When your company enters into a contract with another entity or person, both parties are expected to fulfill the contract terms. However, there are some situations where a contract can be found to be legally unenforceable because of these reasons:
Lack of capacity – if one of the parties lacks the ability to understand what they are agreeing to, which could be for several reasons, including mental incapacity, age (too young) or not understanding the language, a contract could be deemed unenforceable.
Coercion – a contract may be invalid if it was entered into under duress, meaning that someone was threatened into agreeing to the terms.
Undue influence – if one of the parties was pressured into signing the agreement.
Fraud – if there was any misrepresentation during the contract negotiations, the contract could be found to be unenforceable.
Nondisclosure – if one party to a contract makes a misrepresentation by staying silent about important details.
Unconscionability – if something within the contract is grossly unfair – one side has much greater bargaining power or is illiterate and cannot understand the terms – this can render a contract invalid.
Breach of public policy – contracts that require one party to act illegally or force one party to forfeit employment or other rights cannot be legally enforceable.
Mistakes – if one or both parties commit an unintentional mistake regarding something important in the contract that has a significant effect on the negotiating process, the contract can be unenforceable.
Impossibility – sometimes a contract can be found to be unenforceable if it becomes impossible to fulfill the terms due to an unanticipated event or circumstance.
Effective contracts are necessary to govern business relationships between your company, your employees, your vendors and your customers. If you’re a small or mid-size business owner, call us today to learn more about effective contracts or to schedule a comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.