Author: Bryan Holman

Business contracts are essential for establishing clear and enforceable agreements between parties. However, poorly drafted contracts can lead to costly disputes, especially if they include unconscionable clauses, fail to meet the legal requirements of a valid contract, or violate public policy. In Texas, businesses enjoy significant freedom to contract, but there are key legal considerations to keep in mind to avoid common pitfalls. This article will highlight these issues and provide guidance on how to navigate them under Texas law.

Under Texas law, a contract clause may be deemed unconscionable if it is excessively one-sided or oppressive. There are two types of unconscionability: substantive and procedural. To prove that a clause is unconscionable, both types must generally be present:

• Substantive unconscionability relates to the actual terms of the contract being unfair or overly harsh.
• Procedural unconscionability refers to the circumstances surrounding the formation of the contract, such as one party lacking a meaningful choice or being pressured into signing.

To avoid unconscionable clauses, ensure that both parties have a clear understanding of the terms and that those terms are fair and balanced. One-sided clauses that heavily favor one party, such as extreme limitation-of-liability provisions or excessively high penalties for breach, could be ruled unenforceable in court.

Avoidance Tip: Ensure that the contract reflects a mutual agreement between the parties, taking into consideration the general commercial background and the specific needs of the business. Transparent negotiations and the absence of overreaching or sharp practices can help prevent a finding of unconscionability.

Texas law provides significant freedom to contract, especially for sophisticated parties negotiating at arm’s length. Courts generally uphold contracts between knowledgeable business entities, even if one party feels the terms are unfavorable after the fact. However, this freedom is not absolute, and contracts must still meet the legal requirements for validity.

Avoidance Tip: When drafting contracts, ensure that both parties understand the terms and have competent legal representation during negotiations. This helps ensure that any ambiguities are clarified upfront and that the terms are properly documented.

In Texas, a contract is only enforceable if certain elements are present:

• Offer and acceptance: One party makes an offer, and the other party accepts it in strict compliance with the terms.
• Meeting of the minds: Both parties must agree on the essential terms of the contract.
• Consent: Both parties must willingly consent to the contract terms.
• Execution and delivery: The contract must be executed (signed) and delivered with the intent to be mutual and binding.
• Consideration: There must be an exchange of value or promises.

Without these essential elements, a contract may be ruled invalid. For instance, if there’s no clear mutual agreement or if one party was coerced into signing, the contract might be unenforceable.

Avoidance Tip: Review contracts carefully to ensure all essential elements are present. The absence of any one of these elements can render the contract void or unenforceable. This is especially important for businesses, as even small oversights can lead to significant legal and financial consequences.

While Texas courts generally enforce contracts, they will not enforce agreements that violate public policy or positive law. For example, contracts that conflict with statutory regulations or agreements that are deemed harmful to the public interest may be struck down.

Avoidance Tip: Ensure that the contract complies with relevant regulatory statutes and does not conflict with public policy. Businesses should seek legal advice when dealing with highly regulated industries, such as insurance, to ensure their agreements do not violate statutory provisions or public policy principles.

To avoid common pitfalls in business contracts under Texas law, it’s crucial to ensure that contracts are:

1. Fair and balanced, without unconscionable clauses;
2. Legally valid, with all essential elements present;
3. In compliance with public policy, ensuring enforceability.

Businesses operating in Texas can protect themselves from contractual disputes by engaging knowledgeable legal counsel during the drafting and negotiation stages. A well-drafted contract can provide clarity and protect the interests of all parties involved.

If you need assistance with contract drafting, review, or negotiation, contact The Woodlands Law Firm at 832-626-0116, via email at admin@woodlands.law, or schedule a Free 15-minute consultation at our website at https://woodlandslaw.cliogrow.com/book. We’re here to help you safeguard your business with sound legal agreements.