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Unenforceable contracts : what you need to know

April 22, 2022
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This article is written by Michael Shriney from the Sathyabama Institute of Science and Technology. This article analyses the unenforceability of a contract, its requirements, common mistakes, avoidable mistakes, and relevant case laws.

It has been published by Rachit Garg.

Introduction 

A contract is an agreement between two or more parties that is legally enforceable. An agreement is a promise made between two or more people to do or not do something. A contract is a mutual agreement that is normally formed by a party’s offer and acceptance. The courts stated that an enforceable contract needs one party to make an offer and the other party to accept it. A legally enforceable contract is one that is valid. There must be an offer, consideration, acceptance, and complete competent capability for a contract to be effective and legally binding. It ensures that a contract’s mandatory compliance can be enforced legally. It can be in both written or oral format which is enforceable in the court. The Indian Contract Act, of 1872, explains contracts from an Indian perspective. This article will give an introduction to the topic of unenforceable contracts. The term “unenforceable contract” refers to a contract that is either unlawful or invalid. A contract that is not approved by a court of law due to the fact that it is not lawful or contains inaccurate information is an unenforceable contract.

What is an enforceable and unenforceable contract

Enforceable contracts

An enforceable contract is one that is legally bound and enforceable in a court of law, as well as it is a valid contract that gives a remedy if the contract is not performed. A contract must have a set of conditions agreed upon by consenting parties with the ability to exchange for something and receive something in return it can be in the form of money, goods, acts, etc. in order to be enforceable. Consideration refers to the agreed-upon exchange. To agree on the terms and conditions, both parties must provide their consent. 

There must be an offer, acceptance, and consideration for a contract to be enforceable.

Offer: One side must make a proposal to the other.

Acceptance: Both parties must agree to the terms and conditions set out in the contract. There must be a mutual agreement.

Consideration: All parties must agree on a fair exchange of compensation. It must be in writing and both parties must sign it.

For example, in an oral contract, if ‘A’ and ‘B’ are friends, ‘A’ buys ‘B’s’ car. In this situation, ‘A’ has agreed to purchase ‘B’s car. This is a legally binding contract.

Unenforceable contracts

An unenforceable contract is one that is not legally binding and cannot be enforced in a court, as well as it’s not unlawful and has no remedies. When legal conditions are not satisfied, a contract might be declared unenforceable. For example, if ‘A’ and ‘B’ made an oral agreement to kill ‘C’ for a certain sum of money, the agreement itself is illegal and unlawful. This is an example of an unenforceable contract. When a contract is declared unenforceable, the court may order one party to act or pay the other for failing to comply with the contract’s requirements. A contract can be rendered unenforceable for a variety of reasons, including the signing of the contract, the contents of the agreement, or events that occur after the contract is signed. When there is a lack of ability, duress or undue influence, deception or mistakes, or public policy, a contract will be deemed unenforceable.

What mistakes make a contract unenforceable

Lack of capacity, duress or undue influence, deception, nondisclosure, unconscionability, public policy, error, and impossibility are all characteristics of unenforceable contracts. These mistakes are further examined in-depth as follows:

Lack of capacity

All contracting parties must be mentally stable in order to enter into an agreement. Lack of capacity is defined as a person under the age of 18 who is intoxicated by drugs or alcohol or who does not understand what they are doing when they engage in a contract. The contract will not be enforced by law if there is a lack of capacity in it.

For example, if ‘A’ is inebriated and unable to comprehend what is going on around him and enters into a contract, the deal is void and unenforceable by law. Even if he does not complete the contract, he will not be punished and will be let free.

Three types of capacity

When an individual enters into a contract, there are three forms of lack of capacity that are unenforceable by law: minor, a person with an unsound mind, and persons disqualified by law.

Minor

When a person is under the age of 18, he is referred to as a minor in legal terms. In other words, a person who has not reached the age of majority is incapable of entering into a contract. A minor’s contract can be void ab initio, which indicates that the contract must be invalid from the very beginning. 

