When Is A Contract Unenforceable?

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Contracts are an essential part of any business relationship. Whether it be an arrangement with suppliers, employees or a joint venture with another business, it’s encouraged to have the details set out in writing.

This way, if something goes wrong later, you can refer to the written agreement. The agreement would set out what process to follow in the case of a dispute, and who is entitled to what if property is involved.

However, in order for this to work out, the contract needs to be enforceable. In other words, it needs to meet certain requirements so that a party can take legal action if needed.

If it does not meet these requirements, it is deemed unenforceable and the terms within that contract would have no effect.

So, how do you know if a contract is unenforceable?

To understand this, let’s go through what makes a contract enforceable first.

What Makes A Contract Legally Binding?

For a contract to be enforceable, it needs to meet certain criteria so that it is ‘legally binding’.

To be legally binding, a contract must have the following elements:

Offer and acceptance – a proposal of an offer
Intention – parties must be willing to be bound to the terms
Consideration – this could be profit or a service
Capacity – parties must understand what they are agreeing to

Finally, a contract must also have a signature. This is to certify that the parties have accepted the contract and all of its terms.

Signing a contract can now be done online. At Sprintlaw, we offer an E-Signature tool where clients can sign and send legal documents electronically. You can manage your signatures through our custom-built platform, which we’ve designed according to our clients’ needs.

There’s no disruption to your workflow and you can keep all your legal documents in one place – you can access it as part of your Sprintlaw Membership.

What Are Unenforceable Contracts?

Unenforceable contracts are contracts that don’t satisfy the above requirements. This means they are not legally binding and if a party falls short on their obligations or breaches one of the terms, the other party cannot take legal action against them.

Let’s look at situations where a contract would be deemed unenforceable.

What Makes A Contract Unenforceable?

There are many things that could make a contract unenforceable. If any of the following situations arise, this means the contract’s terms have little to no effect.

Capacity

When parties enter into a contract, they all need to have the capacity to understand what they are agreeing to. For example, if someone with a mental impairment enters into a contract, this would be considered unenforceable due to lack of capacity.

Another example is where a minor enters into a contract. Usually, this kind of contract would also be unenforceable, subject to certain exceptions. If the contract was for necessity and benefit in the minor’s favour, then the contract may remain valid.

Duress

If you’ve signed a contract due to being threatened or coerced, the contract would be unenforceable.

Being forced to enter into a contract renders the agreement invalid. This is because a party must be fully willing to accept the terms without the coercion or influence of another.

Mistake

If a significant mistake has been made when signing a contract, the agreement may be unenforceable.

For example, if you’ve mixed up the contracts and consequently signed the wrong one, this could constitute a mistake and render the contract invalid. This mistake could be by one or all parties.

Unconscionability

Unconscionability will render the contract unenforceable if it has been entered into on unfair terms. For example, a party may enter into an agreement where they have lesser bargaining power.

In some cases, this could look like a contract between a child and their guardian. Other examples include a student and their teacher.

A good way to think of it is where one party is easily influenced by the other, or relies on that other party for guidance. In these situations, it can be easy to convince someone to enter into an unfair contract.

This would make the agreement unenforceable, depending on the specific circumstances.

Misrepresentation

Misrepresentation is where a party makes a false statement about something, and the other party relies on this misrepresentation when they sign the contract.

Since they are relying on false information or a misrepresentation, their agreement to the terms is not genuine or fair, making the contract unenforceable.

This sounds a lot like misleading and deceptive conduct, but it’s important not to confuse the two!

Public Policy

Another factor that renders a contract unenforceable is where the terms threaten public policy. This is usually the case when the contract involves illegal activity.

In this case, it is in the public interest to make the contract unenforceable.

What Is The Difference Between A Void Contract And An Unenforceable Contract?

The terms ‘void’ and ‘unenforceable’ are easy to confuse as they are often used interchangeably.

The key difference between the two is that a void contract can be enforced in court so that parties can still ‘affirm’ the contract. For example, the court may order specific performance so that the party in breach still completes the owed obligations.

However, an unenforceable contract is one that cannot be taken to court from the outset. Legal action cannot be taken (such as a court order for specific performance).

Are Verbal Contracts Binding In Australia?

Yes, verbal promises can be legally binding. This depends on whether the elements of a contract are present.

However, if you need to prove that a legally binding agreement exists in court, you may be required to provide evidence. This could be written evidence such as letters, texts or emails.

While verbal contracts are still legally binding, your safest option is to always have your agreements in writing.

What Happens When There Is A Breach Of A Verbal Contract?

Since a verbal contract is legally binding in the same way as a written contract, a breach of a verbal contract would have the same consequences.

Similar to a breach of a written contract, the contract may be declared void or rescinded. Another option is where the court may make an order for specific performance.

What Are Unfair Contract Terms?

The Australian Consumer Law protects consumers from unfair trading practices. When it comes to contracts, this means that the law prohibits any terms that would be considered unfair.

These are known as unfair contract terms.

If a term is deemed to be ‘unfair’, the term will be void. So, the parties will not be bound by that term.

So, what makes a contract term ‘unfair’?

A term is considered unfair if it:

Causes a significant imbalance in the rights and obligations of the parties
Is reasonably considered unnecessary to protect the party’s interests
Causes detriment to a small business if they rely on that term

Can I Make My Contracts Internationally Enforceable?

Businesses aren’t limited when it comes to where they can conduct their business activities. Since businesses expand internationally, so too will their contracts!

However, if you want your contracts to be internationally enforceable, you’ll need to insert certain clauses.

The most common way to do this is to include an international arbitration clause. This clause should set out the details around where arbitration would take place in the case of a dispute, what language it would be in and how many arbitrators there will be.

The Australian Centre for International Commercial Arbitration (ACICA) has a recommended clause that you can insert in your international contracts – you can find it here.

If you don’t have this clause in place, another option is for parties to agree on two main things:

Governing law
Jurisdiction

Governing law refers to which country’s laws will apply to the contract. So, the terms of the contract should comply with the laws of that country. Jurisdiction, on the other hand, refers to which country will have jurisdiction over the matter if a dispute arises.

If you’re unsure about how to approach an internationally enforceable contract, our contract lawyers can help.

How Can I Ensure My Contracts Are Enforceable?

When you draft any contract, you always want to make sure you’ve satisfied the criteria for legality to ensure you can actually enforce it in the future.

The best way to do this is to get a lawyer to review your contracts. At Sprintlaw, we offer a number of contract review packages. From subcontractor agreements to international contracts, we’ve got you covered.

Key Takeaways

Contracts are a great way to secure your business arrangements and ensure you can satisfy the interests of all parties. However, this is only possible if they are legally binding and enforceable.

So, it’s essential that your contracts are well-drafted from the outset to avoid any legal headaches.

Our lawyers at Sprintlaw have years of experience with contract reviews and other legal services. Whether you need an international contract review, an Employee Share Option Plan or a Company Constitution, we’re happy to help.

If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Rowan Gardoce

Rowan is the Marketing Coordinator at Sprintlaw. She is studying law and psychology with a background in insurtech and brand experience, and now helps Sprintlaw help small businesses

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