Contractions are used to indicate where letters are missing in a word. I think that because there may be apostrophes involved, contractions and possessive pronouns are often confused. If the word shows possession, use an apostrophe as necessary to show that possession. (See Apostrophail!) If there are letters missing from a word, the apostrophe shows where those letters are missing. Some of the most confusing examples are:
its (possessive) it’s (it is OR: it has)
their (possessive) they’re (they are) OR: there’re (there are)
theirs (possessive) there’s (there is OR: there has)
your (possessive) you’re (you are)
If you’re not sure which is correct, test substituting “it is, it has, they are, there are, there is, there has, or you are,” whichever is appropriate, in place of the word that is confusing you. If the substitution does not make sense, it is not a contraction, so you should use the appropriate possessive form.
The dog was chewing on its paw. (“Chewing on it is paw” does not make sense.)
HOWEVER: It’s time to get ready to leave for the party. (“It is time” does make sense.)
He said, “Your car is leaking oil.” (“You are car” does not make sense.)
HOWEVER: She said, “You’re welcome” when he thanked her for the gift. (“You are welcome” is correct.)
Their house was beautifully landscaped. (“They are house” does not work.)
They’re in their house with all the lights on. (“They are in their house” is correct.)
Try the substitution test if you aren’t sure if a contraction is appropriate. If it is not, use the proper possessive word. In legal documents, contractions are not used as they are really used for more informal, friendly writing. A legal document is more formal and in an effort to avoid any confusion and keep it more formal, contractions are rarely appropriate. Again, however, this may be a matter of style and preference for a specific attorney. So go out and use contractions at will–except in legal documents and where it isn’t a contraction.