Modern society runs on contracts. From signing up for the latest app to having surgery to buying a new car, contracts lay out what each party can expect and what they must do to hold up their end of the bargain. That is, unless the contract is unenforceable.
Enforceable Contracts 101
The total value of any type of contract depends on it being enforceable. Unenforceable contracts aren’t worth the paper they’re printed on — or, more likely, the pixels they use on the screen. An enforceable contract is one that can be upheld in a court of law. It’s a legally binding agreement between two or more parties.
What Exactly Is an Enforceable Contract?
An enforceable contract must meet specific requirements in contract law before a court will uphold it. As long as a contract satisfies these requirements, it can be enforced. This means if one party doesn’t fulfill their part of the contract, the other can make them do so or get compensation for the breach.
If one party breaks an enforceable contract, the other party can take them to court or seek the legal remedy outlined in the contract. What that remedy is will depend on the terms of the contract. Every contract is unique, but the consequences of failing to uphold the agreement are usually in the contract.
Essential Components of an Enforceable Contract
The basic elements of any contract agreement are the offer and acceptance. One party offers something to another— usually goods or services — in exchange for something else, and they reach mutual consent. Some common types of contracts include bills of sale for vehicles, service contracts for landscaping, and business bilateral contracts between partners.
Essential elements of the offer itself are expression and intention. The expression means the contracting party lays out their terms for entering into a contract. The intention means they intend for it to be a legally binding contract, which applies more to verbal contracts than written ones since putting a contract in writing usually signifies intent.
Of course, the other party has to accept the offer for it to become a legally enforceable contract. However, acceptance doesn’t have to be explicit for there to be a legal contract. Implied acceptance occurs if one party makes an offer and the other accepts it, even if there is no formal written or verbal expression of acceptance. For example, if a cleaning company offers to clean an office for $200 and the office pays, there’s implied acceptance.
Other critical elements of a contract that is enforceable include:
- Valid Consideration. There has to be consideration in an enforceable contract. Consideration means that parties exchange something of value. Often, this is money, but it doesn’t have to be. Nor does it have to be very valuable.
- Legal Capacity. Everyone involved in the contract has to be able to understand the terms of the contract and has to be legally eligible to enter into a contract. Someone who has impaired judgment — either due to a developmental disability or mental illness that prevents them from understanding a contract — has a lack of capacity to agree to the contract. The same applies to people under the influence of drugs or alcohol. Some other reasons people might lack the capacity to agree to a signed contract include being under 18 years of age or being under duress — someone is forcing them to agree against their will.
- Genuine Consent. Genuine consent means everyone who agrees to a contract does so willingly and fully understands what they’re agreeing to. This relates to the concept of duress. If someone threatens one of the parties to get them to agree, it’s not a legally enforceable contract. In addition to physical duress, which is the threat of physical or psychological harm, there’s also economic duress. Economic duress is when someone must agree to a contract because of financial pressure. For example, if one party threatens to cancel an existing business contract unless the other party agrees to pay 10% more, that’s economic duress.
- Lawful Purpose. Finally, the contract has to be legal to be enforceable. Even with all the other elements in place, a contract that involves illegal activities can’t be enforced.
Factors That Make a Contract Unenforceable
If any of the components of a valid contract are missing, it’s unenforceable. Some common reasons personal or business contracts may not be enforceable include the following:
The only people who can sign a contract are the people or business representatives who have the authority to do so. If someone misrepresents themselves by signing a contract with someone else’s name, it’s null and void. That means neither party can enforce the contract.
A void contract is unenforceable, and authorities will treat it as though it was never created. In some cases, a contract can be voidable, which means the injured party can choose whether or not to enforce a contract. For example, if someone buys property and finds out the seller misrepresented it, the buyer can choose whether to void the contract or not. A voidable contract is only enforceable on one party, while a void contract isn’t enforceable on anyone.
In the event of a forgery, the contract can’t be upheld even if the party whose signature was forged later wants to keep the contract. Using contract software that includes identity verification can prevent fake signatures.
Lack of Authority
A contract becomes enforceable only when someone with authority signs it. If someone claims to be acting on another’s behalf without their permission, they lack authority.
However, there are two situations where someone lacking authority can create an enforceable contract. The first is if they are empowered after the fact. The second is when they have implied authority, such as an employee acting on behalf of an employer while performing job duties.
Fraud and Duress
Any type of fraud or duress can make a contract unenforceable. Fraud is an intentional misrepresentation. If a seller tells a home buyer the house doesn’t have termites when they know it does, that’s fraud. The victim of fraud can choose whether or not to enforce the contract, but it can’t be enforced against them.
Duress can render a contract void or voidable, depending on the circumstances. Contracts made under threat of physical harm are void, but contracts made under duress because of undue influence are voidable.
Undue influence occurs when a stronger person uses their position of dominance to persuade someone to sign a contract. One example of undue influence is when a caretaker unfairly convinces their elderly patient to agree to make them their sole beneficiary.
Mistakes happen to everyone, but they can void a contract. Mistakes can be unilateral — made by one party, or mutual — made by both parties. For either type of mistake to make a contract unenforceable, it has to have been about something important. It also has to have had a significant effect on the negotiating process.
An example of such a mistake is when a supplier agrees to provide batteries to a manufacturer, but there is a mistake in the specifications, and the delivered batteries don’t provide enough power.
The Importance of Enforceable Contracts in Business and Law
Enforceable contracts help businesses run smoothly. Signed agreements ensure all parties involved are on the same page and understand their obligations. Contracts provide accountability and protection. They back up businesses in case the other side doesn’t deliver on the promises.
Contracts also make agreements easier to enforce and often eliminate the need to go to court. Many contracts include clauses about what happens if the contracting party or other legal entity doesn’t meet the requirements. Whether a party is using a simple contract for a personal purchase or has a team of lawyers creating reams of documents, legal contracts make doing business easier and safer.
Enforceability Challenges and Dispute Resolution
One of the biggest obstacles to enforcing the law of contracts is ambiguity. Even with all the elements in place, a contract can be difficult to enforce if the terms and conditions are unclear. That’s why parties should explicitly lay out all the terms they’re agreeing to.
Many contracts include a dispute resolution clause that outlines how a breach of contract will be handled, often through mediation or arbitration. A mediator helps the people involved to reach a resolution everyone agrees on. An arbitrator is a neutral third party who listens to both sides and reaches a legally binding agreement.
The dispute resolution clause may also dictate which legal jurisdiction will handle the disagreement for contacts between people in different geographic regions. This can be important since one area’s laws may differ from another’s and can influence the outcome.
Create Legally Binding Contracts With jSign
Using a signing solution to collect signatures is one way to ensure the contracts are enforceable. jSign is a signing solution that allows you to collect legally binding signatures for your contracts. Our platform creates an audit trail, so you can see every action taken on the contract and who took it, and uses unchangeable blockchain ledgers for increased safety.
Unchangeable blockchain ledgers guarantee no one can alter the contract after the parties sign it, so you have confidence in the final document. We also make it simple for everyone to sign elements of a contract digitally, no matter where they are.
Sign up for jSign today to ensure all your contracts are legally binding.