what happens if the borrower doesn’t pay it back. Do you get their baseball card collection? Do you charge a penalty? Do you get a specific number of Thanksgiving Day slaps? Putting this in writing will spare you a lot of stress if things go south.

Borrowed stuff

If someone wants to borrow your expensive stuff—or you want to borrow someone else’s stuff—a contract is a must. Whether it’s your vehicle, expensive power tools, or anything else, a contract protects your property by having the borrower assert that it is in undamaged condition when they take possession of it, by defining how it will be used and for how long, and clarifying that the borrower is responsible for any damage, tickets, or other problems stemming from their use of the property. A contract can also clarify that if they nail their hand to their thigh using your nail gun, you’re not responsible for their medical costs, and if they let your car roll down a hill because they forgot to set the parking brake they have to pay for repairs or replacement.

Pet- or house-sitting

Having a pet is a huge comfort—and a huge responsibility. When we have to leave our pets while we go on vacation or business trips, it’s pretty common to have someone check on them, feed them, and interact with them. And if you don’t have pets, having someone check on or even live in your home while you’re gone can offer a sense of security. You can hire professional house- and pet-sitting services for this, of course, but a lot of folks will just ask a friend to check up on their home and/or pets—or hire someone directly.

To make sure your home and beloved animals are properly cared for, a contract can help define all the expectations on both sides. From how often the sitter will check on the animals to their specific responsibilities (do the animals need medications? do you want music played during the day, or windows opened for them?) to the payment terms, whether a house-sitter can have guests, or how emergencies will be handled (including veterinarian bills incurred while you’re away), a contract will remove any uncertainty concerning how your animals should be cared for.

Handyman projects

Ah, the handyman and handywoman—an essential figure in home maintenance. Ideal for projects too small for a contractor but too complex for a homeowner lacking the right skill set, handypeople are often hired informally, and agreements are often handshake and cash in nature. The problem, of course, is that a handyperson is still in your home messing with essential stuff, and things can go wrong. A handyperson contract can lay out the scope of work, ensure there’s no confusion about how much you’ve agreed to pay them, clarify who’s responsible for buying materials, and make it clear they’re an independent contractor and you have no responsibility for their insurance.

Anything else

If you’re entering into an agreement with someone but you don’t have the specifics worked out quite yet, but want to nail things down a bit, you can craft a Memorandum of Understanding (MOU). This document is not a contract, and isn’t necessarily legally enforceable. But it’s useful if you’re negotiating because it lays out what both parties understand about the deal, and can be referred to when the actual contract is being composed. This way if someone tries to Darth Vader that deal by altering the terms you’ll have something in writing to fall back on. For example, if someone is negotiating to buy a big-ticket item from you (like a used car) but they need to secure financing, you can draw up an MOU that outlines the price you’ve agreed on and defines how long you’ll wait before you look for other buyers.

A contract might seem like a lot of trouble for small or friendly arrangements, but they don’t take long to put together and can save you a lot of heartburn if those arrangements turn wonky.