A contract is a legally binding agreement. Once you enter it, it’s expected that you and the other party will fulfil all your obligations. However, there are certain circumstances which make a contract legally unenforceable. In this article, we break down the different reasons that a contract may be unenforceable, and how you can avoid them.
1. Duress
Duress involves the threat of force / violence to coerce a person into entering into the contract. This must involve illegitimate pressure, and makes the contract unenforceable. Therefore, this can include unlawful threats, unlawful coercion, or the absence of a lawful basis for the pressure.
Law recognises three main types of duress:
Duress to the person
This involves illegal pressure being places on a person. For example, threatening to harm the person if they don’t enter the contract.
Duress to goods
Any unlawful pressure to detain or damage another person’s goods can amount to duress, voiding the contract.
Economic duress
This occurs where one party threatens to cancel the contract unless the other party agrees to their demands. This makes the other party stuck, as the only practical option is to accept the terms.
2. Misrepresentation
A representation is a statement made by a party intending to induce the other party to enter the contract. However, it doesn’t officially form a part of the contract. A misrepresentation occurs when this statement is false, and can potentially make the contract unenforceable. To be considered misrepresentation, the statement must;
Be of fact
Something a reasonable person would believe.
Be false
The statement must be objectively wrong.
Induce
The party had to be relying on the statement to enter the contract.
3. Mistake
This occurs when a party has entered a contract due to a mistake. This can make the contract unenforceable, and generally occurs in two situations.
- Where both parties have made the same mistake to a material fact. For example, mistaking the existence of the subject matter. A contract can’t be made over something that doesn’t exist, and therefore is unenforceable.
- Where one party has made a mistake of the material fact, and the other party is aware of this, taking advantage of the mistake. This can make the contract unenforceable, as a party has been taken advantage of without their knowledge.
4. Lack of capacity
Capacity refers to who can legally enter a contract, and consequentially, be held accountable. There are three kinds of capacity that may make a contract unenforceable;
Minors
Someone under the legal age of consent is deemed to not have the legal capacity to enter a contract. This age in NSW is 18-years old, with the exception to the rule being if the contract is for the minor’s benefit.
Incompetent
This refers to those who may not have the mental capacity to enter a contract. For example, those suffering with Alzheimer’s disease.
Under the influence
This refers to those who might usually be competent to enter a contract, however, are under the influence of drugs or alcohol when entering the contract.
5. Illegal contracts
Any contract that involves illegal business, such as illicit drugs, is an unenforceable contract. The courts can choose to deem the contract unenforceable if it is against public policy.
Final thoughts
As discussed, there are numerous factors that may deem a contract to be unenforceable by the courts. Often, these contracts are created or executed by a person without full knowledge of the law. Hiring a lawyer to draft and consider the legal requirements is essential to ensuring that your contract is valid under law.
