Understanding Contracts: Enforceable vs. Unenforceable Agreements

By on March 6, 2017
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Financial literacy often brings to mind terms like “money management” and “credit education.” However, financial literacy is a broad subject that encompasses many topics. One important topic that should not be overlooked is understanding what makes a contract enforceable or unenforceable.

Often when we make a financial decision, we enter into a contract. If you buy a car, you may enter into a 5-year payment agreement or a 3-year lease agreement. If you buy a house, you may enter into a 30-year mortgage. In both scenarios, you have entered into a contract with a lender, and that lender expects a monthly payment from you in return for the money they lent you.

Lease agreements and mortgages are written contracts, but contracts can also be verbal agreements. If you agree to sell your car to your friend for $2000, you should expect that amount in payment, and your friend should pay no more or less than $2000. Both parties are expected to hold up their end of the bargain, even if the contract is not in writing.

What makes a contract enforceable?

An enforceable contract is a legally-binding agreement between two parties. Both parties are expected to fulfill the terms of the contract. Additionally, while contracts can be verbal or written, verbal contracts are more difficult to enforce. Getting the agreement in writing reduces risk.

Requirements for Enforceable Contracts

For a contract to be legally enforceable, it must contain the following provisions:

  • An offer
  • An acceptance
  • Competent parties
  • Consideration
  • Legally-binding subject matter
  • Mutual obligation

The Offer

An offer is a statement of interest by one party to contract on specific terms with another party. The interested party must create a written or verbal offer that contains the following elements:

  • a communication that identifies the person to whom the offer is made
  • a statement of intent
  • a specific proposal that is certain in its terms

If any of these elements are missing, an offer has not been made.

The Acceptance

The acceptance is basically the other party’s consent to the terms of the offer. The offer can only be accepted by the person to whom it is made, and must be accepted in the manner requested by the offering party. The person to whom the offer is made has the right to reject and/or change the terms of the contract creating a counteroffer.

Competent Parties

Both parties must possess the legal capacity to enter into a contract. That means they must be 18 years of age and of sound mind when entering into the contract.

Consideration

Consideration can be money or a verbal agreement that a party will not sue on a claim that may be part of a legal dispute. However consideration is defined in a contract, it must be clearly implied in the terms of the contract and agreed upon by both parties.

Lawful Subject Matter

The subject matter of the contract must be legal in order for the contract to be enforceable. For example, a person cannot agree to transfer a title to real estate if there is a lien on the property.

Mutual Obligation

Simply stated, both parties must agree on the terms of the contract. However, the word is “agree” is loaded. In this case, it means both parties must be on the same page and have the same understanding of the terms. They must also make the agreement at the same time. If one party is fraudulently misled, the contract is voidable.

To avoid difficulties down the road, consult a qualified attorney to ensure your contract is legally enforceable and meets your original intentions.

What makes a contract unenforceable?

Since a contract is a legally binding agreement, you might think it’s possible for a valid contract to be found unenforceable; however, there are several reasons this could happen.

  • Duress
  • Impossibility
  • Lack of Capacity
  • Mistake
  • Misrepresentation
  • Nondisclosure
  • Public Policy
  • 
Unconscionability

Duress

A contract can be invalidated if a person is coerced or threatened into making the agreement. For example, if you contract a company to deliver a product at an agreed upon price, and the company refuses to deliver the product unless you pay a higher price, the contract is unenforceable.

Impossibility

A contract can be invalidated if, for some reason beyond your control, you cannot carry out the terms. To claim impossibility, however, you would need to prove the that:

  • Carrying out the terms of the contract will be more difficult or expensive than indicated in the agreement.
  • You cannot carry out the terms of the contract due to an unexpected event that’s not your fault, such as a natural disaster.
  • The contract did not address the risk of said event.

Lack of Capacity

As mentioned earlier, in order for a contract to be enforceable both parties must be over 18 years of age and of sound mind. If that’s not the case, and lack of capacity is demonstrated, the contract is unenforceable. The issue of capacity usually arises when one party is too young or does not have the mental capability to understand the agreement and its implications.

Mistake

Sometimes contracts are unenforceable because of a mistake made by one or both parties. In order for a contract to be invalidated, however, the mistake must have a significant effect on the agreement.

Misrepresentation

Misrepresentations occur when a party makes a false claim, or in some other way, conceals or misrepresents the state of affairs. A common scenario is a seller claiming there are no foundation issues with the home you are about to buy when they have prior knowledge that there is foundation damage.

Nondisclosure

A contract can be deemed unenforceable if one party neglects to disclose important facts about the agreement. While parties only need disclose relevant facts, if the other party specifically asks for information, it must be provided.

Public Policy

Contracts can be found unenforceable on grounds of public policy. Contracts cannot pose harm to either party or society as a whole. For example, your employer cannot force you to sign a contract forbidding you from joining a union.

Unconscionability

Unconscionability means that one or more terms in the contract are unfair and the contract simply cannot be allowed as written. In case of unconscionability, the agreement may be deemed invalid, or a court may enforce only the conscionable parts of the contract and rewrite the unconscionable terms.

As you know, or may have experienced, contracts don’t always pan out. Sometimes one party doesn’t hold up their end of the bargain, and you’re left wondering what, if anything, you can do about it. Always consult an attorney before drawing up or entering into any contract. A well written contract is the best way to protect yourself should a dispute arise.

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About Harold Goldman

I am the founder of FinancialSafetyNet.org, and a Retirement Planning and Long-Term Care specialist. I am also the President of Emes Insurance Services, Inc., a Murrieta based insurance agency designed to help people with Retirement Planning and funding for College. I believe in educating my clients to become financially competent in an effort to develop plans for guaranteed income, protection against loss and tax-advantaged growth. To contact me Call (844)-376-2265

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