Don’t Make an Unenforceable Contract or You Could Get Burned
Normally when parties form a contract they are expected to honor their respective promises to one another. The essence of a contract is that once negotiations have ceased, the sides will each perform their promises to each other. However, there are certain circumstances that will render a contract legally unenforceable and excuse the parties from performing their respective sides of the contract. It is important as a business owner to know and recognize these important situations to make binding contracts or to potentially avoid contractual obligations. Some common situations that render a contract unenforceable include misrepresentations, nondisclosure, unconscionability, and mistake.
Misrepresentations and Non-Disclosure
Misrepresentations that make a contract unenforceable are normally the result of some type of fraud during the negotiation process. Contracts are supposed to be made in good faith, with both sides making honest representations to the other. When this does not happen, and a party makes a false material misrepresentation to the detriment of the other party, a contract can be considered legally unenforceable.
Similarly, non-disclosure is misrepresentation, but it is done by not telling the other party something of material importance. The important thing that the courts look to is whether the party that remained silent had a duty to disclose the information to the party that was harmed as a result of the non-disclosure. If there is a duty to disclose, and the disclosure is not made, then the contract is legally unenforceable.
Unconscionability is when one party in a bargain has lower bargaining power when compared with the other party. Unconscionability has two parts: 1) procedural unconscionability and 2) substantive unconscionability. The procedural part describes the unequal bargaining power and position of the two parties. This can mean their relative differences in sophistication or their bargaining power as a result of their position in the marketplace. However, it is important to note that in most jurisdictions unconscionability will not render a contract unenforceable between commercial entities. There is a presumption that businesses entering into contracts are each sophisticated and therefore contracts cannot be unenforceable because of a difference in bargaining power.
The substantive part of unconscionability deals with the terms of the agreement themselves. If the terms are extremely one-sided or harsh to one party, then there is a possibility that the contract will be found to be unconscionable. However, as discussed above, business entities that have contracted will probably not have their contracts found unconscionable because of harsh terms, because most courts consider them sophisticated enough to know the consequences of entering into such one-sided bargains.
Sometimes contracts can be voided because of a mistake made on the part of one or both of the parties. However, the mistake must be about an important and material aspect of the contract for it to be voidable because of a mistake on the part of the contracting parties.
Help with Contracts in New Jersey
It is always important to consult with your local Burlington County business attorney when drafting contracts with other businesses or with customers. Consulting with your attorney will ensure that you do not encounter problems with misrepresentation, non-disclosure, unconscionability, or mistake in your contracts.