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What are the most important things to consider in drafting a contract?

On Behalf of | Apr 8, 2024 | Business Acquisition

Drafting a contract is a significant step for small-business owners, entrepreneurs and senior-level managers. Contracts, including employment contracts, service contracts and nondisclosure agreements, are the foundation of business transactions and relationships.

Understanding the basics of contract drafting ensures these documents serve their intended purpose effectively.

Key elements of a contract

A contract is not merely a formal document but a binding agreement that requires specific elements to be valid. These elements include the intent to create a legal relationship, a lawful subject matter, an offer, acceptance of the offer and consideration (something of value exchanged between the parties). While not all contracts must include payment terms, detailing these terms can prevent misunderstandings and disputes later on.

Offer, acceptance and consideration

The process of creating a contract begins with an offer by one party, which is then accepted by the other. The acceptance can take various forms, such as a written agreement or performance of the agreed-upon tasks. Consideration, or the exchange of value, cements the contract, making it a legally binding document.

Writing a business contract

When drafting a business contract, clarity and detail matter. The contract should clearly state what each party will do and when it should happen. Payment details, including obligations, due dates and payment methods, should be clear to all parties involved. Additionally, in agreements dealing with sensitive or proprietary information, a confidentiality clause is a consideration.

Why client contracts matter

Client contracts are indispensable in defining scope of work and payment terms. Additionally, they define the overall agreement between a company and its client. They ensure legal protection, secure financial transactions and clearly outline the work agreement. Whether written or verbal, the specificity and accuracy of a contract can prevent misunderstandings and disputes, ensuring a smooth business relationship.

Contracts versus agreements

While the terms ‘contract’ and ‘agreement’ are often used interchangeably, they hold different legal standings. Contracts are formal arrangements that are legally enforceable. Agreements, on the other hand, are informal and rely on the honor system. This distinction highlights the importance of drafting a clear, detailed contract to safeguard business interests.

By focusing on the key elements of a contract, small business owners can ensure trust and reliability in business relationships.