What makes a contract unenforceable?

No matter what industry you are in, you can't conduct business on your own. So every business has to have various agreements, contracts and terms in place.

These agreements can be between you and your customers, employees, suppliers or distributors, and are usually formalised by writing legally binding contracts between the parties involved.

Unfortunately, all too often when things start to go wrong we see businesses suddenly take an in depth look at their agreements only to find that they have an legally unenforceable contract or the agreement they signed doesn't cover what everyone thought it did.

It doesn't matter what kind of formal transaction it is, whether it's an employee contract, partnership agreement, purchase order, or terms of business with a customer, the agreement must be recognised legally by the courts for it to be enforceable if someone were to challenge it. 

This is why it's important to understand the key components of a legally binding contract when drafting an agreement.​
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Unenforceable Contract Terms.

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​Offer and Acceptance of an agreement 

​A legally binding contract must include one party making a valid offer and the other party accepting it.

An offer is not quite the same thing as an invitation to make a deal, such as putting out a request to tender. A tender request for example, would not be recognised as an offer in English contract law. The offer that is accepted must be the exact terms of the offer being made. If the exact terms are not the terms being accepted, it would be considered a counter-offer, which the initial offeror must then agree to.
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Intention to be legally bound

All parties agreeing to the contract must intend to be bound by the contract.

There is a presumed intention to be bound with commercial agreements, unless there is what's known as an 'honour clause' in the contract that states otherwise. A court will look through all the factual and circumstantial evidence to determine if this is the case. It is therefore presumed both you and the business you represent have the intention to be bound to any agreements entered on behalf of the business entity (a Limited Company etc.).

However an arrangement or transaction between individuals may not be as formal. As a party involved may have never had the intention of being legally bound to go through with the agreement.
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​Consideration and a 'Bargain'

Legally binding contracts must include a 'bargain'. This is to say one party doing something in exchange for the other party doing something else; which is typically paying money.

But the exchange could also be exchanging services if money is not involved. The consideration has to be significant, but it does not necessarily need to be adequate. There is no law saying that a bargain must be of equal value, just that it must have some value.

Insufficient consideration could be when a contract allows for one party to avoid damages for failing to fulfil their end of the bargain which isn't mirrored by the other party.
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Top industries for contract claims & disputes

IACCM study on the Most Negotiated Terms & Conditions

• Engineering & Construction (20.7% of contracts)
• Telecommunications (13.6%)
• Automotive (13.0%)
• Transportation & Logistics (12.6%)
• Oil, Gas, Minerals & Utilities (12.5%)

Unfair or Unenforceable Contract Terms

An often-seen unfair term is an 'exclusion clause' where one of the parties attempts to avoid the liability that comes as part and parcel of a contract.

Another common example of an unfair term are 'penalty clauses' where one party specifies a monetary amount that is payable upon breach of the contract which is disproportionate to the loss that the party would actually suffer due to that breach.

Does an agreement have to be in writing to be enforceable?

Legally binding contracts do not necessarily have to be written agreements, with a few exceptions such as property purchases/sales, so there are many oral or verbal contracts made everyday.

However, you should understand that it is always best to have an agreement written down and signed by all parties.

If not, you will be stuck with the burden of proving that the verbal contract exists and what the specific terms of the contract are. It is also more difficult to prove the 'intention to be bound' in an unwritten contract.

This is why it is always best to put agreements clearly in writing along with being signed and witnessed, so there will be less room for interpretation should you end up enforcing the contract.
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"On average, approximately 9% of contracts experience a significant claim or dispute"

Tim Cummins - IACCM study

Worried about unenforceable contract terms?

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How to avoid unenforceable contracts & agreements.

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​Ensure a contract does what you think it does

Enforceability aside, a common issue that arises after a contract is signed is that the terms of the contract don't actually do what one of the parties thought it did.

It can be all too easy to assume that what was agreed verbally has been translated perfectly into a written agreement. Often this isn't the case, and a party can be caught out by relying more of the 'sentiment' or 'spirit' of what was discussed rather than what made it into the written contract.

Therefore take time to speak to a solicitor about the purpose of the business arrangement and then ask them to review the wording of the draft agreement. The solicitor will then be able to firm up your contractual position and ensure the contract is fair. 
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Add a ​Dispute Resolution clause

Hope for the best but plan for the worst.

​Inserting a dispute resolution clause into a contract defines how the parties will seek to resolve differences or misunderstandings before they turn legal. To avoid litigation, a dispute resolution clause can point towards independent mediation or arbitration to settle the dispute in a fair and mutually agreeable way.

But even if alternative dispute resolution isn't an option for your type of agreement. If you operate in the UK, checking there is a clause stating that the contract is governed by the courts of England and Wales will ensure that any legal action takes place in your local jurisdiction.
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Proactively review your contracts

It can be difficult for business owners and the uninitiated to draft a legally binding contract that covers what they want as well as protects their position. Therefore, it is always best that you have a solicitor draft or at least review your business contract before getting it signed.

You don't want to be in the position of relying on a contract's wording before checking that it does what you need it to.