If you run a business, you need to understand your contracts. When things are going well, you might not think much about how you word these documents. But when things don’t go well, an unclear or poorly written contract can cause a great deal of trouble.
In fact, several years back, the Bureau of Justice Statistics reported that breach of contract claims accounted for roughly one-third of all civil litigation. Every year, contract disputes cost businesses untold sums of money. But there’s no reason your business should take a hit. You can learn your lesson and make sure your contracts work the way they should.
The 4 basics of a business contract
Most businesses use a wide variety of contracts. These include everything from employment contracts, non-disclosure agreements, commercial leases and sales contracts to franchise agreements, warranties, limited warranties and indemnity agreements. In fact, your business likely has a contract for every relationship into which you have entered it.
Despite the staggering variety of possible contracts, they all require four basic elements to be enforceable. As the American Bar Association notes, these elements include:
- Parties with enough maturity and mental capacity to enter the contract knowingly and willfully
- An offer of goods or services in exchange for some other consideration and an acceptance of that offer
- Consent by all parties to the terms of the agreement or contract
- A purpose that falls within the bounds of legal activity
Failures with any of these elements can render a contract unenforceable. That said, it is the second item that typically sits at the heart of a contract and can cause the most issues.
When courts review contract disputes, they first look at the terms of the contract to see if those terms are clear and legitimate. So, you had better make sure your contracts say what you mean them to say. When the terms of a contract are unclear, courts sometimes hold that ambiguity against the party that drafted the contract. At other times, they may look outside of the contract for guidance.
Templated contracts may not be good enough
The strongest contracts are usually specific. They leave no room for ambiguity, and their language matches their goals. They clarify the identities of each party involved and the exact terms to which each party is agreeing. And they do this in a way that understands all the state and federal laws that might matter.
Form contracts and templated contracts rarely encourage this degree of specificity. As a result, you may want to work with an attorney to draft your own contracts. Especially if you work in an industry, such as construction, that is prone to contract disputes, you don’t want to worry about the strength of your contracts. You want them to serve as the foundations of solid business relationships.