Growing, expanding, or not — no business can succeed without a solid foundation of an enforceable contract. Contracts are supposed to hold up legally, so parties to any deal are protected.
Consider the case of a company that suffers losses due to contracts that end up being unenforceable.
Australia’s Federal Court has voided 34,000 contracts from Fuji Xerox over unfair contract provisions such as follows:
- Fujifilm’s limited obligation of indemnifying a customer
- charge of an excessive amount of exit fees
- demand customers to pay regardless of whether they’ve received the Fujifilm software yet
How did it turn out?
Besides notifying customers of the cancellation of their contracts., Fujifilm Australia also had to pay some legal fees.
That’s why ensuring that your contracts are legally binding is important.
So what determines the enforceability of a contract?
Read on to learn more about enforceable contracts and how to use contract lifecycle management software for managing contract workflows to ensure their legal viability.
What is an enforceable contract?
A contract is made when two or more parties agree to work together. However, for a contract to be enforceable, it should have the six essential provisions. The following are the elements of an enforceable contract:
- Intention to create legal relations
- Legality and capacity
Want a detailed description of the six elements? Read our article on 6 Essential Elements of a Contract: Know What Makes A Contract Enforceable.
Without an enforceable contract, businesses may find themselves at a disadvantage if disagreements arise — because people who sign unenforceable contracts can’t take them to court.
Here are some additional reasons why it is important to have an enforceable agreement.
- They provide additional certainty for both parties since they know exactly their rights and obligations.
- They increase reliance on the terms of the contract being enforced.
- They help promote trust and cooperation between parties.
Are all contracts enforceable?
Generally, yes — most contracts are enforceable. That means that both contracting parties are legally obligated to fulfill their respective roles. However, there are a few exceptions to this rule.
So what are some conditions that can negate your contract’s enforceability?
- Absence of mutual consent
In order for a contract to be enforceable, there must be an offer and acceptance between the parties, and most of all mutual consent to the terms of the contract.
Here are situations where mutual consent may be absent.
- Exposure to duress
If one of the parties was in a situation where they felt they had no choice but to sign the contract — like a life-threatening situation or threatens to harm the other party unless they sign the contract, the contract may not be valid.
- Fraud or misrepresentation
Another situation where mutual consent may be absent is when one party is misled by the other party either through fraud or misrepresentation. This can happen when one party is misled about the nature of the agreement.
- Under the influence>
Similarly, if one party was under the influence of drugs or alcohol when they signed the contract, their consent may be considered invalid.
- Lack of Capacity
This happens when one of the parties to the contract is not legally able to understand the terms to enter into a binding contract. In particular, a person who is under the age of 18 or who has a mental impairment may be considered to lack capacity. In the event a court finds that a contract was made without capacity, it will not enforce the terms of the agreement.
- Illegality of the contract
If a contract is illegal, it’s unenforceable so neither party can sue to receive damages for breach of contract. Contracts that are illegal are generally those that involve illegal activity and are contrary to public order, public policy, criminal law, morals, and good customs. Thus, to name a few, public properties, illegal drugs, or prostitution are not subject to a valid contract.
A contract is unconscionable if it is so unfair to one party that it should not be enforced by a court. Also, it often happens when one party blatantly takes advantage of the other’s ignorance or desperation. An example is when there’s a big difference in the bargaining power of the parties like being much more educated or experienced than the other thereby making terms that are unfair to the other party.
- Execution errors
This means that it wasn’t signed by both parties or witnessed by a neutral third party. If a contract isn’t properly executed, it may not be enforceable in court. While execution errors can seem like a technicality, they’re actually an important part of the contracting process.
What is the difference between a valid contract and an enforceable contract?
So you already know what makes a contract enforceable or not, let’s now talk about the difference between a valid contract and an enforceable contract.
This is a short summary of our explanation below — a contract is only enforceable if it is valid but NOT all valid contracts are enforceable.
