The law says a contract is formed when there is an agreement for an exchange of value, and all parties are legally capable of entering into the agreement. Contracts do not have to be written except for specific types of business contracts, but most business contracts are evidenced by formal, written documents. Texas recognizes the following types of contracts that can be legally enforced:
The parties to an express contract formally agree to agree. Express contracts are usually in writing.
An implied-in-fact contract is inferred from the behavior and actions of the parties. A meeting of the minds of the parties must be evidenced.
Quasi-contracts are imposed as a matter of law where there is no legal contract, but justice is served by making a party perform as though there had been an agreement.
A unilateral contract is an offer. One party creates all of the terms, and the other party can either accept or reject the offered terms. A contract is formed only by acceptance of the offer.
Bilateral contracts are negotiated with both parties having input into the terms. Each party promises to perform, and a contract is formed by the exchange of promises.
Business Contracts that Must be in Writing
Some types of business contracts must be in writing to be considered valid. These contracts are governed by the Texas Business and Commerce Code in the Statute of Frauds chapter in Title 3 and the Sales chapter in Title 1. The contracts listed below are not enforceable unless in writing and signed:
- An agreement to answer for the debts of another
- A real estate sales contract
- A real estate lease lasting longer than one year
- An agreement for performance that will not take place within a year of making the agreement
- A commission agreement for the purchase or sale of an oil and gas lease, oil and gas royalty, minerals, or a mineral interest
- Loan agreements when the loan amount exceeds $50,000
- Contracts for the sales of goods priced at $500 or more
Contracts for Specific Business Purposes
Specific types of business contracts are generally developed for specific business purposes, and the language used in the contracts has particular significance regarding the subject matter of the contract. Proper drafting evidencing the intentions of the parties promotes mutual understanding and helps to avoid contract disputes that can frustrate business owners and operators and interfere with their daily operations.
Contracts where disputes may arise over what was agreed to can include any of the following commonly used business contracts:
- Purchase and sale agreements
- Franchise agreements
- Partnership agreements
- Manufacturing and distributorship contracts
- Employment contracts
- Service agreements
- Business formation or dissolution agreements
Common Reasons for Business Contract Disputes
Even if not legally required, most business contracts are evidenced by some type of writing. The parties have presumably worked out all the details of their agreement, and all questions can be answered by reference to the written document. The fact that contracts get disputed can mean the language used to express the agreement was not clear enough, so all parties could only reach the same conclusion.
When the parties to a business contract are no longer aligned about their agreement, the conflict may involve one of these common issues:
When a contract contains language that is ambiguous, it means the words have more than one meaning or general understanding, so it is not clear exactly which meaning the parties intended. Interpreting ambiguous terms in a contract requires a court to consider information outside of the contract to try and determine the meaning the parties gave to the ambiguous terms.
Force Majeure Clauses
Business contracts may contain force majeure clauses to excuse a party’s non-performance when it is due to circumstances beyond the control of the party. Force majeure events may be characterized as acts of God, natural disasters, epidemics, terrorism, government orders, embargoes, and other events beyond the ability of the parties to control.
Whether an event is found to excuse performance under a force majeure clause can depend in part on whether the event was foreseeable by the parties at the time the contract was executed. A foreseeable event is less likely to trigger force majeure and excuse a party’s failure to perform as promised without a specific additional contractual provision.
Absent a valid force majeure clause, Texas recognizes the doctrine of impossibility of performance, which will generally excuse performance under a contract if the person necessary for performance dies or becomes incapacitated, a thing necessary for performance is destroyed, or performance is prevented by government regulation.
Indemnity / Limited Liability
Indemnification provisions allocate the risk of certain types of losses to various parties to a contract. If particular circumstances arise, one party agrees to pay the costs and expenses incurred by another party. Indemnification clauses may be challenged for being overly broad or because they purport to cover uninsurable obligations.
Limited liability provisions try to cap the amount of damages that a party will have to pay for claims arising from disputes relating to the contract. Contractual limitations on liability are generally enforceable unless they are grossly unfair or against public policy. The relative bargaining power of the parties can influence the enforceability of limited liability clauses.
Non-Compete / Non-Disclosure
Non-compete and non-disclosure provisions are typically found in employment contracts. Employers include restrictive requirements to protect proprietary business information from getting into the hands of competitors.
In Texas, non-compete/non-disclosure provisions can be enforceable as part of an enforceable contract if they contain reasonable limitations as to time, geographical area, and scope of activity. Non-compete provisions must not place an unreasonable burden on a person’s right to make a living.
How to Avoid Disputes Arising Out of Business Contracts
Business contracts are entered into because each party has something of value the other wants. The contract represents the agreement between the parties as to exactly what each must do and what each stands to gain as a result.
The intentions of the parties are presumed to be contained within the terms of the contract, and extraneous information is not typically considered unless the contract language is unclear or the validity of the contract itself is being challenged. When there is a dispute about what was agreed, a court will try to determine the intentions of the parties at the time the contract was executed.
Anticipating potential problems before they become problems and making sure your business contract has language demonstrating clear intentions can help avoid unnecessary business interruptions and costly commercial litigation.
The importance of making sure a business contract clearly and accurately represents the agreement between the parties is fundamental to ensuring efficient business operations with a minimum of conflict or delay.
Proper drafting in anticipation of potential disputes can help eliminate issues and improve understanding.
Whether a business contract is for employment, purchase and sale, leasing, services, business formation, or distribution, the Houston business attorneys at Feldman & Feldman can help with negotiations, contract drafting, and review, so your business dealings remain productive and free of unnecessary controversy. Contact Feldman & Feldman and put over 40 years of Texas business experience to work for you.