Unenforceable Contracts: What to Watch Out For
What kinds of contracts might not hold up in court?
Since a contract is a legally binding agreement, in the typical scenario, once you enter into a contract with another person or business, you and the other party are both expected to fulfill the terms of the contract. But it's possible for an otherwise valid contract to be found unenforceable in the eyes of the law, and this article looks at some common situations where that might be the case.
Lack of Capacity
It's expected that both (or all) parties to a contract have the ability to understand exactly what it is they are agreeing to. If it appears that one side did not have this reasoning capacity, the contract may be held unenforceable against that person. The issue of capacity to contract usually comes up when one side of the agreement is too young or does not have the mental wherewithal to completely understand the agreement and its implications. The general idea here is to prevent an unscrupulous person from taking advantage of someone who lacks the ability to make a reasoned decision. To learn more, check out Nolo's article Who Lacks the Capacity to Contract?
duress, or coercion, will invalidate a contract when someone was threatened into making the agreement. In an often cited case involving duress, a shipper (Company A) agreed to transport a certain amount of Company B's materials, which would be used in a major development project. After Company B's project was underway and Company A's ship was en route with the materials, Company A refused to complete the trip unless Company B agreed to pay a higher price. Company B was forced to pay the jacked-up rate because there was no other way to get the material, and not completing the job would lead to unsustainable losses. The court ultimately found that this agreement to raise the price was not enforceable, because it came about through duress. Another common example of duress is blackmail.
If Person B forced Person A to enter into an agreement by taking advantage of a special or particularly persuasive relationship that Person B had with Person A, the resulting contract might be found unenforceable on grounds of undue influence. In general, to prove undue influence, Person A would have to show that Person B used excessive pressure against Person A during the bargaining process, and that for whatever reason Person A was overly susceptible to the pressure tactics -- or that Person B exploited a confidential relationship to exert pressure on Person A.
If fraud or misrepresentation occurred during the negotiation process, any resulting contract will probably be held unenforceable. The idea here is to encourage honest, good faith bargaining and transactions. Misrepresentations commonly occur when a party says something false (telling a potential buyer that a house is termite-free when it is not) or, in some other way, conceals or misrepresents a state of affairs (concealing evidence of structural damage in a house's foundation with paint or a particular placement of furniture).
Nondisclosure is essentially misrepresentation through silence -- when someone neglects to disclose an important fact about the deal. Courts look at various issues to decide whether a party had a duty to disclose the information, but courts will also consider whether the other party could or should have easily been able to access the same information. It should be noted that parties have a duty to disclose only material facts. But if Party A specifically asks Party B about a fact (material or non-material), then Party B has a duty to disclose the truth.
When contract disputes involve fraudulent dealings like misrepresentation or nondisclosure, and one side of the agreement has already suffered financial losses as a result, a lawsuit for breach of contract might be filed over the matter. Learn more in Nolo's article Breach of Contract: Material Breach.
Unconscionability means that a term in the contract or something inherent in or about the agreement was so shockingly unfair that the contract simply cannot be allowed to stand as is. The idea here again is to ensure fairness, so a court will consider:
- whether one side has grossly unequal bargaining power
- whether one side had difficulty understanding the terms of the agreement (due to language or literacy issues, for example), or
- whether the terms themselves were unfair (like sky-high arbitration costs; read more in Nolo's article Arbitration Clauses in Contracts).
If a court does find a contract unconscionable, it has options other than just voiding the agreement altogether. It may instead choose to enforce the conscionable parts of the contract and rewrite the unconscionable term or clause, for example.
Contracts can be found unenforceable on grounds of public policy not only to protect one of the parties involved, but also because what the contract represents could pose harm to society as a whole. For example, a court will never enforce a contract promoting something already against state or federal law (you can never enforce a contract for an illegal marijuana sale) or an agreement that offends the "public sensibilities" (contracts involving some sort of sexual immorality, for example). Other examples of contracts (or contracts clauses) that are against public policy and therefore unenforceable include:
- an employer forcing an employee to sign a contract that forbids workers from joining a union
- an employer forcing an employee to sign a contract forbidding medical leave
- a landlord forcing a tenant to sign a contract forbidding medically necessary companion animals such as seeing eye dogs, and
- contracts for child custody are invalid in California if their terms are not in line with the child's best interest.
Sometimes a contract is unenforceable not because of purposeful bad faith by one party, but due to a mistake on the part of one party (called a "unilateral mistake") or both parties (called a "mutual mistake"). In either case, the mistake must have been about something important related to the contract, and it must have had a material (significant) effect on the exchange or bargaining process.
In some cases, a contract is deemed unenforceable because it would be impossible or impracticable to carry out its terms -- too difficult or too expensive, for example. To claim impossibility, you would need to show that:
- you can't complete performance under the contract because of some unexpected event that's not your fault
- the contract didn't make the risk of the unexpected event something you needed to shoulder, and
- performing the contract will be much more difficult or expensive now.
For example, if Company A contracts to sell 20 barrels of its flour to Company B and a natural disaster wipes out Company A's entire stock of flour before the sale can be completed, Company A might be able to have the contract ruled unenforceable on grounds of impossibility.
For more information on contracts, read Nolo's new book Contracts: The Essential Business Desk Reference, by attorney Rich Stim (Nolo).