For a contract to be valid, there must be an offer, acceptance of that offer, and consideration (something of value must be exchanged). Agreeing parties here are not automatically bound by law since their contract may lack other essential elements such as capacity and legality.
Take this example, a contract between two people who are not of legal age is valid but isn’t enforceable. Since minors are involved in this valid agreement, their legal capacity is in question in court. Thus, it’s unenforceable.
However, a valid contract is also enforceable only if it further meets the requirements of an enforceable contract. That is if it’s made in good faith, in capacity, legal, and done without any intention of deceiving or defrauding the other party. In this case, the court or judiciary may enforce the signing parties’ stated rights and obligations.
How to create enforceable contracts digitally?
This is the sad reality — when two parties enter into a contract, they often have to exchange a lot of paperwork. However, with the rise of digital technologies, it’s now possible to create, sign and manage contracts digitally.
One solution is using contract lifecycle management software.
Let’s take a look at how Avokaado helps make any contract enforceable:
- Contract repository
Contract lifecycle management software contract repository ensures that all your contracts are stored in one central location. This makes it easy to look up contract-related information like clauses when you need it and so ensure that you’ll be drafting enforceable agreements.
Avokaado lets you create a contract repository in two easy ways.
- Upload your previously used documents to Avokaado where a machine learning-based algorithm divides the document into blocks (clauses) for you. So when you need the added clauses either for creating a new document or preparing a new template, they’re easily searchable in one database.
- Get pre-made templates from the Avokaado Store and store them in one location. They’re pre-lawyered so you’re sure that every important provision is included. Additionally, you can further tweak them according to your specifications and other legal requirements.
Whenever you upload or create documents in Avokaado CLM, they appear in your document view, which also displays their statuses — Drafts, Approval, Signing, and Done.
- Controlled drafting
Good document software will help you with the controlled drafting process to create an enforceable contract. Contract drafting is often the starting point for whether an agreement becomes enforceable or not.
In Avokaado, you can avoid starting to draft contracts from scratch. It’s controlled since filling automated templates is like answering a questionnaire that covers all possible scenarios when drafting. Changed clauses reflect the choices made by the end-user in real time.
- Contract collaboration
Contract collaboration is the process of working with others to create a contract. The first step in contract collaboration happens with you working with your colleagues. After, dynamic collaboration is needed between you and the external party.
Firstly, Avokaado supports document collaboration from co-workers to stakeholders. You just add collaborators and they’ll get an invitation link where they can set their password and access the document. You can set their permission rights too — as a viewer or an editor.
Secondly, the software lets share documents across clients for unlimited external collaboration and contract negotiations via a public link. Also, so you can be sure of a contract’s traceability and transparency, Avokaado ensures that each collaborator’s action is logged in the Activity log tab in the contract.
Important to know: Avokaado allows you to share folders with all their content with your colleagues and collaborators too.
- Approval & signing flows
Getting approvals and signatures on a contract can be a hassle, but it’s important to make sure the contract is legally binding. Contract approval software can help streamline the process and make it simpler.
Avokaado lets you assign contract reviewers so it’ll be sent to the appropriate person for review. Then, once the contract has been reviewed and approved, it will be sent to the next signatory for signing (usually the stakeholders before the enforceable contract goes out).
Avokaado has 2 available signing methods — SignNow and Dokobit — both eIDAS-compliant digital signature services.
Safeguarding business with valid and enforceable contracts
Enforceable contracts not only help to establish the terms of a transaction, but they also provide a legal basis should things go wrong.
A good thing to remember though is that not it’s not enough to have valid contracts because they aren’t automatically enforceable. This is because, for a contract to be legally binding, it must meet these elements of an enforceable contract: offer, acceptance, awareness, consideration, intention, capacity, and certainty.
With the help of modern tools like Avokaado CLM, you can streamline your contracting process and make sure your agreements are both valid and enforceable. Give us a try today to see how easy it is to get started.