A person with an unsound mind

When these unsound-minded people enter into a contract, it is unenforceable by law. The individual’s mental illness must be proven in a court of law.

A person disqualified by law

Contracts between those who are legally prohibited from doing so, such as convicts, insolvents, and others, are not legally enforceable.

Duress/Coercion

A contract must be signed voluntarily without any force or violence. Duress happens when one party uses force to compel the other to enter into a contract. The court will not consider an unenforceable contract to constitute a lawsuit if there is duress involved. For example, if ‘A’ is forced to sign an illegal contract by ‘B’ who threatens him with a pistol, the contract is unenforceable because it’s obtained by duress. 

Undue influence

When using one’s position and authority to execute a contract. For example, when a company’s owner uses his position and forces the employees to sign a contract that solely benefits the owner then, this is an example of undue influence. When there is undue influence, the contract becomes enforceable.

Misrepresentation 

When one party makes a false statement of a material fact that impacts the other party’s decision to enter into the contract, there is a misrepresentation in a contract. The affected party must prove to the court that the facts in the contract are false and that the contract is unenforceable. Not all misrepresentations are frauds, but all frauds are misrepresentations.

Fraud 

Fraud is described as an act committed with the intention of hurting someone by depriving them of their legal rights. When a fraud is brought before a court of law, the fraudster has the option of proving himself by speaking the truth or lying. If it is proven that he engaged in fraudulent behaviour in the contract, the deal will be void. The court does not favour someone who employs fraud to persuade the other party to sign a contract.

Nondisclosure

In a general contract, all statements and declarations are taken into account, especially the most relevant ones. If certain significant statements are omitted, the contract will be unenforceable under the law. When parties to a contract omit important statements during discussions before signing the contract, this is known as nondisclosure.

Unconscionability

Unconscionability refers to a contract term, something underlying in the contract or anything that causes the party to be shocked. These unconscionable contracts cannot be enforced simply. When unconscionability is present, the court will examine and consider the following factors: 

If the court finds the contract to be unconscionable, it will not be enforced. It can only enforce the agreements if they modify or remove the unconscionable terms.

Illegal contract

An illegal contract is one that violates the law or public policy. For example, if a contract is established to buy and sell illicit substances that are unenforceable under the law, then parties to the contract will be forced to break the law. The goal of illegal contracts and public policies which are made unenforceable is to safeguard society’s world in general.

Mistake

To a certain degree, all errors do not declare a contract invalid. Mistakes can be unilateral or mutual. A unilateral mistake is made by one party in the contract, or a mutual mistake is made by both parties in the contract; both scenarios are not legally enforceable. Under these circumstances, only significant errors must be examined in an agreement, which must be noticed and affected in its development or execution in a meaningful way.

Impossibility

When a contract is formed, it is made enforceable and lawful; but, when the contract is performed, it is difficult to carry out, resulting in the contract becoming unenforceable. Impossibility happens when one party is at fault, which normally does not result in a contract.

Unwritten contract

In general, contracts need not be in writing, however, some contracts must be in writing in order to be enforceable. When a different circumstance happens, this is necessary. Contracts for the sale or transfer of land, as well as contracts that cannot be performed within one year, must be in writing. This safeguards parties against fraud and misrepresentation. If the contract is made orally, It can be proven in court, but it’s difficult since the party who claims that a contract has been created has the burden of proof. As a result, it’s hard to prove, and if parties can’t prove it, the contract is unenforceable. The written agreement does not need to be demonstrated orally.

How to avoid unenforceable contracts and agreements

Ensure that a contract accomplishes whatever the parties think it does 

A common mistake that leads to an unenforceable contract is that the contract’s terms do not fulfil the criteria that one of the parties thought were added after the parties signed it. It’s natural to believe that everything that is spoken orally might be included in the written agreement. As a result, the parties must communicate with the attorney about the business agreement’s objective and ask the parties to examine the wording of the contract draft. The attorney will be able to clarify the contractual situation and verify that the contract is fair.

