Contracts form a crucial part of the day-to-day operation of businesses. If you own a business, you may deal with numerous contracts daily. You should put a contract in writing to ensure you and the other party are on the same page. For example, it will help you clarify what the other party is promising you, what you are promising in return, and ensure that the deal is legally binding on both of you. In saying that, a written contract is not always binding and there are circumstances that may make your contract unenforceable. This article sets out those circumstances.

Lack of Capacity

For a contract to be enforceable, the parties need to have the legal ability to enter into the contract. For example, a person suffering from mental impairment may lack the capacity to enter into a contract. Even a person who was intoxicated at the time they signed a contract may not have the capacity to do so.

Another typical example is when minors enter into a contract without the supervision of a parent or guardian. Under these circumstances, the contract may be unenforceable.

Mistake

If a contract is entered into due to an honest mistake made by one party, called a unilateral mistake, or by both parties, called a mutual mistake, the contract may be unenforceable. However, such a mistake must be important or one that significantly affects the bargaining or performing process of the contract. It cannot be a mere mistake like a failure to read the contract properly.

For example, the other party may give you the wrong contract and you do not notice until after you sign it. In this situation, the court may cancel the contract and deem it unenforceable if the parties have not done so themselves.

Unconscionability

If parties have 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.

This is commonly found in standard form contracts that larger enterprises use to deal with a large volume of working relationships.

Another situation in which the contract may not have been entered into fairly is where the other party has difficulty understanding the terms, due to a language barrier, for example.

Duress, Undue Influence, Misrepresentation and Fraud

A contract may be unenforceable if a party involuntarily obtains consent for it 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. Here, there is a likely chance the party would not have consented if they knew the truth. For example, a contract may be unenforceable if a supplier has put up an advertisement which is deceiving of the actual product.

Public Policy

The courts may also choose to 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 the sale of illicit drugs.

Key Takeaways

You should understand when a contract you have entered into may be unenforceable, so you do not lose out. You should ask for legal assistance when it comes to drafting a contract, particularly considering the circumstances forming the basis of your contract and who the intended other party is. Give as much information as you can and ensure you get full disclosure from the other party for the contract. If you have any questions, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

Natasha Bahari
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