Void and Invalid Contracts: What You Should Know

In most cases, once you sign a contract, you are legally obliged to fulfill what was stated in the agreement. However, there are exceptions that could lead to the contract being “void” or “voidable”.

Knowing the difference and what makes a contract invalid will enable more effective contract reviews during the drafting stage and avoid getting into trouble.

In this post, we’ll be sharing more about circumstances that make a contract invalid, and its consequences.

Elements Of A Valid Contract

• Offer — A promise made between 2 or more parties.
• Acceptance — Acknowledgement of the offer and providing a response to accept the offer.
• Consideration — Something of material value that both parties have agreed upon as compensation for performing the deliverables under the offer.

For more information on what constitutes a formal contract, check out our formal contract guide. We also have a guide on how to implement an effective contract management process.

What Is An Invalid Contract?

An invalid contract is unenforceable and can either be void or voidable depending on the cause of invalidity.

Void contracts are unenforceable. No party will be legally bound by it, and it cannot be relied on to obtain compensation for past performance.

Voidable contracts are valid contracts and legally binding to only one party. The other party that is not bound to the contract can choose to accept or reject the contract.

The main difference between void and voidable contracts concerns when the contract becomes invalid. A void contract is invalid from inception. Whereas, a voidable contract is initially valid, but may become void later when a dispute occurs.

Examples of invalid contracts:

• Invitations to treat — Advertisements. For example, if a car dealer puts up an advertisement for a car for sale, the dealer is not legally obliged to sell to the first party that views the car. Neither is the dealer legally obliged to sell the car.
• Social and domestic agreements (non-commercial) — These agreements are generally viewed as lacking the intention to create legal relations.
• Unilateral contracts — These include large scale agreements open to the public where no formal acceptance is required to be communicated to the offeror.

Under What Circumstances Does A Contract Become Invalid?

Void:

• Subject matter of the contract involves an unlawful consideration, goes against public policy or is illegal.
• Contract is entered into under undue influence (duress/fraud).
• Lack of consideration by any party to the contract.
• When a party lacks the capacity to sign the contract. For example, during the time the contract was made, they might have been under the influence of drugs, alcohol, mentally disabled, a minor, or bankrupt.
• Incompetence of any party to the contract.
• When contractual obligations are impossible to be performed.
• Contract was established without an intent to form a legal relationship.
• When the party who concludes the contract does not have the authority to sign the contract.
• When fraudulent/false documents were presented during the contracting process.
• Non-disclosure of certain facts that could affect a party’s decision to enter into a contract.

Voidable:

• When a contract is made with a minor, and the minor decides to reject the contract within a reasonable amount of time.
• Breach of contract.
• Existence of a similar agreement, although not contracting or affecting the main contract. Parties can choose to void this contract or the initial one.
• When there are mistakes in the contract that potentially affect the performance of either party when carrying out legal obligations.
• When there is a disputable or ambiguous term.
• Misrepresentation to any party to the contract.
• Both parties are unclear about certain terms in the contract.

Examples Of Mistakes That Can Make A Contract Void:

• Unilateral mistakes — When only one party to the contract misinterprets the subject matter or specific terms stated in the agreement.
• Mutual mistakes — When both parties misinterpret the subject matter or specific terms stated in the agreement.
• Contracting with a party that lacks capacity.
• Poor allocation of risk — When one party is forced to take on all risks throughout the agreement.
• Defective contracts — Contracts that are incorrect or incomplete are unenforceable.
• Language used to draft contracts creates uncertainty around the subject matter or certain terms.
• Wrong documents presented during the contract negotiation, resulting in parties agreeing to enter into the contract.
• Contract is reviewed and later deemed to have no contractual subject matter.

Consequences Of Invalid Contracts

When a contract is invalid, parties are not required to take any special action if they have not performed any contractual obligations stated. Neither party will continue to be bound by the contract. If there has been prior performance before the contract has been deemed invalid, the return of goods, payment or relevant compensation will need to be made.

3 Tips For Contract Review To Avoid Invalid Contracts

1. Read the entire document.

Contracts come with a long list of terms and conditions that we all dread to read. Carefully read through the document to avoid missing any important information that could hold you accountable for a breach. There may be complex clauses and legal jargon that you don’t understand, so take your time reviewing them.

1. Get second opinions from a legal professional/ your company’s legal team.

If you are not well versed in contract law, get someone with more experience to look through the document for you and provide their opinion. A legal professional will be able to advise you on what you don’t understand and identify any issues in the contract before you sign the document.

1. Be clear about acceptance details, and who you are dealing with.

There could be an acceptance date stated in the contract before the offer lapses. You need to accept or reject the offer before it expires for the contract to come into effect. Depending on what you are dealing with (employment, lease, partnership, etc.), always confirm the other party’s identity before signing.