This article explains void and voidable contracts, their key differences, legal and financial implications, and practical advice.
You'll learn about definitions, distinctions, and what to do if you find yourself in a tricky contractual situation.
What is a void contract?
A void contract is an agreement that is, from the outset, not legally enforceable. Void contracts lack one or more of the prerequisites that make an agreement a contract. You can't enforce a void contract, and neither party has any legal obligations under it.
The prerequisites for an agreement to be legally binding include: offer, acceptance, lawful consideration, capacity, free consent, and lawful object. If any of these are missing or invalid, an agreement is not a contract.
A void contract:
has no legal effect - the law does not recognise void contracts;
is unenforceable from the start - neither party can force the other to fulfil the contract terms; and
has no legal remedy - courts will not recognise void contracts, so you can't claim damages.
Examples of void contracts
Illegal activity - an agreement to smuggle goods is a void contract because it involves unlawful actions.
Lack of capacity - an agreement signed by someone who lacks mental capacity is a void contract.
Impossibility of performance - an agreement to sell a non-existent property is void.
Uncertain terms - if the agreement's terms are too vague or ambiguous to understand, it's void.
What is a voidable contract?
A voidable contract is a valid agreement (an otherwise legally binding contract) that may be rendered unenforceable for one or more legal reasons (such as one or both parties can choose to cancel or continue).
Unlike void contracts, voidable contracts are initially valid and enforceable. However, one party has the right to end the contract under specific legal grounds that the contract states or legislation gives.
Voidable contracts contain all the essential elements of a valid contract, and they remain valid until the circumstances terminate it (whether that is the passage of time, one party decides to terminate it, or some other situation arises as specified in the agreement).
A voidable contract is:
is initially valid;
has an option to terminate - one party can choose to end it;
may allow ratification - the affected party can choose to continue with the contract; and
may have legal remedies available - you can seek damages if the contract is breached.
Voidable contract examples
Misrepresentation - the other party provided false information to induce you to sign the contract.
Undue influence - someone pressured you into signing the agreement.
Duress - threats or force were used to make you agree to the terms.
Mistake - where both parties made a significant error about a material fact in the contract.
How do void and voidable contracts differ?
Void and voidable contracts differ in their legal status, enforceability, ability to ratify, and impact on third parties.
The key difference between void contracts and voidable contracts is that a void contract is null from the start, while a voidable contract remains valid until declared void.
You can't enforce a void contract, but voidable ones are enforceable unless the affected party chooses to void them.
Parties can't ratify a void contract, but they can ratify a voidable one.
A Void contract doesn't affect third-party rights, whereas a voidable contract might.
What makes a contract void?
Contracts are deemed void due to three main factors: lack of capacity, illegality, and impossibility of performance.
About 5% of business contracts in the UK are found to be void and considered null each year.
How does lack of capacity affect contract validity?
Lack of legal capacity can make a contract void.
For a contract to be binding, you need to fully understand and consent to the agreement. A company (and their representative) must have corporate power to enter into it.
For instance, if you signed a contract with someone with advanced dementia, it would likely be a void agreement.
Why does illegality invalidate contracts?
Contracts for illegal activities or those against public policy (society's interests) are automatically void.
This includes contracts for criminal activities, agreements that unreasonably restrict trade, and contracts that violate statutory law.
For example, if you unknowingly entered into an agreement that breaches industry regulations, it would be void.
What factors make a contract voidable?
Misrepresentation
Misrepresentation occurs when one party gives false information to another, leading them to enter into a contract. There are three types of misrepresentation:
Fraudulent misrepresentation - this happens when a party knowingly makes a false statement. For example, if you sell a car and claim it has never been in an accident when you know it has.
Negligent misrepresentation - this occurs when a party makes a statement without reasonable grounds for believing it's true. For instance, if your business partner provides financial projections without checking the figures.
Innocent misrepresentation - this is when a party makes a false statement believing it to be true. An example might be if you sell a painting, stating it's by a famous artist because that's what you were told, but it turns out to be a forgery.
Each type of misrepresentation can make a legal contract voidable. The aggrieved party can choose to cancel the contract and claim damages.
In cases of innocent misrepresentation, the remedy is usually limited to cancellation of the contract without damages.
Undue pressure
Duress involves threats or physical force to make someone sign a contract. For example, if someone threatens to harm your family unless you agree to sell them your business.
