Business contracts are usually the bedrock of any particular successful business relationship. They outline the terms of the agreement, protecting both parties and helping ensure a smooth collaboration.
However, a poorly drafted or misunderstood contract can be rendered invalid. This can leave your business vulnerable to financial loss and legal headaches. It can help, therefore, to familiarize yourself with the most common mistakes that can invalidate a business contract, along with tips to help you avoid them and help ensure your agreements are legally sound.
Lack of capacity
Did you know that for a contract to be enforced under the law, all parties must have the legal capacity to enter into one? This means they must be of legal age, have a sound mind and be authorized to represent the company they are acting on behalf of.
For this reason, entering into a contract with a minor can be a costly mistake. Minors can generally disaffirm contracts they signed before reaching the age of majority. Additionally, anyone under the influence of drugs or alcohol, or those with mental health issues that impair their judgment, may not have the capacity to enter into a valid contract.
Unconscionability
A contract can be deemed unconscionable if its terms are grossly unfair and one party has significantly unequal bargaining power. Unconscionability can manifest as procedural unconscionability. This occurs when the contract formation process is unfair. This might involve:
- Pressure tactics
- Limited time to review the contract
- Hidden terms stacked against one party
Unconscionability can also play out as substantive unconscionability. This refers to unfair terms within the contract itself. These could be one-sided clauses that heavily favor one party, unreasonably high penalties or disclaimers that remove all liability from one party.
Mistake
A mutual mistake, meaning a mistake made by both parties about a fundamental component in the contract, can prevent you from enforcing it under the law. For instance, if you agree to purchase a specific type of equipment, but the seller mistakenly sends a different model entirely, the contract could be invalidated. However, unilateral mistakes that are made by only one party typically don’t invalidate the contract unless the other party knew or should have known about the mistake.
By staying proactive and seeking legal guidance, you can help ensure your business contracts are enforceable under the law. Remember, a well-drafted contract is an investment that can save you time, money and frustration in the long run.
