Contracts are a critical part of running a successful business in Texas, or anywhere. Contracts are involved in all aspects of conducting business and you can hardly make it through the work day without encountering some sort of contract. Some of the more commonly used types of contracts in business include:
- Sales Contracts with Clients and Customers (people who you sell to)
- Vendor and Supplier Contracts (people who sell to you)
- Employment Agreements
- Non-compete Agreements
- Non-disclosure Agreements
Essential Elements of a Business Contract
A contract is a legally binding agreement between two parties. There are specific requirements that must be met for a contract formed between two parties to be both binding and legal.
- Eligible Parties to the Contract. In order to enter into a binding contract with someone, both parties need to be legally capable of entering into a contract. Certain people lack the mental capacity to know what they are doing by entering into a contract. For instance, people who are insane, or are under the age of eighteen are generally presumed to be unable to enter into contracts for a lack of understanding what they are committing to.
- Correct Parties for the Contract. Who are you making your contracts with? Obviously, get their names correct, and the name should match the signature. “Donald H” instead of just “Don” if that’s how he signs his name. The signature line acknowledges the printed name. More importantly, if you’re contracting with the company, use the company name and make sure it’s correct. You don’t want to contract with THC LLC or THC Partners if the company you want to bind and that has the money is Trans Holding’s Company, Inc. Even if they’re all related. Understand whether you’re contract is with an individual or a company. If an individual signs without a title they are personally liable. If they’re binding their company, they must sign with the correct title to establish their authority to sign and bind the company.
- An Offer must be made, and that Offer must be accepted. A contract is formed by one party making an offer and the other party definitively and unqualifiedly accepting the offer. There is a difference between accepting an offer and making a counteroffer. A counteroffer changes the terms of the bargain, and is a rejection of the original offer followed by a new offer. Understand the person making the offer controls the offer, the other party can’t change the terms. If they do, they are making a counteroffer.
- Something must be Exchanged between the Parties to the Contract. Consideration, which is something that one party exchanges with the other to create the contract, must be exchanged be exchanged between the parties. Consideration does not have to be valuable, fair or proportional – consideration just simply has to be whatever the parties bargained for in exchange. Consideration could be money, products, services, favors, promises, or refraining from exercising one’s rights. This is why you often see parties to a contract include the exchange of a nominal amount of money like “$10.00 and other good and valuable consideration received.” Actually, you don’t need any money at all, just two promises, one exchanged for the other. Note the promises cannot be illusory. “I will sell you product and you will pay me $100.00” is an exchange of promises. No other consideration is needed to create a contract. But “I will sell you product if you become CEO” is an illusory promise dependent on an event that might or might not happen and is not sufficient to create a contract.
- Meeting of the Minds and Mutual Assent. The two parties to the contract must clearly understand what the other one means concerning terms of the contract. This is referred to as a meeting of the minds of the parties, e.g., both parties clearly understand what each party is bargaining for in the contract. In many instances, courts will fill in gaps in this understanding by deciding what an “objectively reasonable person” might conclude. For example, a court may find a meeting of the minds where parties where one party wants service as soon as possible and the other promises to provide the service within two weeks. A court may not find a meeting of the minds if one party is buying service for his company and means a national organization of 10,000 employees and 20 locations while the other party can only service the local office of 40 employees.
- The Contract must be for a Legal Purpose. The law is not stupid. You cannot enter into a contract that has an illegal purpose and expect the contract to be legally enforceable. A court will not enforce such a contract. A contract that violates the law is no contract at all.
- Where You’re Sued and the Law That Applies. Make sure you specify where any dispute is to be resolved and what law is to apply. It’s expensive to defend yourself in a court in another state. Realize that another state’s laws may create an unexpected and unfavorable decision because they’re different from the laws in your state.
- Definitions, Promises, and Conditions. Be sure to accurately describe what you’re going to do or what you want done along with any conditions that must be met. Being very specific gives the clarity necessary to limit the gap between expectations and execution, which naturally could create unnecessary conflict.
- Termination and Damages. When does your obligation to provide or your right to receive goods and services end? Can these obligations and rights end early, and if so, what are the consequences? All contracts should have a time and one or more conditions under which the contract will end. If the contract ends early, you may want to consider specific damages or limitations on the damages – depending what side of the contract you’re on.
This is an overview of the major ingredients of most contracts. Depending on the complexity of promises exchanged, an experienced business transactions attorney may be necessary to help you capture your deal’s full opportunity and minimize potential risks. At Walker Law PC, we are happy to discuss how we can help.
How Important are Contracts to Your Business?
Your contracts may be your most valuable asset. That’s true if you can trace large amounts of your revenues, costs, or information to complex relationships with specific customers, vendors, or employees. How well these contracts are written will determine how valuable these relationships are to a potential buyer. Or how well your business will fare if one of those relationships will a customer, vendor, or employee is damaged or disrupted. Failure of one party to perform as required under a contract is termed a “breach.” What happens when one side breaches a contact depends to a significant degree on how well the contract is written.
If a significant amount of the value of your business is dependent on contracts with people and entities beyond yourself, a business transactions law firm like Walker Law PC can help you create the contracts that will protect and preserve that value. If your business requires you to repeatedly enter into complex contracts with customers, vendors, or employees, you need policies and procedures to standardize your contract process.
At Walker Law PC, we can help you create a contracting process that will help your team produce consistent, reliable, and valuable contracts. Call us today and ask us how we can help make your contracts easier for your team to work with and more reliable and valuable for your business.
John H. Walker