What Makes a Contract You Have Entered Into Unenforceable?

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Table of Contents

• An Unenforceable Contract
• Lack of Capacity
• Mistake
• Unconscionability
• Duress, Undue Influence, Misrepresentation and Fraud
• Public Policy
• Key Takeaways

Contracts play a crucial role in the day-to-day operation of businesses. If you own a business, you will deal with numerous contracts daily. Therefore, it is important to understand the fundamentals of contract law to ensure that you enter into legally enforceable agreements. Unfortunately, not all written contracts are binding, and certain circumstances may make your contract unenforceable. This article will explore five situations that may render your contract unenforceable.

An Unenforceable Contract

Under the law, there are certain situations where a contract will be unenforceable. These circumstances include:

• lack of capacity;
• mistake;
• unconscionability;
• duress, undue influence, misrepresentation and fraud; and 
• public policy.

We will explore each of these in further detail.

Lack of Capacity

In order for a contract to be enforceable, the parties must have the legal ability or capacity to enter into the contract. When a party lacks capacity, it means that they do not have the legal or mental ability to understand the contract and agree to its terms.

Mistake

If one party makes an honest mistake, this is known as a unilateral mistake. If both parties do, it is called a mutual mistake, and the contract may be unenforceable. However, such a mistake must significantly affect the bargaining or performing process of the contract. You and the other party can correct minor mistakes, such as typographical errors or misinterpretations, by carefully reviewing the contract.

On the other hand, if the other party mistakenly states in the contract that the price of an item is $5,000, while the parties mutually agreed that the contract price would be $500. In this case, the court may consider this a mere mistake. Accordingly, the parties can mutually agree to amend the contract to reflect this error. 

Unconscionability

If one party has not entered into a contract fairly, the courts may choose to deem the contract unenforceable. This means a contract may not be valid if:

• the terms of the contract are not fair for one party, usually the party with less bargaining power; and
• there is no room for that party to negotiate.

Larger enterprises commonly use to deal with a large volume of working relationships. The standard of unconscionability is high. Unconscionability can be procedural or substantive. 

Procedural Unconscionability 

Procedural unconscionability refers to the process in which the contract was entered into, considering the following scenarios:

• an individual has difficulty understanding the terms of a contract due to a language barrier;
• the other party presents them with a long, complex contract;
• the other party does not explain the terms clearly; or 
• the individual does not have an opportunity to speak with a lawyer, family member or interpreter before signing the contract. 

This is likely to meet the standard of procedural unconscionability. 

Substantive Unconscionability 

Substantive unconscionability refers to the actual terms of the contract. It refers to a situation where the contract terms are so one-sided, unfair, or harsh that they are considered unjust. For example, if one party has to pay a considerable fee to terminate a contract, the other party can terminate the contract for any reason at any time. This would be substantively unconscionable. 

Duress, Undue Influence, Misrepresentation and Fraud

A contract may be unenforceable if a party involuntarily obtains consent due to:

• a threat;
• coercion; or
• improper persuasion.

This also applies when a party has used a misrepresentation or false statement to get the other party to consent. There is a likely chance the party would not have agreed if they knew the truth.

Public Policy

The courts may also deem a contract unenforceable when it is in the public interest to do so. For example, when parties enter into a contract for illegal business dealings, such as selling illicit drugs.

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Key Takeaways

If you handle contracts regularly, you must understand what makes a contract enforceable to protect your commercial interests. You should ask for legal assistance when drafting a contract, particularly considering the circumstances forming the basis of your contract and the intended other party. Give as much information as possible and ensure you obtain full disclosure from the other party for the contract. Furthermore, be aware of any fundamental power imbalances between the parties.

If you need help ensuring your contracts are enforceable, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.