Include a paragraph regarding dispute resolution

The parties must prepare for the worst and hope for the best. A dispute resolution clause in a contract must be included which specifies how the parties will try to resolve any disagreements or misunderstandings before going to the courts. A dispute resolution clause might direct a disagreement to independent mediation or arbitration to settle a disagreement in a fair and mutually agreed on manner, avoiding litigation. If alternative dispute resolution is not an option to the solution for the type of party agreement, they can approach the court of the local jurisdiction.

The contracting parties must proactively evaluate the contract

The contracting parties must appoint a lawyer to prepare the contract, and the contracting parties must check the contract once it has been drafted to ensure that all terms and conditions clauses have been inserted. The parties must sign the contract after they have reviewed it.

Case laws

Couturier v. Hastie, (1856)

Facts of the case

In this case, the parties were the vendor and buyer of a cargo of corn that was carried from the Mediterranean to England. The shipment of grain perished and was disposed of without the parties’ knowledge before the parties entered into the contract for sale. When the parties discover their error, the question of legality arises. 

Issues involved in the case

Whether the sale contract is valid or not?

Judgement of the Court

The House of Lords of the United Kingdom held that the contract was unlawful from the start since both parties had made the identical error and had no physical ability to fulfil the contract. As a result, because there was no corn to be contracted, the contract is unenforceable.

Balfour v. Balfour (1919)

Facts of the case

In this case, In Ceylon, the defendant works as a public servant. When he moved to England, he told his wife that he would transfer her 30 pounds every month. However, he did not send the money. The plaintiff filed a lawsuit against her spouse over the matter. 

Issues involved in the case

Whether Mr. Balfour has entered into any form of contract with his wife and whether it is a valid contract between a husband and wife which is enforceable in a court of law.

Judgement of the Court

It was determined that the lawsuit is unenforceable since it does not result in serious action. The Court of Appeal (Civil Division) held that a court cannot take into account the domestic agreements between husband and wife made in the daily course of life. So the suit was dismissed by the Court.

Lalman Shukla v. Gowri Dutt (1957)

Facts  of the case

According to the facts of the case, the defendant’s nephew was missing and the defendant was unable to find him. He sent his servant (Plaintiff) to look after him. While the servant was searching for the defendant’s nephew, the defendant announced a cash reward if anyone found his nephew. The servant found his nephew and brought him back to his home. After six months of this incident, the defendant fired his servant from the job. In the incident of the servant’s removal, the plaintiff demanded the money, which the defendant refused to give him. The plaintiff files a suit against the respondent.

Issues involved in the case

Whether the plaintiff is entitled to get the said cash reward?

Judgement of the Court

The Allahabad High Court ruled that it is unenforceable since the offer of reward was not made to the offeree. The Court dismissed the case.

Conclusion

An unenforceable contract is one that is valid for all practical purposes until its validity is challenged or questioned, and that cannot be enforced owing to some technical fault. It can be enforced in the future once the technical flaw has been removed or rectified. For example, if a contract is unenforceable due to a lack of registration, it becomes enforceable after registration. Another example: if a contract is made orally to buy land, it is unenforceable in court; yet, if the contract is done in writing, it is enforceable in court.

When a contract is found to be unenforceable, the court does not require one party to pay the other for failing to fulfil the contract’s terms. For example, suppose Ambi agrees to sell 500 kgs of cement to Bala for 30,000/- for building construction. Ambi signs a contract with Bala. Throughout the night, Ambi kept cement in his godown. The cement was damaged as a result of severe rain. This contract is now null and void, and it cannot be enforced against another party.

References

  1. https://www.upcounsel.com/unenforceable-contract#unenforceable-contract
  2. https://www.thebalancesmb.com/unenforceable-contract-4173437
  3. https://law.jrank.org/pages/22695/Contract-Law-Enforceable-Unenforceable-Contracts.html
  4. https://kirasystems.com/learn/what-is-an-unenforceable-contract/ 
  5. https://www.legislate.tech/post/8-legal-cases-where-the-contract-was-void-ab-initio

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