For contracts to operate effectively, laws must be in place to determine what makes contracts legally enforceable. However, it’s just as important for laws to exist when contracts are not enforceable. Knowing when a contract is legally unenforceable is equally essential as understanding the criteria for it to be legally binding. Protecting the financial interests of your business requires having a solid understanding of these two aspects.
Situations that affect the enforceability of a contract
Some instances that can result in an unenforceable contract can include alterations of the contract, bankruptcy, and a statute of limitations. Comprehending these scenarios and ensuring your contracts are valid and legally enforceable can go a long way toward avoiding disputes down the line.
1. Alteration of a contract
Generally speaking, a contract will become unenforceable when a party makes alterations without the other party’s consent. This alteration can involve situations in which either party changes the terms of the agreement and notifies the other afterward without having their permission. It can also happen if the two parties agree to modify the agreement but do not appropriately document the alteration. To avoid this situation, both parties should understand their responsibility to keep documenting the original contract and be sure that any changes are properly discussed and documented.
2. Declaration of bankruptcy
In the event of an individual or business declaring bankruptcy, any financial contracts that they were party to beforehand will generally be deemed void. Creditors no longer have any right to seek the collection of any debt that was owed, with the bankruptcy court assigning a trustee responsible for distributing the debtor’s assets fairly between creditors. Apart from this payment, the creditor cannot collect any previously outstanding debt since the entire contract has been nullified by the judge that granted bankruptcy.
3. Statute of limitations
The statute of limitations can play a vital role in the enforceability of contracts. This law sets out the timeline within which parties have the right to file legal action, varying from one year to multiple decades. According to the Uniform Commercial Code, the statute of limitations for a breach of commercial contracts is four years- meaning that any legal action due to an alleged breach of contract must be initiated within four years. If a party fails to take legal action within this period, then whenever they do try to do so- their claim will be thrown out, even if it was previously enforceable. This time limit can be shortened by mutual agreement between the parties. However, it cannot be extended beyond four years.
Because unenforceable contracts have the potential to cause serious problems, you should always review any contracts before signing to check that they’re both valid and enforceable. To protect yourself, it is a good idea to have a lawyer with experience in contract law review your contracts before signing any agreement. The help of an experienced lawyer can help avoid any potential disputes that might arise from such a contract and save you time and money in the long run.