Undue influence, on the other hand, occurs when one party takes advantage of a position of power over another. This might happen if your elderly parent's carer pressures them to change their last will and testament, or someone coerces their fiancee to sign a pre-nup.
Courts use specific tests to determine if duress or undue influence has occurred.
For duress, they look at whether the threat was illegitimate and if it was a significant cause of the contract being made.
For undue influence, they consider the relationship between the parties and whether the transaction seems fair and reasonable.
Legal consequences of void contracts
A void contract is inherently unenforceable in court - the law would treat it as if it never existed. This means any actions taken under the contract lack legal backing.
The primary effect of a void contract is the requirement for restitution - you and the other party must return any money or property exchanged under the agreement. In 2023, UK courts ordered restitution in just under three quarters of cases involving a void contract.
Restitution aims to put you back in the position you were in before the contract.
Say you bought a house under a void contract, you'd get your money back, and the seller would keep the property.
But it's not always straightforward. What if you've made renovations? Or the seller can't repay all of the money?
Void contracts can also affect related agreements.
For example, you signed a void business contract and then made other deals as a business. These subsequent contracts might also become unenforceable.
Legal consequences of voidable contracts
You have the option to rescind a voidable contract, which means cancelling it and returning both parties to their pre-contract positions.
Rescission must occur within a specific time frame.
Time limits for voiding a contract vary depending on the circumstances.
You might lose your right to rescind if you continue with the contract despite knowing about the voidable element. This is called affirmation.
For example, two parties might have a formal agreement for one to provide services to the other. One never provides the service in full (as agreed) to the other, the other never challenges the issue of non-performance. The effect would be for the client to affirm the contract as being one for the provision of the lesser services.
Third parties
Rights of third parties can complicate things. If your contract involves goods or services that have been passed on to someone else, rescission might not be possible and you might need to seek damages instead. This often arises in business.
How can I void or rescind a contract?
First, assess the grounds for voiding. You must have a valid reason.
Gather all relevant documents, emails, and records of conversations to support your case.
Seek legal advice if there is a lot at stake.
Attempt negotiation before taking formal action. Document all communications during this process. If negotiation fails, provide formal notice of rescission. This is a written statement clearly outlining your grounds for voiding the contract and stating your intention to rescind.
When should I seek professional legal advice about contract validity?
Seek professional legal advice about contract validity when you suspect misrepresentation, feel pressured to sign, are uncertain about contract terms, or have concerns about the other party's capacity to contract.
You're more likely to have a favourable outcome if you use a solicitor.
How can I prevent issues with contract validity?
You can prevent issues with contract validity by properly documenting the contract process.
Clear documentation reduces the risk of disputes significantly.
Essential elements include a clear offer and acceptance, consideration, intention to create legal relations, and capacity of parties. Record-keeping best practices involve maintaining detailed logs of all communications, negotiations, and agreements.
Clarity in contract drafting is crucial. Use unambiguous language to define terms, obligations, and rights. Avoid vague or open-ended phrases that could lead to misinterpretation.
And always ensure all parties have the legal capacity to enter into the contract. This means verifying that individuals are of legal age and sound mind, and that business entities and their staff have the authority to engage in the agreement.
Why is full disclosure crucial in contract formation?
Full disclosure prevents many contract validity issues. Contract law expects you to act in good faith, particularly in contracts that rely heavily on trust. The legal concept is known as 'uberrimae fidei' (utmost good faith).
Failure to fully disclose can render a contract void or voidable so you must disclose material information. This includes known defects in goods or services, financial liabilities, and potential conflicts of interest.
How can I assess and mitigate risks in contract formation?
Conduct thorough due diligence, seek independent financial and legal advice, and consider worst-case scenarios. Include clear termination clauses, use plain language, and regularly review and update contracts.
To implement a systematic approach to contract risk management in your business operations, start by creating a checklist. This list should cover all aspects of contract formation and execution. You'll want to include items such as verifying the other party's financial stability, ensuring all terms are clearly defined, and identifying potential areas of conflict.
Proactive risk assessment isn't just about avoiding problems. It's also about creating opportunities for smoother business relationships. By clearly understanding and managing contract risks, you're better positioned to negotiate favourable terms and build strong, lasting business partnerships. This approach can lead to more stable, profitable relationships in the long run.