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When you agree to commercial contracts in business, you expect them to result in a legally binding contract between the contracting parties. However, if your contract terms contain poorly phrased clauses, a court could rule your commercial agreements invalid in English law. This means that certain types of contracts could be unenforceable commercial contracts. Therefore, your business cannot rely on or enforce your business contract and any contractual obligation with the other party. This article will explore when a contract might be unenforceable and identify certain terms that are necessary for a legally binding agreement.
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Unenforceable Contracts
As a business owner, you must understand if your commercial contracts are unenforceable in English law. If your contracts have an unenforceable clause, they will have no legal weight in court if there is a contract dispute between contracting parties.
When is a Clause Unenforceable?
One of a lawyer’s primary responsibilities is to advise whether a draft written agreement is likely to be an unenforceable or a legally enforceable contract. A lawyer will consider certain factors, including:
(a) the particular type of contract;
(b) whether both parties receive a benefit (called ‘consideration’) from the contract; and
(c) whether there is an overly severe or absurd ‘penalty clause’.
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Contract Type
When considering whether a contract is unenforceable or not, it is necessary to consider the type of contract it is. This is because some forms of contract contain stricter clauses than others.
For example, a construction contract that agrees on demolishing and rebuilding one of your company’s buildings will have stricter clauses on the consequences of breach of contract than a contract with a caterer to have lunch delivered for a meeting. This is because:
- the financial impact of the construction-related breach is much higher; and
- severely worded breaches of contract clauses are more common within construction contracts.
Consideration
A court will consider the benefit in a contract because contracts are only usually enforceable if both parties receive a benefit. This is otherwise known as consideration.
This does not mean that the benefit has to be a good business deal. A company could knowingly sell an item at less than it is worth. For example, selling your printer to another company for £10 when it still has a value of £100.
However, if your contract states that the printer is free, the deal may be unenforceable due to a lack of consideration. Note that this does not apply to genuine donations to a charity.
However, courts are reluctant to strike out many clauses as enforceable as they recognise the importance of the actual bargain struck between businesses. Instead, they wish to target only the most extreme examples. Also, courts can tone down unenforceable clauses.
Excessive Penalty Clause
A penalty clause in a contract will pre-calculate the sum due to your business if the other party breaches a contract term. However, a court will check whether the penalty clause is overly harsh in the circumstances. If it is, it is an unenforceable penalty clause.
Inserting Unenforceable Clauses
Sometimes it is wise for your business to insert strongly-worded clauses in a written agreement, even if they may not be legally enforceable. While you might suspect that a court will rule the clause unenforceable, you might still wish to include a harsh penalty. Ths may be to motivate the other party from breaching the contract. However, keep in mind that if the other party breaches the contract, you put your business at risk if a court strikes out the unenforceable term. You might not have any avenue to seek compensation for the other party’s breach.
Your business could consider agreeing to a written contract containing an ‘unenforceable’ second clause. Some reasons for this are:
- if your company had suggested the clause as a deterrent;
- if the other business suggests the clause and you agree in the knowledge that it is unlikely to be effective in practice; or
- because the bargaining power makes the contract non-negotiable.
There will be situations where lawyers acting for companies will trade off clauses against each other. This means you can have ‘that clause’ if we keep ‘this clause’. For example, you could benefit from allowing another business to keep a term you believe to be ‘unenforceable’ in exchange for your business keeping a clause you believe to be legally binding.
Key Takeaways
You must ensure that your business contracts are enforceable and, therefore, do not contain unenforceable clauses. This ensures that your contracts are legally enforceable. However, there are instances where you may intentionally include an unenforceable clause in your business contracts, such as when you need it as a deterrent.
If you need help ensuring written agreements are fully enforceable, our experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Most contracts between businesses are enforceable and binding, and only a small number of clauses are unenforceable.
In some circumstances, yes. Judges tend to strike out clauses for being too harsh in practice, so a less severely worded clause would stand a better chance.
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